Consumers Distressed, but Less So: Index

A new consumer index measuring wealth, income, spending, credit, housing and employment shows things have gotten a little better. but joblessness remains a huge drag on consumer balance sheets.
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ATLANTA (

TheStreet

) -- A new index measuring U.S. consumers' financial health shows that the situation isn't great, but may be on the mend.

The Consumer Distress Index, developed by the nonprofit group CredAbility, combines measures of wealth, income, spending, credit, housing and employment to show how the average consumer's balance sheet is holding up.

The index shows consumers were still in a "distressed/unstable" area last quarter, where they have been since the fall of 2008. But things have improved slightly since the last three months of 2009, which may have represented a trough.

Perhaps unsurprisingly, elevated unemployment remains the key drag on consumers' financial health. Nevada -- which has the highest foreclosure and jobless rates in the country -- is the only state that's in the "emergency/crisis" level of distress.

"To use a medical analogy, the patient is still in critical condition," says Mark Cole, CredAbility's chief operating officer, who calculates the index. "Until housing and employment markets improve significantly, we cannot expect to see significant recovery in these numbers."

Cole has been working with consumers as a credit counselor for decades and said in an interview that financial difficulties have spread into new consumer brackets. Those who had been employed with "six-figure income" before the crisis erupted have drained their savings and are more worried about their financial health than low-income consumers.

Overall, the index rose by 0.2 points to 65.2 during the period ended in June. It's down from a height of 79.1 during the first quarter of 2007 but up from a level of 64.0 during the last three months of 2009.

A level of 70 is the breaking point between "weakening/at-risk" and "distressed/unstable." Despite the country's economic woes, U.S. consumers haven't fallen below the barrier of 60, which would indicate an "emergency/crisis" situation, like the one Nevada faces.

Some other key findings amid the index's components: Housing has improved due to opportunistic purchases and the expiration of federal incentives. Overall consumer credit has changed little throughout the crisis, because great improvements for creditworthy borrowers has offset delinquencies and defaults. After more a year of "hoarding cash," in Cole's words, consumers recently started to spend again, causing great concern about household budgets.

Also telling is that, even at the tail end of the bubble era in 2006 and 2007, the Consumer Distress Index indicated that consumers were "weakening/at-risk."

The consumer-distress data are useful not just for economic observers, but for investors tracking the recovery: The healthier consumers are, the better for consumer-products companies like

Procter & Gamble

(PG) - Get Report

, retailers like

Wal-Mart

(WMT) - Get Report

or banks like

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Wells Fargo

(WFC) - Get Report

and

Citigroup

(C) - Get Report

that are waiting for signs of a recovery to start lending to consumers again.

CredAbility first unveiled the index in late-May. The agency, which assists 750,000 distressed borrowers each year, calculates the index in a proprietary manner using hard data on consumers' financial condition, rather than sentiment, as other popular consumer indexes do.

--Written by Lauren Tara LaCapra in New York.

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