CONSUMER WATCH
Credit Card, Auto Loan Delinquency Rates Rise in NY Fed Report Those rates climbed above pre-pandemic levels at end of 2023
American households took on more debt at the end of last year, and some of those loans are increasingly going bad, according to data from the Federal Reserve Bank of New York.
Although overall US delinquency rates remain below pre-Covid levels, those for credit cards and auto loans are now higher. About 8.5% of credit card balances and 7.7% of auto loans moved into delinquency in the fourth quarter, the bank said in a report Tuesday.
“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.” (…)
In particular, consumers aged 30 to 39 are struggling with delinquencies on credit-card debt, possibly because they’re contending with student loans as well, the researchers said. However, missed student-debt payments won’t be reported to credit bureaus until later this year, thanks to a leniency program from President Joe Biden’s administration.
While the proportion of consumers indicating a debt collection service is trying to obtain a payment has been declining in recent years, the average collection amount is generally on the rise. The share of credit-card balances that were at least 90 days delinquent approached 10% at the end of 2023, rising more than two percentage points in a year.
In the five years leading up to the pandemic, the amount borrowed for an auto loan increased by less than 1% per year, the New York Fed said. But in 2021, when car prices skyrocketed, the average amount of a newly originated loan rose by 11%, followed by another 10% in 2022 to an average amount of nearly $24,000.
Even though car prices and new loan amounts have been falling in the past year, higher interest rates have kept monthly payments elevated and led to more consumer distress, the researchers said.
Aggregate US household debt balances increased by $212 billion in the fourth quarter of 2023 to $17.5 trillion. More than half the gain was driven by mortgage debt and almost a quarter was from credit cards, according to the New York Fed.
Home equity line of credit balances jumped $11 billion as borrowers chose to tap into existing equity rather than refinancing mortgage rates. Although the interest rates on HELOCs are high, many consumers don’t want to give up their low mortgage rates, the researchers said.
In the aggregate, no crunch yet:
Source: Federal Reserve Board and Wells Fargo Economics
Wells Fargo just published a detailed analysis of household debt and concluded:
Total household debt in the United States currently stands 36% above its level of mid-2008, when excessive personal debt was an important factor that caused the financial crisis. Every major category of household debt (i.e., residential mortgages, student loans, auto loans and revolving credit) has grown in recent years.
But household income has risen even more — it is up 85% over the same period — so the household debt-to-disposable income ratio, commonly referred to as “leverage,” is lower today than it was at the start of the housing bubble.
Furthermore, the ability of households to service their debt obligations is better today than it was in 2008. Mortgages account for 70% of total household debt, and the downward trend in mortgage rates that was in place between 2008 and 2021 induced many households to refinance at lower rates.
Consequently, the debt service ratio, which measures the percent of disposable income that households need to devote to interest and amortization payments on debt obligations, has receded by more than three percentage points since 2008 and currently sits near its lowest level in at least 30 years.
Younger and less affluent households, who tend not to be homeowners, may be more exposed to higher interest rates than their home-owning counterparts with fixed rate mortgages. The recent increase in delinquency rates on auto loans and revolving credit, as well as the rise in student loan delinquencies that seems inevitable, indicates that some households are starting to experience some financial stress.
Spending by these households on goods and services could downshift in the near term. That noted, the financial position of the household sector, in aggregate, appears to be generally solid at present. Consequently, a debt-induced retrenchment in aggregate consumer spending in the foreseeable future does not look very likely, in our view.
TRUST BUT VERIFY
I like David Rosenberg, having known him since his Merrill days. He covers a lot of data ground and is not shy of clearly expressing his views. A one-handed economist as Harry Truman liked them. Plus he writes a full note daily, not a walk-in-the park, I can tell you.
But sometimes another hand can be handy, if only to keep the first one open. The right hand is not always right.
David, still in recession mode, and increasingly skeptical of official data, yesterday:
Then take a look at Simon Properties, who reported yesterday. All the numbers were just fine from an occupancy rate and rent per square foot basis and the company boosted its dividend. But get this: “Reported retailer sales per square foot was $743 for the trailing 12 months ended December 31, 2023, a decrease of 1.3% compared to 2022.” This is the largest mall owner in the United States, and it just told us that its retailers saw a negative -1.3% sales performance last year! But the government’s data on retail sales show a +5.6% YoY increase in 2023 retail sales, and this is why everyone, including Jay Powell, believes that the consumer is in such great shape.
First, the government’s data show 2023 retail sales, ex-food services, up 2.1%. Ex-gasoline stations: +3.7%. Not +5.6%.
Two, Nonstore retailers, nearly 20% of all non-gasoline sales, recorded an 8.0% jump in sales last year, leaving brick-and-mortar retailers (ex-food services) up only 0.8%.
We also know that off-price retailers such as ROSS and TJX are ringing same store sales of 5%+.
This leaves Department Stores sales officially down 2.7% in 2023 and Apparel store sales up 1.6%. That jibes with Simon’s –1.3%.
This is why everyone, including Jay Powell, believes that the consumer is in such great shape, unlike department stores and their hosts.
Sorry David, as handy as you are, I verify.
Today’s WSJ neatly illustrates why the American consumer is in good shape. The immaculate disinflation helps a lot.
MegaCap-8 Continue To Impress
From Ed Yardeni:
The MegaCap-8 now accounts for a record-high 28.3% of the S&P 500’s market capitalization. They currently account for 18.5% of S&P 500 forward earnings and 10.8% of its forward revenues.
Among the MegaCap-8 companies, all but Nvidia have reported their Q4 earnings so far. These seven MegaCap-8 companies collectively recorded earnings growth of 44.7% y/y and revenues growth of 11.4% y/y. Analysts had been expecting earnings and revenues to rise 36.6% and 9.7%, respectively.
Back in early December, the MegaCap-8 had surpassed its prior record-high forward profit margin of 21.4%, registered nearly 12 years earlier on January 4, 2013! It has moved even higher since then to 21.7% in early February.
At a forward P/E of 28.3 currently, the MegaCap-8 aren’t cheap, but they are cheaper than during the pandemic. With and without them, the S&P 500 forward earnings is 20.1 and 17.7.
FYI, 17.7 is the red line below:
Warning signs continue to trigger on the Nasdaq
A few times in recent weeks, we’ve noted nascent signs of odd behavior under the surface of superb index performance. This is really the first time since the October 2022 bottom that these issues have begun to appear with consistency.
There are more that are triggering. Due to many smaller and lower-quality stocks struggling while investors focus on spectacular gains available in some of the largest stocks, the list of securities falling to 52-week lows has been rising while 52-week highs are stagnant. (…)
When this happened in 1999, the Nasdaq rocketed higher, jumping nearly 40% over the next few months before the bubble was pricked. But other than that, these conditions tended to precede weak returns.
The table below shows returns in the Nasdaq composite after it closed at a 52-week high at least five times over the past three weeks, while the average ratio of stocks at new lows versus new highs averaged more than 1.5. In other words, the Composite was consistently hitting new highs, but there were half again more stocks on the exchange falling to 52-week lows than rising to 52-week highs.
The S&P 500 didn’t enjoy quite the upside in 1999, so its returns after these signals on the Nasdaq were even worse. Over the next two months, it managed to show a positive return only twice.
Since a relatively large number of stocks have hit new lows or new highs on any given day, the 50-day average of the HiLo Logic Index has spiked. It’s now the highest in over 20 years, indicating a split market that indicates unhealthy market conditions. (…)
Since October 2022, we’ve looked at a lot (a lot!) of supposed warning signs from financial and social media, analysts, and pundits. Not many, if any, showed a consistent predictive ability. Stocks continued to do what they should, given all the studies we looked at that summer and fall, and we couldn’t find any reliably good reasons to doubt why they couldn’t continue to follow through.
For the first time, that’s starting to change. While momentum in the indexes has been fabulous, and breakouts to new highs tend to lead to even more new highs, we are seeing some deterioration under the surface that begs attention. It’s not a glaring red light yet, but it’s certainly yellow, particularly on the Nasdaq. That exchange is stuffed with more speculative issues, many of which are struggling. It’s to a point now where it suggests a prudent swing trader snug up stop losses if they are fortunate enough to have long exposure to tech-heavy indexes.
Moody’s Cuts NYCB to Junk, Extending Sharp Decline The downgrade is the latest blow to the besieged bank seeking to shore itself up after acquisitions and property losses.
Moody’s cited “financial, risk-management and governance challenges” for NYCB, which reported a surprise quarterly loss and slashed its dividend last week, as the ratings firm downgraded the bank to Ba2 from Baa3. Fitch Ratings on Friday downgraded NYCB to the lowest possible investment-grade rating.
NYCB plunged 15% after hours. The stock hit its lowest close since 1997 on Tuesday, tumbling 22% on the day, having lost more than half its value since the loss was reported.
When it reported fourth-quarter results, the bank said it was shoring up its balance sheet after its acquisition of Signature Bank last year and losses on its commercial real-estate book.
The Signature deal and a separate one with Flagstar Bank in 2022 put NYCB past a key regulatory threshold of $100 billion in assets, subjecting it to stricter regulatory and capital standards. NYCB also said it had charged off two large loans and set aside millions for potential future losses. (…)
The SPDR S&P Regional Banking ETF and the KBW Nasdaq Regional Banking Index each shed roughly 1%.
NYCB has said its deposits are stable. (…)
NYCB said deposits were down around 2% from the previous quarter at the end of December. (…)
Fitch hasn’t seen “anything worth talking about” as far as deposit movements, the firm’s senior director, Mark Narron, told The Wall Street Journal on Monday.
“It’s primarily a profitability question,” Narron said. (…)
America Has Never Had So Many 65-Year-Olds. They’re Redefining the Milestone. A record number of people will turn 65 this year. Here’s how they are distinct from their predecessors.
(…) About 4.1 million Americans will reach 65 years old this year, reaching a surge that will continue through 2027, according to an analysis by Jason Fichtner, executive director of the Retirement Income Institute and chief economist at the Bipartisan Policy Center. That is about 11,200 a day, compared with the 10,000 daily average from the previous decade, he says. (…)
Nearly 20% of Americans 65 and older were employed in 2023, which is nearly double the share of those who were working 35 years ago, according to a recent report from the Pew Research Center. (…)
Close to two-thirds of 65 and older employees are working full time, compared with nearly half in 1987, he says. They’re earning more, too, with average hourly pay reaching $22 an hour in 2023, up from $13 an hour in inflation adjusted dollars in 1987, according to the Pew report. (…)
While significant disparities exist, the median net worth of those 65 to 74 was $410,000 in 2022, up from $282,270 in 2010 in inflation-adjusted 2022 dollars, according to the Federal Reserve’s Survey of Consumer Finances. (…)
Some of that 45% increase in net worth reflects rising values of homes and retirement accounts. Not all baby boomers have fared as well: Those 75 and older had a 13% gain in median net worth over the same period.
Today’s 65-year-olds have more to spend now, but fewer have pensions that offer protected monthly income. (…)