Is Consumer Credit Recovering?
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The same "smoke and mirrors" that I see in our unemployment rate decrease from our labor force dropping out rather than true job growth, can be pegged to the de-leveraging analogy. First let us hone in on the true definition of "smoke and mirrors" - it is a metaphor for a deceptive, fraudulent or insubstantial explanation. The source of the name is mainly based on a magician's illusions, where one makes objects appear or disappear by extending or retracting mirrors amid a confusing burst of smoke. Kind of like our overstated and understated jobs numbers coming out of Washington, highlighted in an article in Columbia Daily Tribune.
While the supposedly 96,000 is still below the expected 140,000 jobs a month needed to bring the unemployment to a norm amidst population growth, there is even a bigger gridlock that needs to be fixed - consumer credit. An estimate reported by a Bloomberg survey of more than 30 economists showed revolving credit, that includes credit card spending, decrease by $4.82 billion. Meanwhile lending by the federal government for educational loans increased by another $1.1 billion in July before seasonal adjustment variations. Non-revolving debt, such as auto loans, also climbed $1.55 billion.
Companies That Slashed Their Limits First
Major financial institutions that did not just specialize in consumer credit, such as Bank of America and Citigroup, took heavy losses during the credit crisis as they were lending too freely from consumer to business loans, not seeing the need to cut back on their lending standards immediately. Bank of America had a lot on its plate; it acquired the suffering Countrywide and later Merrill Lynch, simultaneously dealing with foreclosure lawsuits.
At the height of the subprime crisis, American Express (NYSE: AXP) was one of the first cautionary companies that slashed its credit limits even to some of its loyal cardholders that have paid on time for years and had over 700 credit scores. It raised its transaction fees from merchants and focused on providing exceptional customer service and better point rewards. It earned $4.9 billion net income in 2011, which was up 22% from the prior year, boasting its ability to produce strong growth even in a weaker environment. Its revenues net of interest expense rose 9% to $30 billion in the same year. While the shareholders cheered for EPS and dividend stability, it all came in an expense of small business owners' misery. The company dropped the axe by reducing the profitability for thousands of credit worthy small business owners that needed that lifeline the most during turbulent times, some eventually being pushed into bankruptcy.
J.D. Power & Associates ranks Discover Financial (NYSE: DFS) as the second quality credit card name that measures up to American Express in the following areas: customer service, card transaction & execution fees, interest from credit cards & investments, travel services, mobile phone usage, and membership fees. It is one of the largest direct banks in the U.S. with $57 billion in loans and $100 billion in credit card sales volume. Its payment services PULSE, is one of nation's leading ATM/debit networks, including its global payments network Diners Club International. Due to it not charging a percentage fee to its retailers unlike Visa, Mastercard and American Express, it quickly regained ground in 2011. Although being hit with major losses in 2009 and 2010 while limiting its credit availability to consumers, the company has made a robust comeback in diversifying its holdings in student loans with over $7.3 billion lended in private loans to over 1,200 universities. In the second quarter of this year, DFS also saw its card sales volume increase by 5% to $26.1 billion.
While pundits are shouting that we're going through a de-leveraging phase, I cannot help but to see a Japan's scenario of stagnation in play - a long decade of high unemployment norm mixed with lower GDP due to an impaired credit environment. While the quantitative easing might aid commercial mega banks and even credit card companies, it still doesn't assist the regular Joe that just came out of bankruptcy and is going through temp jobs year after year to make ends meet. Public realizes that there is no certainty in the working world and the savings rate will definitely increase further if the job stability is not on the horizon. Whether the consumer credit is truly recovering remains to be in the eye of the beholder and whether one owns shares in the above stocks. The aforementioned companies are faring better than expected and I am bullish on American Express, Discover, Visa, Mastercard, and even Bank of America, but what really worries me about our current environment is the fact that credit is extended to people who don't really need it. This is what I mean by a gridlock.
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edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and has the following options: short OCT 2012 $55.00 puts on American Express Company, short OCT 2012 $60.00 calls on American Express Company, and long OCT 2012 $65.00 calls on American Express Company. Motley Fool newsletter services recommend American Express Company and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.