Skittish Consumers Threaten the ARM Industry

As leading indicators continue their downward course, the question on everyone’s mind is whether consumers will reduce discretionary spending, impacting everyone from retailers to the ARM industry.

For the most part, growth rates for revolving debt – a leading gauge of overall consumer spending – remained strong through 2007, according to the monthly G. 19 statistics from the Federal Reserve. Revolving credit grew by 7.6 percent last year, with October and November seeing double digit growth rates of 11.1 percent and 12.8 percent respectively, as Americans were spurred on by holiday shopping. Even as consumer sentiment diminished throughout the year, overall revolving credit grew from $879.2 billion to $941.8 billion.

This rapid expansion in revolving debt in the face of escalating rough economic conditions hit a snag with the release of the Fed’s December numbers, which showed a precipitous drop to a growth rate of just 2.8 percent.

With consumer spending accounting for 70 percent of the total economy, broader economic implications are obvious, and the Fed’s December numbers added to the fear that the increasingly pessimistic views of the U.S. economy would continue to curb credit card spending.

However, last Friday the Fed reported January’s revolving credit growth at 7.0 percent, lessening concerns, temporarily, of a continued slow down in consumer spending ("Credit Card Spending Grew 7 percent in January: Fed," March 10).

Other economic indicators remain troublesome. The Discover Consumer Spending Confidence Monitor – an index designed to measure consumer spending intentions from a monthly survey of 15,000 adults – and the Consumer Confidence Index, released by the Conference Board, have shown steady declines recently.

Discover’s Spending Monitor stayed steady in January and February, landing at 86.4 points, but it has seen a decline of 13.6 points since its start in May 2007.

Likewise, the Conference Board’s Consumer Confidence Index in February stood at 75 points, after dropping 36.2 points from its mark one year prior.

As consumers continue to anticipate difficult economic conditions, discretionary spending continues to be approached cautiously as more than 43 percent of respondents in February to Discover’s Spending Monitor planned to spend less in each of the discretionary categories surveyed: eating out or going to the movies, household improvements, and personal spending on items such as health club memberships or vacations.

Shoppers ratcheted back excessive spending in the first quarter. In January same store sales numbers were weak across the board, with middle market retailers like Kohl’s and J.C. Penney showing significant weakness. Kohl’s reported sales declines of 8.3 percent in January and 3.8 percent in February; Penney reported a 1.9 percent fall in sales in January and a 6.7 percent decline in February.

Other examples of middle market retailers experiencing weakness in the first two months of the year were Gap Inc. and Macy’s, who saw declines of 2 percent and 7.1 percent respectively. Macy’s announced in February it would stop reporting such figures as it no longer gives quarterly guidance.

Though high-end rivals have been hurt, the continuing shift in spending behavior has benefited retailers with lower price points with Wal-Mart as an example. In January, even as rival discount store Target showed a 1.1 percent sales decline, Wal-Mart showed a 0.5 percent increase in same store sales followed by a 2.6 percent increase for February. In comparison, the department store sector saw same store sales drop by 2.8 percent in February.

As pessimism about the economy and job market persists and further drag down consumer sentiment, perceptions of disposable income will continue to shift. Though consumer spending is unlikely to see a dramatic shift, the psychology governing discretionary spending will undoubtedly impact the recovery rates and strategies of ARM agencies handling all debt types and will remain closely watched.

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.