A little over a month ago, after we first brought the market’s attention to the crisis quietly unfolding in consumer debt, Business Insider has finally caught up, acknowledging that “lower-income consumers and younger borrowers with substantial student debt moving at a slower pace than more affluent and established participants.” In other words, Bussiness Insider describes the economy as running at ‘two speeds,’ and mentions an ominous warning sign that lower-income consumers are entirely tapped out.
Without consumption, the US economy would collapse. Consumption accounts for about 70 percent of US GDP. Further, there are some 95 million Americans out of the labor force. The rosy narratives of how millennials and low-income consumers are propping up the economy are starting to fade, as Business Insider through a new UBS report —provides the knowledge that the “mobile-home market is showing signs of stress.”
According to the consumer research desk at UBS, Americans can no longer afford mobile-homes, as the delinquency rate on these tiny trailers has soared two percentage points, over the past year. In fact, what is even more mindboggling, is the 30-day-plus delinquency level is now about five percent, not seen since the first quarter of 2005 or a few years after the dot-com bubble.
The recent surge in the number of struggling mobile-home borrowers is a new phenomenon. It hints at severe wealth inequality and a divided labor force that has left millions of Americans behind. Nevertheless, this is all occurring as the unemployment rate is hovering near record lows.
“We interpret this data to mean that these individuals have not largely benefitted from these macro-dynamics, and may also be disproportionately exposed to industries that have experienced compression — rather than expansion — in the current economic conditions, such as retail or some areas of energy extraction,” UBS said.
During the 2016 presidential campaign of Donald Trump, mobile-home delinquencies spontaneously erupted, as conventional single-family residential loan delinquencies stayed stagnate.
Business Insider said, “this data represents a piece of a jigsaw puzzle of the condition of consumer finances.” According to UBS, the picture that is emerging for the lower-income consumers and younger borrowers should serve as a “warning sign for the economy.” Summarization of the report below:
- About three in five consumers with an annual income below $40,000 indicate that their earnings barely or do not cover their expenses, a UBS survey found.
- Lower-income earners are often renting and carrying non-mortgage debt — such as credit card, auto, and student debt — at levels similar to or higher than the period before the financial crisis.
- More than one-third of borrowers in this demographic report misrepresenting their financials in loan applications, a UBS survey found.
- “While delinquency rates among student loans remain the highest of any consumer asset class, several other asset classes are beginning to inflect off of recent lows, despite broadly supportive economic conditions,” UBS said.
- The new tax law is likely to benefit middle-income borrowers, but it could have limited benefits for lower-income borrowers.
“We believe weakness in these two groups will drive higher credit losses at some stage over the next few years — particularly in credit card, installment, and student loans — with macroeconomic inflection from job growth to job loss as a likely catalyst,” UBS said.
For now, however, to find the inflection point, keep an eye on the American consumer — rising consumer debt, low personal savings rate, soaring bank funding rates, and wage stagnation could be some of the contributors tilting the economy into the next recession.