What is happening to US consumer credit and car loans?

by Shaun Richards
If we take a look at the US economy then we see on the surface something which looks as it is going well. For example the state of play in terms of economic growth is solid according to the official data.

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the third quarter of 2017 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent.

Looking ahead the outlook is bright as well.

The New York Fed Staff Nowcast stands at 3.9% for 2017:Q4 and 3.1% for 2018:Q1.

That would be a change as the turn of the year has tended to under perform in recent times. Also if we use the income measure for GDP the performance is lower. But if we continue with the data we see that both the unemployment rate ( 4.1% in December) and the underemployment rate ( 8.1% in December) have fallen considerably albeit that the latter nudged higher in December.
Less positive is the rate of wage growth where ( private-sector non farm) hourly earnings are currently growing at 2.5%. This is no doubt related to this issue.

In the 2007-2016 period, annual labor productivity decelerated to 1.2 percent at an annual average rate, as compared to the 2.7 rate in the 2000-2007 period.

So a familiar pattern we have observed in many places although the US is better off than more than a few as it has real wage growth albeit not a lot especially considering the unemployment rate and at least has some productivity growth.
Interest-rates are rising
Whilst wages have not risen much in response to a better economic situation interest-rates are beginning to. The official Federal Reserve rate is now 1.25% to 1.5% and is set to rise further this year. If we move to how such things impact on people then the 30 year (fixed) mortgage rate is now 4.06%. It has had a complicated picture not made any easier by the current government shutdown but in broad terms the downtrend which took it as low as 3.34% is over.
How much debt is there?
As of the end of the third quarter of 2017 the total mortgage debt was 14.75 trillion dollars. This is not a peak which was 14.8 trillion in the spring/summer of 2008 but if we project the recent growth rate we will be above that now. Of course the economy is now much larger than it was then.
If we move to consumer credit then we see the following. It was 3.81 trillion dollars at the end of November and that was up 376 billion dollars on a year before.

In November, consumer credit increased at a seasonally adjusted annual rate of 8-3/4 percent. Revolving credit increased at an annual rate of 13-1/4 percent, while nonrevolving credit increased at an annual rate of 7-1/4 percent.

So quite a surge but care is needed as the numbers are erratic and October gave a much weaker reading. So we wait for the December data. If we look into the detail we see that student loans were 1.48 trillion dollars as of September and the troubled car loans sector was 1.1 trillion dollars. For perspective the former were were 1.05 trillion in 2012 and the latter 809 billion.
In terms of interest-rates new car loans are 5.4% from finance companies and 4.8% from the banks for around a 5 year term. Credit cars debt is a bit over 13% and personal loans are 10.6%.
Credit cards
The Financial Times is reporting possible signs of trouble.

The big four US retail banks sustained a near 20 per cent jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion……Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.

It suggests that the rise in lending that has been seen is on its way to causing Taylor Swift to sing “trouble,trouble,trouble”

Yet borrower delinquencies are outpacing rising balances. While still less than half crisis-era levels, the consultancy forecasts soured credit card loans will reach almost 4.5 per cent of receivables this year, up from 2.92 per cent in 2015.

The St.Louis Federal Reserve or FRED is much more sanguine as it has the delinquency rate at 2.53% at the end of the third quarter of 2017. So up on the 2.29% of a year before but a fair way short of what the FT is reporting.
Maybe though there have been some ch-ch-changes.

“The driving factor behind the losses is that banks are putting weaker credits on the books,” said Brian Riley, a former credit card executive and now a director at Mercator.

Car Loans
According to CNBC lenders are being more conservative in the automobile arena.

The percentage of subprime auto loans saw a big decline in the third quarter despite growing concerns that auto dealers and banks are writing too many loans to borrowers with checkered credit histories, according to new data.
In fact, Experian says the percentage of loans written for those with subprime and deep subprime credit ratings fell to its lowest point since 2012.

In terms of things going wrong then we did not learn much more.

In the third quarter, there was a slight decrease in the percentage of loans 30 days overdue and slight increase in those that were 60 days delinquent.

Although a development like this is rarely a good sign.

Meanwhile, Experian says the average term for a new vehicle auto loan hit an all-time high of 69 months, thanks in part to a slight increase in the percentage of loans schedule to be repaid over 85 to 94 months.
“We’re starting to see some spillover to loans longer than 85 months,” said Zabritski.

This morning’s Automotive News puts it like this.

Smoke expects higher interest rates and tighter credit this year will drive many consumers to buy a used vehicle instead of a new one. Most of those buying used cars will be millennials, who are often saddled with student loans and remain credit challenged, he said.

It is no fun being a millennial is it? Although I suppose much better than being one in the last century as we have so far avoided a world war.
This piece of detail provides some food or thought.

Last year, the U.S. Federal Reserve raised interest rates three times for a total of 75 basis points, and data show that auto-loan lenders have been tightening credit for six straight quarters, but auto loans for “superprime borrowers” increased by just 20 basis points, Smoke said.

Are lenders afraid of raising sub-prime borrowing rates? Not according to The Associated Press.

Subprime buyers got substantially better rates even a year ago. The average subprime rate of 5.91% last year has jumped to 16.84% today, Smoke says. For a 60-month loan of $20,000, that means a monthly payment hike of more than $100, to $495.

Comment
There is a fair bit to consider here as we mull how normal this is for the mature phase of an economic expansion? Also how abnormal these times have been in terms of whether the benefits of the economic growth have filtered down much to Joe Sixpack? After all wage growth could/should be much better and the unemployment figures obscure the much lower labour participation rate. We will be finding out should interest-rates continue their climb as we mull the significance of this.

Securitisations of US car loans hit a post-financial crisis high in 2017, as investor demand for yield continued to provide favourable borrowing conditions across a range of credit markets. Wall Street sold more than $70bn worth of auto asset backed securities, which bundle up car loans into bond-like products, this year, the highest level since 2007, according to data from S&P Global Ratings. ( Financial Times).

One thing we can be sure of is that we will be told that everything is indeed fine until it can no longer possibly be denied at which point it will be nobody’s ( in authority) fault.
Jimmy Armfield
Not only a giant in the world of football in England but in my opinion the best radio summariser by a country mile. RIP Jimmy and thank you.
 

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