This week on “Inside the Economy”, we discuss consumer debt and the pending economic slowdown. Credit Card and HELOC balances have ticked up over recent months, but despite this, there has been limited delinquency in student loans, mortgages, and HELOCs. Auto loans and credit cards on the other hand have shown a slight uptick in delinquencies. What does that mean for the consumer as we move into the second half of the year? There is still lots of talk of “recession” on the horizon, as we see unemployment above 4%, but looking at the other data around the economy, does a slowdown seem more likely than recession? Revenue growth within the S&P 500, after a period of earnings recession, is beginning to normalize, reflecting a more balanced economic landscape. Tune in to learn more!
Key Takeaways:
- Headline inflation drops below 3%
- Oil remains under $80
- Unemployment at 4.3%
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
I want to talk a little bit about the consumer and the pending slowdown that we might see, which is an impetus for the Federal Reserve to start lowering rates here in about 30 days. Most of the issues that are floating out there right now are relatively positive. CPI numbers came out down. Headline is now down below three. Core is on its way down.
There was a little drama a couple of weeks ago that initial unemployment claims went up in a surprising rate. Well, as it turns out, there were some issues with the data and how it’s recorded and a number of other factors. The initial claims now are sort of back down and not very dramatic.
So we don’t have a lingering or developing problem in the labor market. Unemployment’s still 4.3 and there are some pending layoffs, but the numbers aren’t dramatic. Oil is fine. All the interest rates have come down 30 years down, the 10 years down, everybody’s down. The only thing that isn’t down, basically, is the three months, the cost of money. They’re waiting for the Fed to bring that one down, and we’ll probably see what they do. You can anticipate a quarter of a point here in September.
The issue now is, well, consumers eaten through all of the liquidity from COVID the markets have adjusted, the consumers are coming back. So for scope down, here is where fixed mortgages are six and a half, let’s call it seven credit cards, call it 22, though some are significantly higher than that. This is where the financial market has shifted mortgages pretty much back to where they were 30 years ago. How long they stay there? We’ll see.
Credit cards, well, that’s sort of a new thing. And that interest rate is up for a reason. There are additional costs and services and organizations that are starting to have troubles taking credit cards, especially for the large dollar amounts. But we’re not going to talk about that right now.
So credit card debt, we’re coming up on about 1.2 trillion. Compare that to a much higher quality debt, like a home equity line of credit HELOC, not quite half a trillion, and there’s not a lot of need for that money right now. There’s not a lot of stress in the shelter market. There’s not a lot of stress in housing, which is sort of the big thing right now, which is what we’re seeing. Where we’re going with all of this is how bad is the market.
You can probably see, and I’ve mentioned in the past that some parts of consumer debt are starting to show signs of delinquencies. Credit cards, auto loans, some revolving loans up there a little bit, certainly not in historic highs, but they’re up there compared they were the quality debt. Mortgages, HELOCs still way down. Mortgages are just barely above. Delinquencies are barely above two.
And of course, just for entertainment, we put the student loans in there. This would be off the charts the other way if we were really tracking the data. Most of that debt has been walked away from. But that’s more of a political side than anything else. Now this is the consumer price index. And the components, the parts of the components and the parts of the CPI that are still holding inflation up are all to do with shelter, affordability, primary shelter rents, cost of money, the list goes on and on.
The cost of servicing it, utilities, huge list, shelter, everything else, food, energy, all that sort of stuff is down well on their way to being where the Fed wants inflation at 2%. The specifics are we’re growing a half a percentage point every month and it’s not abating like we’d hoped.
There isn’t a problem in the housing market like it’s going to collapse because one, there’s not that much debt in the housing market. Two, a lot of marketplaces like Denver, the prices of homes is not adjusting. Homes don’t sit on the market that long, whatever they are. They come on, they say, boy, that’s really pricey. Three days later it’s gone. Or something that’s really pricey. Been in the market for a month and a half, then it’s gone. That’s not a market that’s going to collapse and have a 15 or 20% reduction in price. I don’t see that happening at all.
All so there is our source of ongoing inflation. Not to jump ahead, but deficit spending by the federal government and ongoing cost of shelter are really the two big drivers that we have to deal with. And there’s very little control over either one of those. The red down here really is rent and shelter. It isn’t coming back. It is slowing its rate of growth.
But on the small business side of things, and this is a big study done by the bank of America, the small business side, if they have infrastructure debt like rent or parking lots or something like that, their expenses are way up. These are mom and pop shops or a little bigger than that. Small, tiny little manufacturing, don’t have public stock or debt and they’re paying a lot more for everything they have.
One, that’s kind of built into the system. And two, it’s very indicative of what’s going on in the labor market. A lot of these companies who have their labor are keeping them. They’re just raising prices. Last little piece of evidence about the housing market, and you’ve seen this before, these delinquencies, there’s not any stress in the housing market. Delinquencies are still low. They are nothing. Growing 30 days up to 60 days is just not a subject. It’s nothing like it was in 2008-9.
And I don’t think it’s going to get anywhere near that. The other side of the coin here is how busy banks are, how interested they are in lending money, and they’re just coming up right now to being not interested at all in lending money. They’ve been anti lending money for quite a while. Most of them, as we’ve discussed in the past, have a tremendous amount of reserves, meaning they have a lot of treasuries at the Federal Reserve. Lots of treasuries, billions of treasuries, and they get a pretty good rate of return on those treasuries.
In fact, if you’re getting 3% on your treasuries, and basically the spread on a loan you make is about 3%, why would you make a loan when you’re making all your money off the treasuries you have in reserve? That’s kind of where we are right now. Banks are of no interest whatsoever in getting in the lending business for the foreseeable future. The consumer has to adjust out and something has to be more attractive in the market to make them want to get in there and start taking risk.
On the consumer side, corporate side, the S&P 500, this is basically the earnings. We’re going to run about 5% here in the second quarter. Quarter. It’s great. It’s as expected. We had a little rally here this last week. No reason for the rally. We’re kind of back over price a little tiny bit. Not very much, but a little tiny bit. I think everyone is just building volatility in the system so the traders can make the trades.
Before we get the actual news, what the Fed’s going to do here in September, count on a quarter of a point and it’ll be undramatic. Very undramatic. Finally, most of you know that I have a great deal of interest in the higher education side of the municipal bond market. There have been a lot of small colleges folded in the last year. We’ve talked about some of them. They can’t afford the debt. Their enrollment is down. They’re paying too much for everything.
So they have what’s known now as an impaired muni, meaning a technical default. When a small school says, oh, well, we really can’t afford all this debt we made, so we better get absorbed by somebody else. Small private colleges getting absorbed by larger universities. That’s what a lot of this growth is. That’s about $2 billion worth of technical defaults. They aren’t really defaults. People haven’t lost money yet because larger institutions, state institutions, have been absorbing them and covering their debt. This isn’t over.
As the higher education industry rethinks, it’s not going to collapse. It’s going to fall down a couple notches. But as it rethinks itself, rethinks its infrastructure, all of that stuff. We haven’t seen the last of these municipal bond problems with higher education. They are unique in the marketplace. They are very rarely, rarely backed up by the municipality they reside in. They just sort of do it on, oh, we have a name, and you’ll lend us money kind of things.
This is going to be in the next couple of years is going to be a very interesting marketplace. Not a very attractive marketplace, but I’ll just be watching it. Well, that’s enough for now. Rates coming down here in a little while. If there’s anything really dramatic changing, of course, we’ll keep you updated.
If you have any questions, send them along to info@SHJwealthadvisors.com, and I’ll be glad to deal with them.
And thanks for joining me!
