Equifax breach could shake consumer confidence, cut spending


It’s too early to know if Equifax’s massive data breach will have a significant impact on the U.S. economy, but it’s not too soon to worry, economists say.

The Atlanta-based company recently acknowledged that information on 143 million people was commandeered by hackers. That’s not the largest such breach – information from more than 1 billion accounts was exposed last year in two Yahoo fiascos – but the Equifax debacle may very well be the deepest. Vast amounts of personal information about Americans and their spending habits have been compromised.

Now it’s a matter of how consumers react: Many will simply freeze their credit where it is. Some could stop trusting that their information is being kept secure and use less credit. Maybe a large number of people will find their finances suddenly poisoned. And that might make others afraid.

Together, those reactions could do serious damage to the economy, chilling an already tepid expansion by undercutting consumer spending and shaking confidence in the underpinnings of the American financial system.

“In a worst-case scenario, we could see … all of a sudden, your credit report is trashed and there’s maybe 20 million people who are affected,” said economist Thomas Smith, with Emory’s Goizueta School of Business. “And, as a result, a lot of other people just freeze their spending. They don’t buy anything. That could send us into a recession.”

Oh, and by the way, economists warn, it could also threaten the 2,385 jobs at Equifax headquarters in Atlanta – as well as the company’s ambitious expansion plans, as reported earlier this year by the AJC.

“No one is talking about this like it’s a crisis yet,” said Smith. “But economic recessions can be caused by all kinds of reasons. You can have an economic shock because of many kinds of things.”

It’s also true that the story might fade and become just another example of apparent corporate sloppiness with the personal data of Americans. The latest reminder that no data is safe.

“My guess is, it won’t have much of an impact,” said Dean Baker, co-director, Center for Economic and Policy Research in Washington, D.C. “Even if it were 1 million people who were affected – and I think that’s a lot – those people are not going to stop spending. They might spend differently. They might spend less. But it would not go to zero.”

It’s all about magnitude.

“The issue is, what if we do start to see criminal use of the data and if that happens to a lot of people – say 100,000?” Baker said.

The hackers may sell the data on the “dark web” to scammers and others who want to steal identities. They could use it to take out credit cards in the names of honest consumers.

Currently, U.S. consumers are carrying more than $3.75 trillion in credit. That is up 31.9 percent from five years ago.

Credit not only rises along with the economy, it is an important fuel for that expansion.

Many entrepreneurs use personal credit to fund their start-ups. Most consumers buy their cars and homes using credit, along with the daily necessities that send them to grocery and retail stores.

“If we don’t have credit, that makes those kinds of spending decisions very difficult,” Smith said. “Your ability to pay will be hampered without access to credit.”

Credit, in general, is the lubricant for the economy. Limit the use of that lubricant, and the economy’s financial gears must slow.

People typically get paid in regular chunks, but they often spend in spurts.

“Credit is a smoothing mechanism,” Smith said. “If I go to New York, I don’t want to have to save up for months before so I will have the cash.”

But to work, the consumer must trust the lender and vice versa, said economist Michael Wald, formerly of the U.S. Labor Department. “The entire economy works on trust. Now everyone is going to be more careful. Not just consumers. Lenders are going to want to make sure — are you who you say you are?”

The most immediate damage is to the reputation of Equifax. Many companies have survived security breaches, but few of them were actually in the business of collecting sensitive information.

After news of the breach, Equifax stock plunged about 35 percent. “And that makes them a takeover target,” Wald said. “They give money to places like United Way, UGA, the Red Cross and foundations. If someone buys them and moves the corporate headquarters, those checks don’t get written.”

Even without a takeover, if regulators come down hard and costly legal challenges are mounted, the company could face other penalties.

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AJC Business reporter Michael E. Kanell keeps you updated on the latest news about jobs, housing and consumer issues in metro Atlanta and beyond. You'll find more on myAJC.com, including these stories:

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