Consumer Gloominess Likely to Continue to Pressure Collections

As the price of necessities such as gasoline has continued to climb, the economic mood of consumers remains negative. This was illustrated most recently by the Conference Board’s Consumer Confidence Index, which declined yet again to 50.4 points in June following its drop from 62.8 points in April to 58.1 points in May. It marks an overall decline of more than 52 percent from the 105.3 points reported in June of 2007.

Likewise, the Discover US Spending Monitor – which tracks spending intentions and economic confidence with a monthly survey of 15,000 consumers nationwide – remained weak. Though rising 1.4 points in May, this increase was attributed mainly to consumer expectations of increased spending on household expenses in the coming month, in particular on food and fuel.

The Discover Monitor has seen an overall decline of more than 13 percent from its commencement in May of 2007.

Household budgets already stretched precariously thin during past months were met with another milestone – record-breaking gasoline prices. The American Automobile Association (AAA) recently announced that the average price of gasoline nationwide reached $4 a gallon for the first time in history. Undoubtedly the soaring price of gas, which has risen 29 percent over the past year, did its part in dampening consumer sentiment.

With the average price of gasoline in the U.S. above $4.00 a gallon and spending on fuel accounting for more than 6 percent of wage income, the fear that has come front and center is the risk of declining consumer spending as confidence plummets.

In the Federal Reserve’s most recent monthly report on consumer credit – known as the G.19 – some evidence of slowed consumer spending may have made an initial appearance. In April revolving or credit card related credit increased at an annual rate of 0.4 percent, the slowest expansion since May of 2005 when credit card debt contracted 1.8 percent ("Consumers Put Away Credit Cards in April, But Still Rack Up Debt," June 9).

Fears of slowed spending are understandable with the unemployment rate now standing at 5.5 percent and 54 percent of consumers surveyed by the Discover Spending Monitor viewing their personal finances as getting worse. Most telling, 42 percent of respondents reported putting less into savings as a response to high fuel costs, while 48 percent of respondents planned to spend less on discretionary purchases, up five points over the last three months.

Though sentiment points towards a continued slowdown in credit card debt growth, year to date monthly credit card spending has averaged $6.9 billion, compared to the $5.5 billion monthly average of 2007. In addition, the current cost of necessities such as food and fuel, and the continued upward trend in the cost of discretionary spending categories pegged to fuel costs like travel and leisure, will remain a driving force behind further credit card debt growth and limit the extent of a continued slowdown.

Tightened budgets and a heightened awareness of one’s financial burdens will inevitably produce a difficult recovery environment for collectors, but to what extent the severity of this slowdown will be felt in accounts receivable management and for how long, remain to be seen.

Dimitri Michaud analyzes trends in strategic receivables management within the consumer finance sector, including the banking, credit card and mortgage markets. He conducts research, writes publications and hosts a regular blog on insideARM.com for Kaulkin Media.