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Investing Specialists

Improving Credit Picture Bolsters Case for Recovery

Consumers are forgoing trips to the mall--to pay off credit cards.

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This week's data and company news continued to show signs of improvement in manufacturing and housing, supporting my case that the economy will see 3%-4% growth in the second half of 2009. Data this week also showed that general inflation appears to be well under control. Still, initial unemployment claims went the wrong way (up) for the second week in a row, and earnings reports from  Sears (SHLD),  Lowe's (LOW) and  Home Depot (HD) did nothing to dispel the notion that consumers are still clinging tightly to their hard-earned cash

The best news of the week came out of the financials sector. Our banks team is beginning to see signs of improvement in both mortgage and credit card delinquencies. This could bode well for housing prices and consumer spending over the next several months. My biggest worry remains the continued slowing in commercial real estate. I am also still keeping an eye on interest rates, though this week rates on the 10-year bond continued to move down to 3.56%.

Credit Trends Improving
While I want to talk about manufacturing and housing, the new news this week was the report of an improving trend in both credit card and mortgage delinquency rates. Improved credit card and mortgage statistics are good news for bank earnings and hopefully banks' propensity to lend. Although delinquencies overall are showing improvement, its particularly interesting to note that it is the delinquencies in the 30- to 60-day bucket (versus longer delinquencies) that are showing the most improvement. This should bode well for the overall credit statistics in the months ahead. The credit card companies are also seeing improvement in their charge-off rates, with five of the six major credit card companies reporting improved results in July, versus only three of the six companies showing improvement in June.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.