As Of: August 20, 2002

NUMBERS

Yes, numbers can be misleading, but . . .

   

    Sometimes just looking at a collection of numbers can tell a story or raise some questions. The following quotes and statistics were taken from Dow Jones, Reuters, and numerous popular business magazines published in the past month.

    "In the first quarter of 2002, households borrowed $540 billion, which represents a record 7% of disposable income, and an unsustainable rate of growth in debt."

    During the second quarter, the percentage of homeowners who dipped into home equity while refinancing increased. According to Freddie Mac, 67% of the Freddie Mac owned loans that were refinanced during the second quarter resulted in new mortgages at least 5% higher in value than the original loans. A year ago, 58% of refinancings resulted in higher loan amounts.

    "Household debt is 78.2% of GDP, or $8.2 trillion, the highest percentage ever, according to the latest statistics provided by the Federal Reserve."

    According to Consumer Bankers Association, "delinquencies on non-mortgage consumer debt reached 1.86% of debts at the end of 2001, up a third from 1.4% a year earlier and the highest in a decade."

    The subprime market is estimated to have grown to be as much as 37% of credit-card loans.

    "The number of credit card solicitations has grown from about 1 billion per year in 1991 to about 5 billion per year in 2001. During the same period the default rate has doubled to almost 7%."

    The Federal Reserve reported that consumer credit expanded by 8.4 billion in June, down from a gain of 9.5 billion in May. This places consumer credit at a seasonally adjusted $1.713 trillion. Overall, consumer credit is rising at about a 6.5% annual rate, and has not fallen since January 1998.

    William Poole, president of the St. Louis Federal Reserve Bank, said, "Certain government-sponsored private agencies, including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System, are undercapitalized relative to their debt load."

Government-sponsored enterprise securities and government-related mortgage pool securities exceed the total outstanding issues of all other private sector financial firms. Mr. Poole said, "Looked at another way, the total of GSE direct and guaranteed debt is 40% larger than the federal government's debt. Yet the government requires Fannie Mae and Freddie Mac to maintain core capital of just 2.5% of on-balance sheet assets and 0.45% of outstanding mortgage-backed securities and other off-balance sheet obligations."

    "More than 40% of firms offering self-funded health plans for retirees will reduce benefits this year according to a study by Credit Suisse First Boston. That is far above the 25% that planned to reduce benefits a year earlier."

    College costs are going up 6%-8% per year. Health care costs are estimated to be rising at 8% per year.

    Nearly 50% of all households did not save anything last year. "Revolving consumer debt over the past five years has soared 30%."

    Between $7.5 and $8 trillion of wealth has disappeared from the stock market in the past 2 ½ years.

    Ten year U.S. Treasury rates recently dropped to 4% and mortgage rates are down to 6.2%, a 35 year low. Mortgage refinancing is understandably continuing at a record rate.

    Residential home values have been rising faster than family income for years, a trend that cannot last. July's 3.6% downturn in housing starts and 11.7% drop in existing-home sales may signal the beginning of the end.

    Aside from debt, the consumer's biggest worry is joblessness. While unemployment continues to grow, the good news is that employees who are working are continuing to enjoy pay raises. Hourly pay increases for nonfarm production workers and longer work hours are adding up to an increase of 3.6% in worker's paychecks.

    A survey released July 10 by the National Association for Business Economics found that goods-producing companies slashed capital spending again in the second quarter - the sixth straight quarter of cuts.