Late payments hit 16-year high

By Elizabeth Strott

U.S. consumers have been slammed by the slowing economy, from record oil, gas and food prices to the slumping housing market.

The result: a surge in consumer credit delinquencies in the fourth quarter of 2007. Consumer delinquencies soared to their highest levels since 1992, according to the American Bankers Association.

"The rise in consumer credit delinquencies is consistent with a rapidly slowing economy," ABA chief economist James Chessen said in a report. "Stress in the housing market still dominates the story, but it's a broader tale of an overall weak economy."

Home-equity loan delinquencies rose 2.4% in the last quarter of 2007 from 2.3% in the third quarter, and personal-loan delinquencies increased to 2.5% from 2.3%. Delinquent auto loans made through dealerships increased to 3.1% from 2.9%, and delinquent direct-auto loans rose to 1.9% from 1.8%.

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"It's an indication of the degree of stress consumers are facing right now," Nigel Gault, director of U.S. research at Global Insight, told Bloomberg News. "People are overextended themselves; they took out loans they thought weren't a problem as long as house prices kept rising."

The most recent reports on the housing market are mostly grim, with mortgage foreclosures hitting an all-time high in 2007, according to the Mortgage Bankers Association. The median price of existing single-family homes fell 8.7% in February from the same month last year, the National Association of Realtors stated in a report in late March, although sales of existing homes managed to rise. New-home sales fell to a 13-year low (.pdf file) in February, the Commerce Department said.

"U.S. consumers borrow from mortgage companies, local banks and finance companies through mortgages, auto loans and credit cards," Peter Morici, a professor at the University of Maryland School of Business and a former chief economist at the U.S. International Trade Commission, wrote in a note to clients March 24. "Many homeowners borrowed more than their paychecks and home values could support."

The amount of outstanding debt in the U.S. totaled $2.52 trillion in 2007, a 5% increase from $2.387 trillion in 2006, according to the Federal Reserve.

Rise in late payments for plastic

Delinquencies on credit and debit cards were up in the fourth quarter as well, increasing to 4.4% from 4.2% in the previous three months, the ABA report showed.

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In late January, American Express (AXP, news, msgs) reported a decline in fourth-quarter earnings because the company increased its reserves to cover bad loans. The move by American Express, which typically caters to wealthier consumers, indicated that the economic slowdown and credit crunch had started to spread. "We are not immune from further deterioration in the economic and credit environment," Chief Executive Officer Kenneth Chenault said in a press release on Jan. 29.

Late payments at the country's six biggest credit card companies averaged 4.1% of loans in February, according to data compiled by Bloomberg, a jump from the 3.52% average in February 2006.

Soaring commodities, weak economy slam consumers

"No relief for consumers is in sight, as food and gas prices remain stubbornly high and income growth is anemic," the ABA's Chessen said.

Gas prices hit record highs earlier this week, according to an AAA survey. On Wednesday, the national average for a gallon of regular gasoline rose to $3.289, the survey showed, topping the record of $3.168 per gallon set just two days earlier. Californians paid the highest prices at the pump -- $3.663 a gallon.

Light, sweet crude oil has been trading above $100 a barrel for weeks now. "Low available crude oil surplus production capacity, combined with supply concerns in several oil exporting countries, have continued to put upward pressure on world crude oil prices," the Energy Information Administration said in its short-term outlook.

Corn, wheat and soybeans are all trading near record highs, and the rise in prices is translating to higher food costs at the supermarket. The rising cost of food is "the biggest risk we face, economically, and it might be the thing that does us in," Rich Yamarone, director of economic research at Argus Research, told The Boston Globe last month. "There's nothing really worse than having a job, making money and forking most of it over just so you can have the same amount of food. You're running in place, and it really weighs on you."

On Wednesday, Federal Reserve Chairman Ben Bernanke cautioned that the economy is slowing and a recession is possible. "Our estimates are that we are slightly growing at the moment, but we think that there's a chance that for the first half as a whole, there might be a slight contraction," Bernanke said to the Joint Economic Committee.

The Institute for Supply Management's index on the service sector in March showed a slight improvement, but the industry is still in contraction. Earlier this week, the ISM's manufacturing index illustrated a similar picture for the manufacturing sector -- a slight improvement from February but continued contraction.

Meanwhile, nonfarm payrolls fell 80,000 in March, the biggest decline in five years, adding pressure to the economy. The unemployment rate rose 0.3 percentage point to 5.1%.

Delinquencies are likely to rise through the first half of the year, Chessen said.