ARM Companies Under Pressure as Q2 Ends with Persistent Consumer Pessimism

While economists and government regulators continue their disputes over whether or not the nation is in a recession, average American households are more than aware that it costs more to buy milk, bread, and cheese, let alone fill their tanks – as the national average price for a gallon of gasoline this week was reported at $4.06 – and have continued to feel the pressures of simple household budgeting.

Consumer and economic confidence surveys across the board have shown a steady downward trend for more than a year, and though these surveys are subjective and the general public consists not of economists but average hardworking citizens, it is still the spending behavior and financial intentions of these same citizens that impacts our economy.

Consumer perceptions of current economic circumstances, whether fueled by press grabbing headlines of a rising unemployment rate or $4.00 a gallon gasoline, may differ from the actual state of the economy. But however distorted the disparity “public perception” may be from “economic fact,” expensive gasoline and negative economic news will always induce a consumer reaction.

The most recent example of this “negative economic news” took the form of a Labor Department report showing that the economy had shed an additional 62,000 jobs last month.  June’s labor losses equated to an unemployment rate of 5.5 percent. The unemployment rate has long been one of the most important economic indicators in the accounts receivable management industry – when people don’t have jobs, they can’t pay their bills.

But most troubling for U.S. households, and most concerning for those in the ARM industry, is the effect of inflation.  Aside from widespread calamity, there is little doubt anything would more acutely impact consumer sentiment than price increases for all basic goods and services.

As the price of goods and services has continued upward, the two consumer sentiment surveys tracked by insideARM.com – the Conference Board’s Consumer Confidence Index and the Discover US Spending Monitor, which tracks spending intentions and economic confidence with a monthly survey of 15,000 consumers nationwide – have continued to steadily deteriorate. 

In June, the final month of the second quarter, the Consumer Confidence Index declined yet again from 58.1 points in May, to 51.0.  This ended the second quarter of 2008 with an overall decline of more than 51 percent from the 105.3 points reported for the same quarter a year prior.

Consumer Sentiment Readings

Likewise, the Discover Spending Monitor illustrated the persistent weakness that has come to characterize America’s view of the broader economy.  For June, the monitor ended the second quarter with a decline of almost a full point from 86.8 points in May, to 85.9.  In all, June’s reading was a more than 11 percent decline from where the monitor ended the second quarter the year prior.

A driving factor behind this decline – the continued rise of household expenses – has forced many consumers to further cut spending on discretionary items as a means of compensating for the higher cost of necessities.  These signs of financial strain were evidenced as 66 percent of Discover’s respondents anticipated higher spending on everyday household expenses, and nearly half of these consumers expected to spend even more money next month than they did this month as a result. 

More than half (56 percent) reported that they intend to spend less next month on discretionary purchases, such as dining out or going to the movies.

To date, consumers and households have shown some resiliency. But this apparent financial buoyancy has continued to fade and fade fast, leaving an increasing number of consumers with less budgetary wiggle room.  For July’s Discover monitor numbers, the most probable prediction is that June’s increase of the Consumer Price Index – a key government measure of inflation – by 1.1 percent, the largest monthly increase in 26 years, will have consumers believing that the sky is falling and with it their overall economic sentiment. 

The annual inflation rate, which now stands at 5.00 percent, has undoubtedly done its part in maintaining the unremittingly pessimistic outlook held by consumers.  As another sign of where the Discover numbers might head for the first part of the third quarter, the Consumer Confidence Index held steady in July with an inconsequential uptick that left the index nearly 54 percent below its July 2007 reading.   

Moving into the second half of the year, the factor that will impact consumer confidence most, and consequently concern the ARM industry most, will be the job market.  In a Gallup survey conducted from July 14 – 20 to measure net new hiring activity, results suggested that job market conditions have continued to worsen, and that the unemployment rate may increase further in July exceeding the current 5.5 percent.  The percent of consumers expecting fewer jobs in the months ahead increased from 35.7 percent to 37.1 percent according to the Conference Board.  Whether consumers possess adequate job security or not, such news is certain to take a toll.

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.