[This is the newest installment in an ongoing news series that looks at the anticipated “aftershocks” of the global financial crisis, and the profit plays those events can trigger.]
By Jason Simpkins
And William Patalon III
Money Morning Editors
U.S. consumers are already losing their jobs at an accelerating rate.
The same thing is now set to happen to their credit lines.
But with so many Americans already losing their main source of income – their jobs – at an ever-spiraling rate, will an economy that derives two-thirds of its power from consumer spending end up mired in its worst funk in decades because those same consumers are now losing their charge accounts?
Before you dismiss the possibility, consider this: The U.S. economy weakened across all regions since the middle of October as it became tougher to get loans and demand for credit shrank, the U.S. Federal Reserve said in its regional economic survey report yesterday (Wednesday). The so-called “Beige Book” report – published just two weeks before central bank policymakers are to meet and consider interest-rate changes – said that retail sales, tourism spending and manufacturing declined in most places, labeled housing markets as “weak” and concluded that the commercial real estate sector “weakened broadly,” Bloomberg News reported.
“We are looking at an economy that is not only in a recession, but a recession that is deepening rapidly,” former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co.,
told Bloomberg Television. “It certainly is a gloomy report, but not, I guess, worse than what you would expect given the data [we’ve seen] coming in.”
The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported this week. This economic one-two punch could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010.
To fully understand the forces at play, let’s first look at the outlook for U.S. employment.
Weakening Worker Ranks
Non-farm payroll employment fell by 240,000 in October, and the unemployment rate jumped to 6.5%, up from 6.1% the month before, the Bureau of Labor Statistics reported in early November. October’s drop in payroll employment followed declines of 127,000 in August and 284,000 in September.
That means that U.S. employment has fallen by 1.2 million jobs in the first 10 months of the year, with more than half of that decrease occurring in August, September and October.
The government’s jobless numbers for November won’t be released until tomorrow (Friday) – although it’s expected to show that the U.S. economy lost jobs for the 11th straight month, Bloomberg News reported.
But a private report based on payroll data released Tuesday said that United States companies eliminated an estimated 250,000 jobs in November – a much larger amount than was forecast and the most since November 2001, said ADP Employer Services, a unit of payroll-processor Automatic Data Processing Inc. (ADP). That would take the total number of job losses for the year up to 1.5 million.
The ADP report prompted some analysts to boost their estimates for the job losses we’ll see in tomorrow’s Labor Department report. New predictions include a payroll decline of 400,000 from Goldman Sachs Group Inc. (GS) and a drop of 450,000 from Wachovia Corp. (WB) economists. And the unemployment rate for November probably spiked to 6.8%, the highest it’s been since 1993, a Bloomberg survey of economists concluded.
With the world’s largest economy mired in its first recession since 2001, companies have accelerated their job-ranks reductions, with such sectors as banking, manufacturing and even business services taking major hits.
The NBER said Monday that the deterioration of the labor market was one of the key factors in labeling this downturn as a recession, even though we have yet to experience two consecutive quarters of economic contraction.
According to a number of estimates, the U.S employment outlook – and the overall economy – is going to get much worse before it gets better. Goldman Sachs Group Inc. (GS) says the U.S. unemployment rate will spike to 9.0% by the fourth quarter of 2009, as corporate profits plunge an estimated 25% – and that’s after an estimated decline in profits of about 10% this year, Goldman says.
Indeed, the U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman predicts.
Those numbers are worse than Goldman originally forecast, and create an outlook similar to Money Morning’s projections, which called for a credit-crisis-nurtured economic downturn that could last as long as 12-18 months.
The business-cycle dating committee of the NBER, a privately run, nonprofit economic research group, on Monday formally announced that the U.S. recession started after the economy peaked in December 2007. The U.S. Commerce Department estimated that U.S. GDP rose 0.9% in the first quarter and 2.8% in the second quarter. For the third quarter, GDP declined an estimated 0.3%.
The loss of consumer credit lines could make matters even worse.
$2 Trillion in Credit Lines on the Chopping Block
More than $2 trillion in consumer credit could be cut in the next 18 months, as credit-card companies pull back credit lines in anticipation of credit funding problems and regulatory changes, said Meredith Whitney, an Oppenheimer Holdings Inc. (OPY) banking analyst who’s well-known for her gutsy and prescient (and ultimately correct) market calls.
Throughout the week, Whitney has warned that the entire mortgage market will contract for the first time ever in the months ahead. More importantly, however, Whitney says the credit card market will be 18 months behind, as credit-card companies pull back more than $2 trillion in credit lines, taking away consumers’ second major source of liquidity, following jobs.
“What you haven’t seen yet digested by the market is banks pulling lines from consumers,” Whitney said in an interview with CNBC. “And across the board you saw the big banks that command so much of the market share of key products like mortgages and credit cards start to pull lines in the third quarter and that’s going to continue in the fourth quarter. And that’s going to continue into 2009.”
Although some experts note that consumers reduce their spending during recessionary periods — and, needless to say, after they lose their jobs — it’s important to not confuse spending and credit. During dire times, many consumers can boost their use of credit even as they cut overall spending, using the credit cards, home-equity lines and other forms of borrowing as a lifeline to tide them over. For those consumers, a credit line cut can be disastrous personally, and can aggregate into an even-steeper downturn in spending.
Roughly 70% of U.S. households have access to credit cards, and 90% of those people use those credit cards as a cash-flow management vehicle, or revolve payments at least once a year, Whitney says.
A surprisingly small number of national companies dominate the major lending arteries – including credit lines, mortgages and credit cards – that have sustained the U.S. consumer for so long, including mortgages and credit cards. Mortgages have already hit a wall with the collapse of the U.S. housing market and wave of subprime defaults. But credit cards could be next as companies raise interest rates, tighten lending standards, cut credit lines, and even close millions of accounts in an effort to insulate themselves from consumer defaults.
Bank of America Corp. (BAC), Citigroup Inc. (C), and JPMorgan Chase & Co. (JPM) – which controlled more than half of U.S. credit-card lines at the end of the third quarter – have all discussed reducing their credit-card exposure or scaling back growth, according to Whitney.
“You’re going to start to see the consumer get really strained on their credit card lines,” said Whitney. “People think the next shoe to drop is the credit card credit costs – the charges going up. No, it’s the credit card lines being pulled by bank lenders in anticipation of worsening credit funding problems, and then regulatory changes on the horizon.”
Whitney expects the credit-card market to begin to shrink by mid-2010, a time when the unemployment rate could be as high as 9.0%.
“Just when the consumer is losing their job that’s their first source of cash, their first source of liquidity, then they lose their second big source of liquidity, which is their credit card line,” she said.
Indeed, as unemployment rises, so too will credit-card delinquencies. David W. Nelms, chief executive of Discover Financial Services (DFS), told Reuters that card write-offs could be in the mid-5% range in the fourth quarter and near 6% in the first quarter of 2009.
Delinquencies “will tend to track with unemployment,” Nelms told Reuters after a speech to the Executives Club of Chicago. “Most agree that things will tend to get worse next year.”
Lenders, still reeling from losses tied to subprime mortgages, can’t afford another round of defaults on credit cards. So they’ve begun pulling lines of credit, leaving the consumer out in the cold. And it’s only going to get worse, Whitney says.
Crisis Expert Sees Change in Consumer Psychology
Investment expert R. Shah Gilani – a retired hedge fund manager who’s been chronicling the credit crisis as a Money Morning contributing editor – isn’t surprised by Whitney’s predictions.
“This is already happening in a big way,” Gilani said referring to Whitney’s assertion that credit lines have been put in jeopardy. “I have already talked to people who have had their credit lines reduced, even cut in half. So I wouldn’t be surprised if $2 trillion turns out to be an accurate figure.”
And according to Gilani, the evaporation of $2 trillion in credit could be the death knell for the American consumer.
“A number that high makes you gasp, just considering the quantitative effect on consumer spending,” Gilani said. “There’s a strong chance that the American consumer is not just down on the canvas, but has been knocked out of the ring.”
American consumers cut spending by 1% in October, the biggest drop since the last recession in 2001, the government said last week.
U.S. retail sales plunged 2.8% in October – the largest monthly drop since the Commerce Department began tallying monthly retail sales in 1992. The sales drop marked the fourth consecutive monthly decline and the first retrenchment since 1992. And few have any hope left for the Christmas season as consumer confidence is also waning. The Reuters/University of Michigan consumer sentiment index clocked in an ultra-low 55.3 for November, down from 57.6 the month before.
The reading fell well short of the projected 57.7, Reuters said, and – even worse – had deteriorated since the middle of the month, even though lower gasoline prices were seen as a bright spot for consumers. The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.
Once again, jobs, liquidity and confidence were the key issues, the survey report said.
“Consumer confidence fell in the last half of November due to mounting job losses, falling incomes and the evaporation of household wealth,” the report said. “Consumers were unanimous in their recognition that the economy was in recession, and nearly three-in-four expected the recession to deepen in the months ahead.”
However, Gilani, who is also editor of the Trigger Event Strategist – a trading service specifically designed to help investors maneuver through this economic malaise – also believes that what investors are witnessing is yet another “aftershock” of the ongoing global financial crisis.
“What is actually taking place is a shift in consumer psychology that has been driven by factors such as the socioeconomic climate – as well as the environment – and that’s now being compounded by credit conditions,” Gilani said. “This is about banks and credit companies de-leveraging and forcing the American consumer to do the same.”
The trouble is, he said, this can become a cycle that’s hard to stop once it takes hold.
“Whether Americans have lost confidence in the market or simply can’t afford to repay loans, money flows have simply dried up” Gilani said. “So banks have been forced to raise their lending standards to a point that many Americans are now unable to meet. It becomes a vicious cycle.”
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Investment News
Money Morning
http://www.articlesbase.com/investing-articles/will-the-loss-of-consumer-credit-serve-as-the-next-economic-aftershock-to-further-fuel-the-financial-crisis-672106.html
A debt consolidation credit card is designed for people who have several cards. These days, it is not surprising for an individual to have more than one card. When there are numerous cards in your purse, it is nice to be able to spend, but it becomes very difficult to grapple with your card debt. Who does not dream of a debt-free card? However, it is not impossible to make it happen through debt consolidation. No more waking up in the middle of the night, worrying.
How To Go About Credit card Debt Consolidation
There are many ways while considering debt consolidation credit cards and it is important to understand what it means. One way is to apply for a new loan and spend the money clearing off all the debt on your present cards. Another way is to transfer the balance off your cards. This means you apply for a new card.
Then you transfer all your balances from the cards you already have. It is compulsory to have an unsecured credit account here. You could also borrow money showing your property or your home as security, which you can then use to settle the debts on your credit cards.
Another method for debt consolidation is refinance. Here you consolidate your existing credit cards plus the mortgages you have. Then you get a new mortgage. By refinancing your mortgage you will generate some money to clear your outstanding debts.
Credit card Debt Consolidation And Its Advantages
Debt consolidation credit cards have some major advantages. Your interest rates reduce substantially and you get a reasonable time to repay your debts. Instead of struggling with many bills and remembering when to pay them, and worse still, defaulting and paying an interest, or being penalized for it, you will have only one bill to clear.
One card is always a great benefit because of low interest rates. This saves you money in the long run, money you can spend on clearing debts. The new account you create will have a lower rate of interest unlike when you total the interest outgo on your individual cards put together. This will bring down the cost of your debt.
If you have a good credit rating, you can even get a balance transfer at zero percent. Some card companies waive off your interest charges. The secured loans like mortgaging refinance carry a lower rate of interest. Money saved is money earned. This is made simpler by the fact that you have one bill to pay, further easing the process. Several credit cards make you worry about lots of monthly statements, different repayment dates and you have to stay abreast of when they are all due to avoid penalty.
Make sure that you get all the details of your debt consolidation credit card with all the options available to you. This will enable you choose the one that suits you best, and make the process easy.
Saurabh Jain
http://www.articlesbase.com/non-fiction-articles/debt-consolidation-credit-card-a-credit-card-that-sets-you-free-133085.html
Having a bad credit report can affect your current interest rates and your ability to apply for further credit or loans. It is a good idea to know what your credit report contains, as this is what potential lenders see when they consider you as a candidate for a loan whether it is for a house, car, or other item.
The first step you need to take in examining and fixing your credit is to obtain a copy of your credit report. The three major credit bureaus are now required to provide you one free credit report each year, through the website annualcreditreport.com. Though each credit bureau might have slightly different information about you, each report should be more or less the same.
Once you have obtained a copy of your credit report, look it over for accuracy. Most negative items are only allowed to stay on your credit report for 7 years, however bankruptcies can remain for 10 years and unpaid tax liens can remain indefinitely after they are posted to your report. If there are any negative items older than that, you need to dispute it so that they will be removed.
Also, make sure that all items are correct. Because negative items are more likely reported than positive ones, it is possible that there is something beneficial missing. Check that all the accounts that you have stayed current on are listed. If not, dispute it so that they will get listed. Also, sometimes items have been reported inaccurately or have been inappropriately attributed to you. These also need to be disputed.
It is relatively simple to dispute an item on your credit report through the specific credit bureau’s website. After filing the dispute, you will hear back from the company with an updated copy of your credit report. If it is not fixed completely, it will then be time to file a dispute by mail with documentation. Make sure to save a copy of everything you send.
There is no need to pay a credit repair service to help you out. There is nothing that they can do that you can’t do easily for yourself. Anything more that they promise you is most likely illegal and not actually beneficial.
If you want to find out more about what on your credit report is helping or hurting you, talk to a credit counselor. They can weed through your credit report and provide you with steps you can take in the future to improve your credit. A credit counselor can show you ways to improve your credit score by making positive credit history to offset the negative items you have in your past.
If you have credit card accounts that are reaching their credit limits or ones that are delinquent, a debt management plan and credit counseling might be right for you. It will allow your accounts to stay current and action to be taken to lower your debt, which are positive factors. Such credit counseling can be beneficial to your credit history as well as provide you with information that can help you avoid bad debt in the future. Knowing what is on your credit report can help you determine what steps to take to improve your financial situation.
Ronnica Rothe
http://www.articlesbase.com/credit-articles/credit-reports-and-credit-repair-tips-132408.html
I am looking to buy properties in Ohio to start renting, but don’t know how to get credit reports on people or to find out if they have stiffed other landlords. Also, what is a good credit report threshold to use for renting? Should I go by a minimum score (say 600) or go by percentage of rent to income (say rent can’t be more than 25% of their monthly income or something to that effect)?
There is probably a local landlord’s association you can join that will offer access to the ability to pull Credit Reports. I know that here in Central Texas, they also have a bureau that lists evictions and lease skips. (evictions are public record and should show up on a court record and credit report but a lease skip might not).
There are also companies you can pay to do the background checks. It is fair and common for you to pass the cost of that check onto the prospective clients.
Income verification is pretty important. And yes, your belief that rent shouldn’t exceed a percentage of their net take home pay (usually about a third of take home or a quarter of gross) is a good idea. You can ask to see bank statements and/or pay stubs. Self-employed applicants can show tax returns or bank statements.
One other trick I used, that I got from one of my landlords when I was a tenant. He asked for permission to come see where I was currently living (we had dogs). We said "sure." I didn’t expect him to pop in by surprise and was embarrased and worried because there were dishes in the sink, but…..
He said all he was looking for were issues that would upset a landlord and that routine mess was not his problem. He looked to see the house was in good shape and not being abused, and that the dogs had not destroyed the backyard.
I thought this was an awesome deal and used it on my own properties.
Some people can appear really nice and clean but are brutal on their residences and some problems are very expensive to fix.
Check out their current home and that will be an eye opener.
Someone with really bad credit may be a bigger risk but keep in mind that if someone has a family, it is possible that the ONLY bill getting paid is the rent. You can check with their current landlord in 2 ways -
1. Ask to see the cancelled checks for the past 6 months.
2. Look up the property owner (all public records accessible for free) and contact them to see how the rent was paid.
It is easy for a tenant to have a friend pretend to be a landlord so one of the above is more reliable.
And a tenant who is having a rough time, but passes the "paid rent regularly" and "isn’t living like a pig" tests may be forever grateful to a landlord that cut them a break if their credit otherwise sucks. That person may well be a good long term tenant.