Wrong Reasons

It was only 10 days ago when the so-called experts were heralding a big jump in consumer borrowing as a positive sign for the economy.

“May Consumer Credit Expands Most in Five Months” (Reuters)

Consumer credit expanded in May by the most in five months as Americans used their credit cards more readily, offering hope household spending will help the sputtering economy.

The Fed also said credit rose more during April than originally thought.

The data follows a report on Friday that showed employers hired at a dismal pace in June, a sign Europe’s debt crisis was shifting the economy into low gear. Most economists think economic growth slowed in the second quarter, when the pace of hiring fell off dramatically.

The credit data from May suggests consumers are gaining some confidence after a long stretch in the doldrums.

“If sustained, this dynamic would be positive news for consumer spending as a whole and, ultimately, for job creation,” said Dana Saporta, an economist at Credit Suisse in New York.

However, like most of what passes for analysis these days, that upbeat assessment had little to do with economic reality.

As Real Clear Markets notes in “Americans Resort to Plastic Safety Nets,”

Americans are starting to borrow once again, they’re doing so at an unexpectedly high level, but it’s for all the wrong reasons.

One of those reasons, according to Victor Nava and Anthony Randazzo, has to do with the nature of the obligations that are being taken on.

This added debt is coming from increased levels of borrowing on revolving lines of credit. Households are struggling to pay their bills, leading credit card usage specifically to jump 11 percent in May. Essentially, households are taking on more debts with high servicing costs – not low rate home and business loans.

The latter, for the most part, are paid down over time, leading to reduced debt loads and stronger household balance sheets, while the higher rates and open-ended repayment structure of credit cards and other revolving debt tends to have the opposite effect, leaving consumers worse off. Hence, the authors conclude,

while the Federal Reserve’s recent consumer credit report may appear to paint a rosy picture of Americans who are spending money, taking out bank loans at a growing rate, and generally feeling better about the economy, closer inspection suggests a stagnant economy that is failing to create jobs, and Americans resorting to their “plastic safety nets” just to get by.

But even if one takes issue with this assessment, it’s not hard to find other evidence that suggests the debts being racked up now are increasingly a matter of necessity rather than choice.

A new report from the Pew Charitable Trust, for instance, detailed by the Huffington Post in“Poorest Americans Turning To Payday Loans To Afford Food, Electricity,” reveals that

the poorest Americans are stringing together multiple high-interest loans each year just to keep the lights on and food on the table.

According to the report, 7 out of 10 borrowers use payday loans — typically short-term, high-interest cash advances — to make payments on recurring bills, including utilities, car payments, food, rent and mortgage payments. This is contrary to the typical marketing from payday lenders, who often pitch the loans as quick cash for a onetime cash crunch.

The report’s release comes as other financial woes, like high unemployment and rising household costs, continue to put economic pressure on many consumers. There are signs that other kinds of high-cost borrowing, like use of credit cards, are also being increasingly tapped to pay for everyday items as well.

In contrast, those at the other end of the economic spectrum, who presumably could afford to amp up their spending and borrowing if they were so inclined, are apparently moving in the opposite direction, as Reuters reveals in “AmEx Revenue Misses as Spending Growth Moderates”:

Credit card company American Express Co’s second-quarter revenue marginally missed Wall Street estimates as cardmember spending growth moderated amid low consumer confidence.

U.S. retail sales fell in June for the third straight month, the longest run of consecutive drops since 2008, and consumer sentiment is now at its lowest level in seven months as Americans take a dim view of their finances and job prospects.

“Overall cardmember spending rose 7 percent, or 9 percent adjusted for foreign currency translations. That’s slower than the increases we’ve seen in the recent quarters,” Chief Executive Officer Kenneth Chenault said in a statement.

Cardmember spending at the company, which focuses on the affluent customer, grew in the double-digit range for the last nine quarters.

American Express said spending growth rates slowed across all business lines and all segments.

The company’s card data is widely held as an indicator of the spending sentiment of the more affluent consumer, signaling that the weak recovery is taking its toll across all economic segments.

In sum, while more borrowing might have been seen as a positive sign in the good bad old days, that doesn’t appear to be the case now.