Borrowing & Spending

We recently looked at how Retail was doing. Given the noise yesterday from Home Depot (HD) and Sears Holdings (SHLD), warning about poor earnings and lowering guidance, let’s revisit the subject on what the consumer is up to:

The amount of cash people can pull out of their homes has obviously declined, due to 3 factors: 1) Decreasing home values; 2) Tightening credit standards; and 3) Rising mortgage rates.

Creditcard_use_070907With the ability to tap Home Equity impaired, the consumer has now turned to Credit cards. The Federal Reserve confirmed this earlier in the week, noting that US Revolving Credit had jumped 9.8% in May:

"The Federal Reserve reported its monthly G.19 Consumer Credit statistics today for the month of May 2007. Consumer credit increased at an annual rate of 6-1/2 percent in May. Revolving credit rose at an annual rate of 9-3/4 percent, and nonrevolving credit rose at an annual rate of 4-1/2 percent. Revolving credit outstanding now totals $894.8 billion."

This is what’s driving the softness at Home Depot and Sears (although Sears may be more company specific). I suspect that when people tap into their homes for cash, they are comfortable spending that equity on improving the house — essentially converting home equity into enhanced home value. Plus, they get to enjoy the improvements while they live there.

Certainly, some people used their Home Equity ATMs to buy cars, plasma screens, and vacations. But I suspect that much of the MEW we saw was spent on the homestead itself.  Compared with other MEW spending, it is a form of spending that is quite rational, and is in many cases a mere conversion.

But we need to put this into some context: The total amounts of consumer borrowing rose by $12.9 billion to a seasonally adjusted $2.441 trillion, That represents a 4.7% increase form a year ago. So even as Home Equity Withdrawal is fading, the revolving credit usage (i.e., credit-cards) is rocketing at an annual rate of 9.8% (to $894.8 billion).

As noted back in January, the beneficiaries of this are/will be the credit card companies. As we discussed with Paul Kangas and Susie Gharib:

Sectors to avoid: Electronics Retailers, Durable Goods makers, Mortgage Underwriters, and the Sub-prime  mortgage lenders.

With new Mortgages and refis down — and revolving credit use up —
the credit card companies have become much more attractive. Also well
positioned are the big caps and exporters who can take advantage of the
week dollar.

The only question I have now is whether the credit card companies have had their full run or not. Mastercard (MA), which I mentioned favorably on that January show as a buy, is up 50% since then. I am not sure how much more room there is for the stock to run . . .


Consumer credit 
Federal Reserve, July 9, 2007

Credit-Card Use Lifts Consumer Borrowing
WSJ, July 10, 2007; Page A2

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What's been said:

Discussions found on the web:
  1. Ken M. commented on Jul 11

    The Demos research organization is planning some updates to their credit card indebteness publication series. Very interesting reading.

  2. Red Pill commented on Jul 11

    Yes, credit card companies will do well until people start defaulting at higher rates than their “models” predict. Where have I heard that before?

  3. michael schumacher commented on Jul 11

    well the CC companies will continue to do just fine if the consumer switches it’s ATM from MEW to cards.

    Consumer’s are not cutting back as of yet merely switching the location of the ATM. Only this time there is a much higher interest rate to pay. A few months of 18% and things start to get put into perspective quite quickly.

    Like that gas bill that was already well over $100 to fill up the hummer?…just got an increase of (insert bloated card interest rate here)..

    People have a hard time understanding that part of it…..


  4. lloyd commented on Jul 11

    Another driver of relentless consumer spending has been proceeds from selling down stock holdings. Retail has been a net seller of US equities (I realize some has been switched into overseas securities) as companies have feverishly bought back stock and private equity have taken companies private. Not sure if its more than credit card debt but the money is coming from somewhere and it will reach a tipping point.

  5. Sean-Paul commented on Jul 11

    Hey, Barry: where’s that print-friendly feature you promised?

  6. wally commented on Jul 11

    I’m with Red Pill on this: when the CC companies get a jump like that at the same time MEW dries up, they are getting the worst of the worst. Good luck to them.

  7. sam commented on Jul 11

    i agree w/ wally. The junkest of sumprime folks are queuing up for credit card. That means, credit card defaults will shoot up..
    No Gusto.

  8. Stan commented on Jul 11

    Likely vast majority of the new CC debits are ending up on newer gasoline sponsored/linked cards. Still spells an eventual big squeeze and a price to pay for satisfaction now followed by deferred pain.

  9. shawn commented on Jul 11

    I have been asking this question around to no answer:

    If consumer credit rises, where are they spending the money? The HD, Sears, vehicle volume sales, weekly chain store sales, etc are terrible for the last 3 months.

    So, again, where are consumer spending the money from credit card? To pay other debt?

  10. Fred commented on Jul 11

    I wonder how much of that CC debt is at the 0% 1 year offerings out there?

    Seperately, I thought I heard something about a rule change that might have skewed the credit number this month. Anyone else aware of this?

  11. dark1p commented on Jul 11


    maybe they’re buying plane tickets to fiji so they can skip town when they can no longer pay the mortgage or the credit card debts.

    nothing like a fresh start in a new town.

  12. michael schumacher commented on Jul 11


    for someone who does’nt like answering questions about the comments they make it’s a bit ironic that you now have a question about the validity of a credit report.

    Are you trying to say something???

    Say it…..


  13. Fred commented on Jul 11

    I’ll answer anyone’s questions but yours Michelle.

  14. DavidB commented on Jul 11

    I thought the axiom was:

    By the time it hits the news the rally is already over.

    I think that probably goes triple for government statistics.

    And do you think they are using the cards to buy groceries? Yikes! There’s a scary thought!

    BUT…there always is hope. Maybe they are taking cash advances in order to short homebuilders

    I can dream can’t I?!

  15. me commented on Jul 11

    “So, again, where are consumer spending the money from credit card? To pay other debt?”

    Probably at the gas pump, grocery store and making their mortgage payment until they hit their limit. And those rates, wow.

    And of course there is no more bankruptcy forgiveness so look for the party to go a little longer than we expect.

  16. andy commented on Jul 11

    “So, again, where are consumer spending the money from credit card? To pay other debt?”

    don’t forget fees, missed payment penalties etc these are all added to the balance owed on CC’s and mortgages. So amount borrowed increases while ability to purchase decreases because of higer balance and larger repayments of exsisting debt. its a vicious cycle plus add a little inflation for the coup de grace.

  17. The Big Picture commented on Jul 12

    Top 100 Retailers

    Last week, we asked, How’s Retail doing?. Yesterday, we visited the subject of Borrowing Spending. Today, as we hear from many more retailers, we will contextualize it. From an annual industry report, Top 100 Retailers. The nation’s retail power player…

  18. D. commented on Jul 12

    “So, again, where are consumer spending the money from credit card? To pay other debt?”

    Credit available on their cards is probably not as high as credit available on their house ATM was!

    They were buying renos, cars and trips with their home ATM; now they’re buying gas, restaurants, clothes and other essentials on cards! Think about it, it’s hard to go form spending to not without huge withdrawal sypmtoms. Most will go from large ticket items to smaller ones!

  19. Fred commented on Jul 12

    Apparently the market has all these negatives baked in.

    Robust exports are trumping the housing/consumer/subslime/CDO/CLO/credit concerns.

    ’nuff said.

  20. Anons commented on Jul 12

    What is “MEW”?

  21. Greg0658 commented on Jul 12

    mortgage equity withdrawl

    borrowing cash on your house (collateral)

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