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It's really very simple. In a credit-driven consumer economy, when consumers are defaulting at all-time record levels there is only one direction in which this economy can possibly move: down.

It has already been widely reported that all categories of U.S. loans are simultaneously defaulting at record levels (with the exception of commercial real estate, which is just starting its own crash). However, a report just released by credit bureau, TransUnion shows that things are about to get worse.

It's “credit risk” index for U.S. consumers just hit a new, all time-record. As this is a “risk” index, rather than a “default” index, this shows what is going to happen in the future, as opposed to what is taking place at the moment.

There are many implications for this report. The obvious starting point is that U.S. consumers who are defaulting on debt and/or declaring bankruptcy will not be buying products in the U.S.'s 75% consumer-driven economy. As loan defaults continue to rise, this means loan-losses for the U.S. financial sector also must continue rising – meaning less new credit available for those Americans not on the verge of bankruptcy.

As always, less spending means more lay-offs, which means even more defaults/bankruptcies, which then leads to even less spending, followed my more lay-offs – and so on. The positive “buzz” from media propagandists today about less-bad U.S. manufacturing numbers is just irrelevant hype. If this was 30 years ago, then an improving picture for U.S. manufacturers would be a reason for hope – but not in an economy built 75% on credit and consumption.

Reinforcing this negative picture was the latest U.S. inflation reading for June, leaping higher at an annualized rate of 8.4%. This more than completely negates the supposed “rise” in consumer spending reported days earlier. Even “juiced” with a spike in U.S. automobile purchases, it only rose at an annualized rate of 7.2%. In other words, while Americans are spending more money, they are buying less goods – and this means more pain ahead for U.S. retailers (and more job-losses for their employees).

Perhaps most-troubling in the TransUnion report are the breakdowns in “credit-risk” data by individual states. While Nevada (not surprisingly) ranks near the bottom, the other “foreclosure kings” (namely Florida and California) do not appear in the bottom-five of worst credit-risks. Instead, there are states like Texas and Louisiana, which supposedly had among the strongest economies of individual, U.S. states.

Texas, was supposedly going to “weather the storm” better than most, due to the oil industry remaining an area of relative strength, while Louisiana is one of the few spots in the U.S. where construction spending has remained strong – as the state continues to try to recover from Hurricane Katrina. In fact, what the TransUnion data shows is that these two states are about to suffer extreme pain from massive levels of loan-defaults and bankruptcies, as the brain-dead residents of these states have squandered their relatively better circumstances by recklessly leveraging themselves with debt even more than their neighbours. This, in turn, will translate into a collapse in state tax revenues, meaning that these states have not escaped the Greater Depression, they are merely lagging other states in descending into economic collapse.

Which U.S. states are showing the lowest levels of consumer credit-risk? North and South Dakota, Minnesota, Iowa, and Vermont. These small and/or sparsely inhabited states are hardly going to lead the U.S. to an “economic recovery”.

Those investors who allow themselves them to be distracted by irrelevant manufacturing numbers, or deceived by contrived, “sentiment” readings are simply setting themselves up to be “surprised” by the next down-leg for the U.S. economy. As I pointed out in “The Death of the U.S. Consumer Economy”, U.S. retailers themselves have already acknowledged a “generational” shift in U.S. consumption behavior.

They are now in “survival” mode – and their only tactic for surviving is laying off employees. This is a self-reinforcing downward spiral which cannot be interrupted (let alone negated) by the tiny Obama “stimulus package”.

The U.S. is a consumer economy, and the U.S. consumer is dead. As I said at the beginning, it's really very simple.

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