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Inflation Takes a Breather but Bankruptcies Soar

Business bankruptcies were up 44% last year, new figures show

By Mark Huffman
ConsumerAffairs.com

April 16, 2008

Looking on the bright side, the March Consumer Price Index was up 0.3 percent. Even when skyrocketing food and energy costs were excluded from the equation, the "core" index rose an even more modest 0.2 percent. While the numbers show prices are rising, the increase is not enough to set off inflation alarm bells.

"The reality, at least according to the government, is that there are some products where price increases are huge but they are being offset by declines in other goods," said Joel Naroff, Chief Economist at Commerce Bancorp. "As expected, gasoline prices jumped but that was offset by a major decline in clothing costs. Rising utility expenses were balanced by surprisingly tame health care costs and flat to down motor vehicle prices. And the usual surge in education was counteracted by minimal rises in communication and the usual drop in computers."

Naroff says even food price hikes were more modest than expected. The overall result, he says, is an inflation picture that was pretty acceptable. But he points out, it's just a one-month snapshot.

"Let's not kid ourselves, inflation is not tame," Naroff said. "Over the year, food, energy and health care expenses have skyrocketed. But there have also been areas where prices have not gone up. It's just that the costs that consumers see on a daily basis are out of control."

But Naroff says its hard to make a case that consumers are doing okay because of a drop in computers and motor vehicles. Not that many people buy those goods every week or even each year. But they do buy clothing and those prices have collapsed.

"How long that can continue is a real question as the dollar's decline has to be pressuring importers," he said. "There was only a modest rise in imported apparel prices so we can hope the restraining effect coming from clothing will continue.

Bankruptcies soar

While inflation may be lagging, bankruptcy filings are soared in 2007, the latest federal figures show. And it's not just consumers who are fleeing to bankruptcy court.

The number of businesses filing for bankruptcy increased by 44 percent in 2007, according to the Administrative Office of the U.S. Courts. Last year, 28,322 businesses filed for bankruptcy, compared with 19,695 in 2006. While many speculate about how bad the economic downturn will be, bankruptcy lawyers say it's getting worse by the day.

"What used to really be a trickle -- one every two to three weeks -- is now closer to one a day. And it's a steady drumbeat of filings and a steady drumbeat of phone calls, of problematic situations," said Peter Gilhuly, a bankruptcy partner in Latham & Watkins' Los Angeles office, according to a report in Law.com.

"I think we'll be in a full insolvency cycle six months from now, and it will continue for some time," he said.

California topped the list of business bankruptcies last year with 3,505 cases, up from 2,098 in 2006. That's 40 percent more than Texas, the state with the second most filings, accounting for nearly one-eighth of bankruptcies filed in 2007.

Many of those filing are smaller companies and real estate companies but bankruptcy lawyers say they expect to see bigger firms biting the bankruptcy bullet as the year progresses. Many will be unable to finance their debt while others will be stuck with partnerships and alliances that looked good a few years ago but are now untenable.

Consumer debt

Consumer loan delinquencies in the fourth quarter of 2007 reached their highest levels since 1992, according to the American Bankers Association’s Consumer Credit Delinquency Bulletin. The composite ratio, which tracks eight closed-end installment loan categories, rose 21 basis points to 2.65 percent of all accounts in the fourth quarter (seasonally adjusted).

All eight loan categories experienced increased delinquencies during the fourth quarter, a rare occurrence. The ABA report defines delinquency as late payments that are 30 days or more overdue.

James Chessen, ABA chief economist, attributed the rise largely to auto loan delinquencies. The auto loan category comprises about two-thirds of all closed-end consumer installment loans. In addition, the number of delinquent bankcard accounts rose to 4.38 percent, but remains close to the five-year average of 4.40 percent.

“The rise in consumer credit delinquencies is consistent with a rapidly slowing economy,” Chessen said. “Stress in the housing market still dominates the story but it’s a broader tale of an overall weak economy.”

The weak housing market continues to be reflected in rising delinquency rates for home equity loans and lines of credit. Delinquencies for home equity lines of credit -- the lowest delinquency rate category -- rose to 0.96 percent.

The fourth quarter composite ratio is made up of the following closed-end loans. All figures are seasonally adjusted based upon the number of accounts.
• Home equity loan delinquencies increased to 2.39 percent from 2.28 percent.
• Property improvement loan delinquencies increased to 1.81 percent from 1.60 percent.
• Indirect auto loan delinquencies increased to 3.13 percent from 2.86 percent.
• Direct auto loan delinquencies increased to 1.90 percent from 1.81 percent.
• Personal loan delinquencies increased to 2.48 percent from 2.29 percent.
• Mobile home loan delinquencies increased to 2.92 percent from 2.87 percent.
• Marine loan delinquencies increased to 1.57 percent from 1.30 percent.
• Recreational vehicle loan delinquencies increased to 1.08 percent from 0.89 percent.

No relief

Chessen predicted that delinquencies will continue to rise during the first half of 2008.

“No relief for consumers is in sight as food and gas prices remain stubbornly high and income growth is anemic,” Chessen said.

Chessen recommends that borrowers experiencing financial stress seek out their lenders promptly as more options are likely to be available when the problem is addressed early.

ABA advises consumers to review their finances often and watch for the warning signs of overextended credit:
• Paying only the minimum payment month after month;
• Being out of cash constantly;
• Being late on important payments such as rent or mortgage;
• Taking longer and longer to pay off balances; and
• Borrowing from one lender to pay another.

For others having trouble paying down debts, ABA advises taking action -- sooner rather than later -- by following these tips:
• Talk with creditors -- hiding only makes the problem worse;
• Don’t charge more purchases until your problems are solved;
• Contact Consumer Credit Counseling Services at 1-800-388-2777.

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