US Consumer Borrowing Surges on Jump in Credit-Card Balances
Total credit rose $23.8 billion after rising a revised $5.8 billion in October, according to Federal Reserve data out Monday. The figure well exceeded the highest estimate in a Bloomberg survey of economists, which had a median forecast of $8.6 billion.
Revolving credit outstanding, which includes credit cards, increased $19.1 billion in November, the most since March 2022. Non-revolving credit, such as loans for vehicle purchases and school tuition, climbed $4.6 billion. The figures aren’t adjusted for inflation. (…)
According to separate data from the New York Fed, the amount of revolving debt outstanding was more than $150 billion higher in the third quarter than a year earlier, the largest annual increase in data back to 1999.
There are some signs of stress. New York Fed data also showed the rate of credit-card debt becoming newly delinquent rose in the third quarter. The increases were largest for millennials, or those born between 1980 and 1994, as well as people who also have auto loans and student debt.
Goldman Sachs:
(…) in recent quarters stock and home prices have recovered from their declines, strengthening household balance sheets. This has left total household net worth as a share of disposable income at 740%, the highest level in history aside from 2022.
Recent data releases from the Distributional Financial Accounts suggest that balance sheets have strengthened across the income distribution. In particular, households in the lower half of the income distribution, who typically have about twice as much of their wealth in real estate as in equities, have benefited from the steady rise in home prices over the past few years and experienced a meaningful increase in their net worth-to-income ratio since 2019.
See also my Sept. 11,2023 post: The Wealth Defect
Rent Rant (4)
We get good data on most everything from the BLS or other research outfits. Why can’t we get decent data on rent which is about 30% of CPI and 40% of core CPI? The FOMC itself has been wrongly guessing trends in the rental market for over 3 years.
Here’s a non-exhaustive run down of recent “expert” analysis for your consideration.
The WSJ: U.S. Rents Drop for Third Straight Month as Apartment Construction Booms Rising supply and vacancies are motivating landlords to lower asking rents, particularly in the South and West
The median U.S. asking rent fell 0.8% year over year in December to $1,964, according to Redfin’s report Monday. That’s on the heels of a 2.1% annual drop in November—the largest since 2020—and a 0.3% decline in October. December rents only slightly changed from the month prior (-0.2%).
As landlords look to fill vacancies created by the building boom, many have turned to dropping asking rents. They also are offering incentives, such as a free month of rent and reduced parking costs, as a way to draw potential renters. These additional concessions mean the total price that renters are paying is likely falling faster than the data suggest.
“High supply—more so than low demand—is driving rent declines,” Redfin economics research lead Chen Zhao said in the report. “But if mortgage rates continue to drop at a fast clip in 2024, slowing rental demand could become a major driver of rent declines. That’s because more Americans would ditch the rental market to become homeowners, leaving landlords with even more vacancies.”
There are currently more newly completed and under-construction apartments in the U.S. than there were a year ago. The number of completed apartments is near the highest level in more than 30 years, and the number of buildings still under construction is just below the record high.
Because renters have more options these days, the rental vacancy rate grew to 6.6% in the third quarter—the highest level since the first quarter of 2021. (…)
Goldman Sachs: “We expect a 0.45% increase in both rent and OER in December. Rent growth for new tenants has slowed from 5.7% in 2022 to only 0.6% in November, and we expect this to translate into a slower pace of shelter inflation in 2024. We expect shelter inflation to be running at a monthly pace of 0.25-0.30% by 2024H2.
Rosenberg Research:
The Apartment List National Rent report just came out for January and showed apartment rents going in the complete opposite direction of the Case-Shiller home price index — sagging -0.8% MoM for the fifth consecutive decline (and deflating in 83 of the 100 cities in the sample).
The YoY trend remained in negative territory at -1% — a far cry from the 2021-2022 peak of around +18%. The gap between tepid demand and abundant supply of multi-family units (and there are still around 1 million units under construction and soon to flood the market) has taken the national vacancy rate up to 6.5% (above the pre-Covid level of closer to 6%) from the cycle-low of 3.9% in October 2021.
As per the report:
“Despite a recent slowdown in new building permits being issued, the number of multifamily units under construction remains near record levels. As developers work through this robust construction pipeline, the supply of new apartment inventory should remain strong throughout 2024. This means that renters should have more available options than they have in some time, especially in the Sun Belt markets where construction activity has been strongest.”Just imagine what happens to the YoY inflation rate and core rate once the lagged BLS rental data (showing near +7% YoY increases) “catches down” to what is happening in real time. The math is almost incredible: all else equal, we could well end up seeing the former (headline) easing sharply to 0.6% and the latter (core) decelerating to 0.9%.
For the record, here’s what Rosenberg Research headlined in January 2023: “Big Rental Disinflation Coming Our Way”
And in April 2023: “RENTAL INFLATION TO HEAD IN REVERSE”
(…) we think that the demand-supply mismatch is going to correct itself because of an outward shift in the supply curve during the second half of the year. The supply of rental units, which are predominantly apartment buildings (multi-family units), was severely curtailed last year. In fact, completed units built for rent grew by a meagre 0.6% in 2021 (the average annual change for the last 20 years is 2.5%). As a consequence, the rental vacancy rate dipped to 5.6%, the lowest since Q3-1984.
This tightness in the apartment rental market has contributed to the surge in rents. But builders have responded to high demand with a classic supply response, that is, by building more. Housing starts on multi-unit structures averaged about 40% higher on a monthly basis throughout the entirety of 2021, when compared to the past 10-years.
Given the surge in starts, apartment construction is now booming (…). The level of multi-family units under construction is currently at 811k — the highest it has been since June 1974. This means that there is a rich supply pipeline, which will increase the number of units available to rent.
Currently, it takes around 15 months for a start to morph into a completion. By factoring in that lag and taking into account the number of multi-family units started last year, we will end up adding about 450k units to the rental stock in the next 12 months. This is roughly 25% higher than 2021 and will be the largest 12-month percent change since 2014 (a 1.5 standard deviation event). Additionally, there are also about 120k multi-family units which have been “authorized but not yet started.” Once the builders commence working on these projects, it will only add to the wave of incoming supply.
(…) We find that the upcoming increase in the supply of rental apartments can potentially cause the vacancy rate to hook up by 1 to 1.2 percentage points in the next 12 months. Since the vacancy rate is inversely related with rents (primary rents and OER), an increase in the former can result in the latter declining by up to 1.5 percentage points to roughly 3% (YoY) over the same timeframe.
A 1.5 percentage point reduction in rents will shave off 45 basis points from headline CPI and 60 basis points from the core index. While this may not sound like much given the inflation prints that we have seen lately, the large flow of multi-family units coming our way implies that rental inflation has a higher chance of going down than up, which would be contrary to what the consensus expects.
Builders have taken a cue from higher rental demand and are building units at an unprecedented pace. As such, we can expect the vacancy rate start to start hooking back up and rental inflation to reverse course. This process seems to have already started as evidenced by the moderation observed in March in the pace of CPI rents. Other private rental websites like Apartment List are also witnessing the same phenomenon, with monthly changes in rent at much lower levels than were seen last year and the vacancy rate is also gradually starting to increase.
CPI-Rent was up 6.9% YoY in November with MoM growth rates stable around 0.5% (6.0%+ a.r.) since March 2023.
Rosenberg was far from being alone crying wolf on rent in recent years. The strong consensus remains that rentflation is about to slow down considerably.
I am no rent expert, I simply observe the available data:
- This puzzling chart highlights what many say is the coming tsunami of apartments. Units under construction have exploded, well above starts since 2016 and even more so since 2021 (note that “starts” and “completions” are at annual rates unlike “under construction”). The data implie that, of the roughly 1.35 million apartment units started since 2021, ~685k were completed in the last 7 quarters but 991k are still under construction, and still rising even though starts and completions have declined in 2023. Strange math that a Census Bureau economist suggested is possibly due to “constraints preventing the builder from completing a project”. At the end of the day, builders can only complete what they started. It seems better to focus on “completed” units which totalled 391k units, 9% more than the average of the previous 4 years.
- True, rental vacancy rates have gone up and, at 6.6%, exceed pre-pandemic levels. But they are still historically very low. Furthermore, CPI-Rent is significantly better correlated with wages. On housing, people tend to dwell based on what they can afford to pay:
- Zillow has the most comprehensive rent data. It is still not as good as it should because it also only uses new rentals which are less than 10% of all rentals in the U.S.. Seasonally adjusted MoM rent growth troughed in June 2023 and has been accelerating every month since, reaching 0.32% in November, +3.9% annualized. On a YoY basis, Zillow rent is up 3.2% in November, close to John Burns Research’s 3.5% growth rate. CPI-Rent, which includes renewals, is still rising 0.5%+ MoM (+6.9% YoY).
- In absolute terms, Zillow rent has continued to rise, with CPI-Rent trying to catch up to close the apparent 10% gap to “market”.
- John Burns Research estimates that the monthly premium to own versus rent has now hit $1,030 per month, compared to $884 per month at this time last year, “increasing demand for rental homes while reducing demand for homeownership”. JBR reckons that 5.5% is the magic mortgage rate:
- 62% of consumers believe a historically normal mortgage rate is below 5.5%.
- 71% of prospective home buyers who plan to purchase their next home with a mortgage say they are not willing to accept a mortgage rate above 5.5%.
US Small-Business Optimism Rises to Five-Month High on Earnings
A National Federation of Independent Business index of sentiment rose 1.3 points last month to 91.9, the highest since July and matching the best reading of 2023, the group said Tuesday. Owners were less downbeat about the outlook for business conditions and only a net 4% expect lower sales in the next three months, the smallest share in nearly two years. (…)
A net 25% of firms reported higher prices in December compared to three months ago, holding at the lowest level since early 2021. However, that share was more in the range of 10% to 15% in the two years leading up to the pandemic.
Many owners still reported difficulty filling open positions and attracting quality candidates. More firms on net reported recently decreasing headcount for a ninth month, matching the longest streak since 2011. (…)
More on the NFIB release:
- Inflation overtook labor quality as the single most important problem facing small businesses in December. That said, December’s survey suggested some marginal improvement in price pressures. Although there was no change in the prevalence of realized price hikes, the net percent of small business owners planning to raise prices dipped two points to 32%.
- Despite a negative reading, sales expectations improved significantly in December and recorded its best print since January 2022.
- The net percent of owners planning to add payrolls dropped two points to 16%, continuing the stalling trend in labor demand that was pervasive in the last six months of 2023. At the same time, 40% of small business owners reported difficulty filling their job openings, a reading that remains elevated above pre-pandemic normals.
- The net percent of firms raising compensation continues to move sideways as labor demand comes off the boil, remaining unchanged at 36% for the last five months. Plans to raise compensation remained elevated but dipped slightly in December to 29% on net. (Wells Fargo)
U.S. crude oil falls 4% as Saudi price cut heightens global demand worries
The sell-off comes after Saudi Aramco on Sunday sharply lowered the price of Arab Light Crude to Asian customers by $2 per barrel.
The Saudi price cut comes amid persistent market weakness due in large part to record U.S. crude production and softening demand in China. OPEC and its allies are cutting their production by 2.2 million barrels per day this quarter in an effort to balance the market. (…)
Though geopolitical risk is rising, the global oil market remains well supplied. The U.S. pumped an estimated 13.2 million barrels per day of crude in the last week of 2023, and its inventories of gasoline and distillate both soared by more than 10 million barrels.
U.S. crude exports also rose by more than 1 million barrels per day to 5.2 million barrels per day in the same period. Saudi Arabia is slashing prices to stop customers from buying U.S. crude as well as to undercut cheap Iranian and Russian barrels, said Bob Yawger, energy futures strategist at Mizuho. (…)
Suddenly, the Saudis are concerned about volume and market share, less so about price/revenues…
Price Wars Break Out Among Consumer Brands in China as Growth Slows Aggressive discounts from local players pull in global brands
A $3 KFC combo featuring a chicken sandwich, fries and soda. A $1.20 beer from a German supermarket. A new chain of grocery stores that stocks only deeply discounted soon-to-expire foods.
These are some of the deals foreign and domestic brands are rolling out to woo Chinese shoppers trying to stretch every penny as consumer confidence in the world’s second biggest economy fades. Across Chinese high streets, discounts and special deals are being advertised from clothing to cosmetics, a reflection of an alarming shift in consumption attitudes that has sent retailers scrambling. (…)
These cheaper fares are being rolled out by brands and companies that traditionally projected themselves as premium choices for the aspiring Chinese middle class. The pivot to discount offerings marks a sea change in their strategy to drive sales in the new Chinese economic reality and is weighing on their prospects. And those that aren’t slashing prices, like Starbucks Corp., are losing ground to cheaper rivals. (…)
The discounts will erode profit margins until the price war – which is currently accelerating – normalizes, they wrote in a note on Friday downgrading Yum to neutral. (…)