Byline: Dennis Jacobe

Synopsis: The January Experian/Gallup Personal Credit Index poll shows consumers' perceptions of the credit markets at their highest levels since February 2005. This is good news for consumer spending, but will tumbling real estate prices produce a negative "wealth effect"

PRINCETON, NJ -- Consumer credit market perceptions hit a new high according to the most recent Experian/Gallup Personal Credit Index (PCI) poll, conducted Jan. 2-8, 2007. Still, 54% of consumers say that given their current financial situation, now is a bad time to spend money. The question is whether this hesitancy to spend on the part of the majority of consumers is simply the result of a holiday spending hangover, or something more serious.

Personal Credit Index Hits New High

The PCI reached 105 in January 2007 -- up 5 points from December and 22 points over the two months since November 2006. The PCI is also 20 points above its level of a year ago and sits at its highest level since its inception in February 2005, when it was benchmarked at 100. Reasons for the significant increase in consumer credit perceptions over the past couple of months include lower gas prices at the pump than during most of 2006, readily available credit, and the continuation of relatively low, stable interest rates.

Both dimensions of the PCI increased over the past two months. The Present Dimension is at 42 -- up 12 points from November 2006 and up 11 points from its 31 of a year ago. The Future Dimension stands at 63 -- up 10 points over the past two months and 9 points higher than it was in January 2006.

Still, Consumers Have Worries

Three in four consumers feel they have enough money to live comfortably right now. Still, consumers do have some worries. Forty-two percent say they are "moderately" or "very" worried about having enough income for retirement. Thirty-seven percent say they are worried about not being able to pay the medical costs associated with a serious illness or accident while 27% worry about being able to pay medical costs for normal healthcare. Twenty-eight percent say they are worried about being able to maintain their current standard of living, 20% are worried about having enough money to pay their monthly bills, 17% are worried about being able to pay their rent, mortgage, or other housing costs, and 12% are worried about being able to make the minimum payments on their credit cards.

A Change in Consumer Spending?

The continuing improvement in consumer credit market perceptions may suggest an increase in consumer spending during the months ahead. In turn, this trend tends to support the argument that the economy will be somewhat stronger than many people expect later this year. On the other hand, many of the nation's housing markets continue to suffer with slowing sales, growing inventories, and declining prices. It is possible that today's declining housing values may have a "negative wealth effect" on homeowners. These consumers may not simply stop their habit of using their home equity as a "piggy bank," but may actually slow spending even more -- particularly on "big-ticket" items -- in an effort to reduce their overall debt.

The positive spending impact of increasing housing prices took some time to affect consumer spending, and there may be a similar effect as prices trend downward. As a result, the impact of falling home prices on the U.S. economy remains a significant unknown as far as consumer spending in 2007 is concerned.

Survey Methods

Results for the Experian/Gallup Personal Credit Index poll are based on telephone interviews with 1,001 adults, aged 18 and older, conducted Jan. 2-8, 2007. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is 3 percentage points.

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.