Credit Available, but Consumers Remain Wary

Heath E. Combs, August 29, 2011

HIGH POINT - Retail credit availability doesn't appear to have declined much lately, despite the recent volatility in financial markets.
     A nagging problem remains, however: Getting enough consumers to want to exercise that credit to buy home furnishings.
     Bill Hartman, president of buying cooperative Furniture First, said it doesn't look like the volatility will affect credit availability. Furniture First offers consumer financing programs through TD Retail Card Services and Wells Fargo.
     One problem with retail finance continues to be that the industry hasn't yet replaced the customers lost with the changing of no-interest, no-payment, no-down-payment promotion rules that ruled out the no-payment part of those programs.
     Hartman said 10% of the customers who used the financing programs prior to 2008 are gone from the market. About a third of consumers are using financing for furniture purchases, he said.
     Twelve months, with a minimum payment and same as cash offer, is probably the most promoted financing deal offered these days by retailers, and also one of the cheapest, Hartman said.
     While he said 48-month programs are coming back, longer term offers are cost-prohibitive for many dealers. For a long-term financing offer, such as the once-popular 60 months, a dealer would pay as much as 18% of the value of loan, Hartman said. For a 12 month offer, a dealer pays about 3%, Hartman said.
     "It's going to be a lot more expensive.... That's 15% higher that you've somehow got to take out of your gross profit margin to pay for it," Hartman said.
     He said he's not expecting to see much change in the economy for the rest of the year, and said he has a "gut feeling" that interest rates may begin creeping up by the end of the year.
     While offering lines of credit isn't a problem for most furniture retailers, approval rates continue to be lower than in the past and haven't gotten back to 2008 levels, Hartman said.
      Ed Heffernan, president and CEO of Alliance Data, a retail credit programs provider, said the recent market volatility was the culmination of two camps wrestling with a single question: Is the economy moving into a double dip recession or is the recent weakness just a soft spot?

"An in-house funding program is likely to struggle, while an
outsourced program at a large well-known firm will have more than sufficient access to markets to ensure credit is widely available."

Ed Heffernan, Alliance Data

Ed Heffernan

     Heffernan said that equity markets are saying that the economy is moving along much more slowly than expected and additional risks exist in the form of downgrades for U.S. and other sovereign debt.
      "Thus, a 10% re-pricing of equity assets should be viewed as a normal response to this," he said.
     The debt downgrade has thus far had no impact on liquidity in the credit markets, Heffernan said. For multibillion- dollar companies with strong cash flow models, access to credit is plentiful and debt markets are still looking to put money to work.
      "Today's market is nothing like the liquidity-frozen market which characterized the Great Recession," he said.
     As it relates to customers obtaining credit via private label credit cards, it, depends on the provider and their access to markets, Heffernan said.
     "An in-house funding program is likely to struggle, while an outsourced program at a large well-known firm will have more than sufficient access to markets to ensure credit is widely available," he said.
     Heffernan said that high unemployment and political brinksmanship in U.S. and European capitals have damaged the consumer's psyche, but jobs are still being created and consumer spending will likely crawl forward, especially for smaller ticket items.
     "For the large ticket purchases, we might see consumers taking a breather until the ‘noise level' abates a bit," he said.
     The big problems for retail finance - as they are for the U.S. economy - continue to be the sagging housing market, high unemployment and a contraction of consumer debt.
     With the Federal Reserve continuing to pump out "an awful lot of money," said Kenneth Goldstein, an economist with research firm The Conference Board, liquidity isn't the problem and credit isn't likely to contract this year. The problem is trying to find someone to take the money, he said.

Kenneth Goldstein

"What we need is fireworks in the labor market, not in the
financial market."
Kenneth Goldstein, The Conference Board

     Banks and medium-to-large companies are sitting on trillions in cash - so they don't need to borrow - and state and federal governments are looking to pare down debt and cut back new bond issues, Goldstein said.
     Consumers continue to be in a period of austerity and deleveraging as they look to pay down debt and not take on more, he said.
     "It gets down to the real problem the economy faces: lack of sales," Goldstein said. Retail sales were pretty good in July and borrowing probably saw a slight uptick that will likely continue in August, and initial reports suggest back-toschool sales are a little better than last year, he said. Recent stock market volatility has changed the broad picture very little, he added.
     "If Mr. and Mrs. Smith back in June were discussing what they were going to spend in August to send the kids back to school or what their vacation plans were going to be this summer, I suspect those plans didn't change much over the last two weeks because of the fireworks in the financial market," Goldstein said.
     In fact, consumers may have a little more money in their pockets because gasoline prices have dropped over the past several months, he said - from its 2011 peak of about $3.90 a gallon for regular in early May to about $3.57 in mid-August, according to government figures.
     While gas prices will likely rise around Labor Day, consumers came into back-to-school sales with a little more cash, Goldstein added. Another recent positive is that as mortgage rates continue to be low, many are refinancing loans.
     "All of this drama on Wall Street in the stock market and bond market, for the average person, I suspect, hasn't fundamentally changed their attitudes, their spending plans, and certainly not make them more or less likely to look for a loan," Goldstein said.
     That said, in upcoming months if consumer savings, now at about 5%, increases by a point or two, it could signal a big pullback in spending. Or if unemployment increases, consumers may be less optimistic.
     "What we need is fireworks in the labor market, not in the financial market," Goldstein said.
     Until then, the economy is stuck in the slow lane, with little fundamental change in the status quo among consumers, and is likely to continue muddling through on into next spring, he said.
     "If the labor market were to pick up either in terms of more new jobs or faster wage gains, you might get a few folks looking to replace the old bedspread or the sofa that the kids just destroyed downstairs," Goldstein said. "We haven't seen that activity pick up this summer, I suspect we're not going to see that pick up this fall, probably not this winter."
     Jay Bryson, an economist with Wells Fargo, said the recent market volatility was due to a combination of worry about economic growth thus far this year, market jitters in Euro zone countries reverberating globally, and reaction to the S&P downgrade of the U.S. credit rating - which could result in a marginal increase in the cost of borrowing for the U.S.
     That said, the stock market stabilized somewhat by last week and continued to wipe out some of its losses, Bryson said. Banks are still looking to make loans. In addition, credit spreads between corporate bonds that are high-yield to investment-grade, which had widened earlier, have started to narrow again, he said.
     That doesn't point to businesses believing there is a significant risk that consumers will tighten their fiscal belts. Signs of credit weakening would be banks and investors getting more defensive, Bryson said.
     Wells Fargo isn't forecasting a recession, he said, and while the economy isn't booming, it has been grinding along with slow growth.
     "I don't think anyone's slamming down the credit on the retail side either," Bryson said. "There certainly are a number of headline risks out there, but if we're all breathing a collective sigh of relief it's probably also too early to sound the all clear siren as well."

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