Economy Creating a Challenging Collections Environment

Consumer anxiety over the economy and personal financial well-being was amply demonstrated by the decline of the Discover U.S. Spending Monitor to a value of 85.1 in March from 86.4 in February.

Discover’s Monitor has quickly become an intriguing gauge of consumer mood and spending since the credit card issuer launched it in May 2007. Its 15 point fall from its initial value of 100 is a clear statistic that indicates both consumer unease and the air coming out of an economy that relies on ever higher levels of consumption.

Consumer pessimism appears likely to persist as bad news concerning the economy continues to surface. Witness the surge in both the number of jobless claims reported as well as the number of bankruptcy filings for the first quarter of 2008.

Claims for unemployment benefits climbed to 407,000 at the end of last week, the highest level since September of 2005, according to the Labor Department. Many economists had predicted that claims would only reach around 365,000.

In the first quarter of 2008, consumer bankruptcy filings increased 27 percent compared with the same period last year, according to the American Bankruptcy Institute. In 2007, consumer bankruptcy filings nationwide increased nearly 40 percent to 801,804, from 573,203 during 2006.

The most telling statistic in Discover’s recent release was the mismatch between expected spending and actual spending. Only 29 percent of respondents surveyed in February expected to spend more in March, but when surveyed in March, 46 percent reported having spent more for the month. This rise shows the increased pressure placed on household budgets by the rising cost of necessities like gasoline and food that respondents had not factored in.

As sour economic news and the prospect of rising costs for these necessities continues, discretionary spending will continue to be the easiest portion of consumer budgets that can be curtailed.

Whether or not a deterioration of personal or disposable income does occur, the cutting back of discretionary spending will likely continue for the time being as the weak personal consumption expenditure numbers recently released by the Bureau of Economic Analysis can attest.

For the accounts receivable management industry this continued weakening in consumer confidence remains a challenge. As pessimism about the economy persists and impacts the discretionary spending behavior of consumers, this shift in spending priorities will continue to negatively impact the collections environment.