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Is loss of consumer credit Serve Economic Aftershock Next to continue feeding the financial crisis?

[This is the latest in a series of ongoing news that is seen in the planned "replica" of the global financial crisis, and proceeds the works could trigger the events.]

By Jason Simpkins
William III and trousers
Money Morning Editors

U.S. consumers and are losing their jobs at an accelerated pace.

The same is now ready to happen to their credit lines.

But with so many Americans who lose their main source of income - your job - at increasingly rapid pace, an economy that derives two-thirds of its energy consumer spending end up mired in its worst funk in decades due to the same consumers are now losing their credit accounts?

Before dismissing the possibility, consider this: The U.S. economy weakened in all regions since mid-October when it became harder to obtain loans Credit demand and contracted, U.S. Federal Reserve said in its regional economic survey yesterday (Wednesday). The so-called "Beige Book" report - Released two weeks before policymakers from central banks will meet and consider the interest rate changes - said that retail sales, tourism spending and industry has declined in many places, housing markets are tagged as "weak" and concluded that the commercial real estate sector "weakened in general terms, "Bloomberg News.

"We're seeing an economy that is not only a recession, but a quickly deepening recession, "said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co.
told Bloomberg Television. "It is certainly a gloomy report, but no, I guess, worse than expected given the data [we have seen] coming in. "

The United States has already been in recession for a year, the National Bureau of Economic Research (NBER) reported this week. This economic one to two could generate a much larger crisis-financial "reply" what most experts realize. Only two of the last 10 recessions that have occurred since the Great Depression have lasted a full year. But this could last well into 2010.
To fully understand the forces at stake, we will see for the first time in employment prospects in the U.S..

The weakening of the ranks of workers

Employment nonfarm payroll fell by 240,000 in October and the unemployment rate rose to 6.5% from 6.1% the previous month, the Bureau of Labor Statistics reported in early November. October decline in payroll employment followed declines of 127,000 in August and 284,000 in September.

This means that employment in U.S. has been reduced by 1.2 million jobs in the first 10 months of the year, with more than half of which is decreased in August, September and October.

government unemployment numbers for November will not be released until tomorrow (Friday) - but is expected to show that the U.S. economy jobs lost for 11 consecutive month, Bloomberg News.

But a private report based on payroll data released on Tuesday, said that U.S. companies eliminated 250,000 jobs in November - an amount much larger than had been forecast and the most since November 2001 said ADP Employer Services, a unit of payroll processor Automatic Data Processing Inc. (ADP). That would bring the total number of job losses for the year to 1.5 million euros.

The ADP report led some analysts to raise their estimates of job losses will be in tomorrow's report Labour Department. New predictions are reduced payroll of 400,000 from Goldman Sachs Group Inc. (GS) and a drop of 450,000 from Wachovia Corp. (WB) economists. And the unemployment rate in November, probably jumped to 6.8%, the highest it's been since 1993, a Bloomberg survey of economists concluded.

With the U.S. economy plunged into its first recession since 2001, companies have stepped up their ranks for employment reductions, with sectors such as banking, manufacturing and business services, even taking big hits.

The NBER said Monday that the deteriorating labor market was one of the factors Key in the labeling of this recession as a recession, though not yet have experienced two consecutive quarters of economic contraction.

According to a set of projections, the outlook for U.S. employment - And the economy in general - is going to get much worse before it gets better. Goldman Sachs Group Inc. (GS) said that U.S. unemployment rate rises to 9.0% in the fourth quarter of 2009, corporate profits plunge 25% - and after an estimated decline in the profits of about 10% this year, says Goldman.

In fact, the U.S. economy - Measured by gross domestic product (GDP) - will decrease by 5.0% in current quarter, followed by a decrease of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman predicts.

Those numbers are worse Goldman originally envisaged, and create a vision similar to the projections of money tomorrow, who asked for a credit crisis fueled by the economic slowdown that could last up to 12-18 months.

The business cycle dating committee of the NBER, a privately run nonprofit economic research group, on Monday formally announced that the U.S. recession started after that the economy peaked in December 2007. U.S. U.S. Department of Commerce estimated that GDP grew 0.9% in the first quarter and 2.8% in the second quarter. For the third quarter, real GDP declined by 0.3% estimate.

The loss of lines of consumer credit could worsen things.

$ 2 billion in credit lines on the block

More than $ 2 trillion in consumer credit could reduced in the next 18 months as credit card companies pull credit lines, in anticipation of the funding problems of credit and regulatory changes, said Meredith Whitney, an Oppenheimer Holdings Inc. (OPY) analyst banking is well known for his courageous and prophetic (and ultimately correct) calls market.

Throughout the week, Whitney has warned that the mortgage market will contract for the first time in the coming months. More importantly, however, Whitney said that the credit card market is 18 months late because the credit card companies go back more than $ 2 billion in credit lines, taking away consumers' second major source of liquidity, following jobs.

"What I have not yet been digested by the market are the banks pulling lines of consumers," Whitney said in an interview with CNBC. "And through the card you saw the big banks that command much of the market share of key products such as mortgages and credit cards start throwing lines in the third quarter and will continue in the fourth quarter. And that will continue in 2009. "

Although some experts say that consumers reduce spending during recessions - and, needless to say, after losing their jobs - is important not to confuse spending and credit. During difficult times, many consumers can increase their use of credit, even as they cut spending in general, using credit cards, credit lines and other home forms of debt as a lifeline to tide over them. For consumers, a cut line of credit may be a personal disaster, and can be added in a recession even more pronounced-in spending.

Approximately 70% of U.S. households have access to credit cards, and 90% of these people use these credit cards as a vehicle for cash flow management, payment or turn in at least once a year, says Whitney.

A surprisingly small number of domestic companies dominate the main arteries of the loan - including credit lines, mortgages and credit cards - that have sustained consumer U.S. for so long, including mortgages and credit cards. The mortgages have hit a wall with the collapse of U.S. housing market and high wave of defaults risk. But credit cards could read as companies raise interest rates, tightening lending standards, cutting credit lines, and even near million accounts in an effort to protect consumer defaults.

Bank of America Corp. (BAC), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) - which controlled more than half of U.S. lines of credit cards at the end of the third quarter - have discussed the reduction of exposure credit card or reduction of growth, according to Whitney.

"You'll begin to see the consumer get really tense in their lines of cards credit, "said Whitney." People think that the next shoe to drop on credit card costs credit - interest rates go up. No, credit card lines credit lenders dragged by banks in anticipation of worsening credit problems of financing, then regulatory changes on the horizon. "

Whitney expects the credit card market to begin to drop in mid-2010, a time when the unemployment rate could reach 9.0%.

"Just when the consumer is losing his job that is their primary source of cash, their first source of liquidity, they lose its second major source of liquidity, which is its line of credit cards, "he said.

In fact, with increasing unemployment, also so will the credit card delinquencies. David W. Nelms, CEO of Discover Financial Services (DFS), told Reuters card repayments could be in the middle range-5% in the fourth quarter and about 6% in the first quarter of 2009.

Delinquencies "tend to track with unemployment, "Nelms told Reuters after a speech to the Executives Club of Chicago." The majority agrees that things seem to be worse next year. "

Lenders, still reeling from losses related to subprime mortgages, can not afford another round of defaults on credit cards. So they started to pull the credit lines, leaving consumers out in the cold. And only you worse, Whitney says.

Crisis of Experts considers the change in Consumer Psychology

R. investment expert Shah Gilani - a Hedge fund manager has been removed chronicles the credit crisis as an editor and contributor to the morning the money - not is surprised by the predictions of Whitney.

"This is already happening in a big way," Gilani said, referring to claim that Whitney Credit lines have been in danger. "I've talked to people who have had their credit lines reduced, but halved. So do not surprised that $ 2 billion is to be an exact figure.

And according to Gilani, the evaporation of $ 2 billion in credits could be of the sentence of death for U.S. consumers.

"A number so high it makes you gasp, considering only the quantitative effect on consumer spending, "Gilani said." There is a strong possibility that the U.S. consumer is not simply down on the canvas, but has been beaten out of the ring. "

U.S. consumers cut spending by 1% in October, the biggest drop since the last recession in 2001, the government said last week.

U.S. retail sales fell 2.8% in October - the biggest monthly decline since the Commerce Department began calculating monthly retail sales in 1992. The sales decline marked the fourth straight monthly decline and retrenchment for the first time since 1992. And few have any hope for the Christmas season as consumer confidence is also waning. The Reuters / University of Michigan consumer sentiment index clock in an ultra-low 55.3 in November, down from 57.6 the previous month.

The reading was well below the projected 57.7, told Reuters, and - worse still - has deteriorated since mid-month, even though lower gas prices were seen as a bright spot for consumers. The University of Michigan index confidence goes back to 1952. Its record low was 51.7, which hit him in May 1980.

Once again, employment, liquidity and confidence are the key issues, the survey report said.

"Consumer confidence fell in the latter half of November due to work mounting losses, falling revenue and evaporation of household wealth, "the report said." Consumers were unanimous in their recognition the economy was in recession, and almost three in four expect the recession to deepen in the coming months. "

However, Gilani, who is also chief strategist Event Trigger - A commercial service designed specifically to help investors through This maneuver economic malaise - also believes that what investors are seeing is a new replica "of the current global financial crisis.

"What really happens is a change in consumer psychology has been driven by such factors as socio-economic development climate - as well as the means environment - and now compounded by credit conditions, "Gilani said." These are the banks and credit-use and forcing American consumers do the same. "

The problem is, he said, this can become a cycle that is difficult to stop once it takes hold.

"If the Americans have lost confidence in the market or simply can not afford to repay loans, money simply flows have dried up, "Gilani said." So the banks have been forced to raise their credit standards to a point that many Americans are now unable comply. It becomes a vicious circle. "

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About the Author

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