Sunday, July 30, 2017

US economic "resilience" is highly exaggerated




















Credit card debt is edging into record territory but not because of consumer confidence




By Danielle DiMartino Booth









Are US Federal Reserve stress tests leading economic indicators? That certainly seems to be the case.

Just ask Capital One Financial Corp.

As of the first quarter, credit card loss provisions at Capital One were above 5 per cent, a six-year high. The company recorded some improvement for the second quarter, yet Fed stress tests of the bank’s overall loan portfolio in a deep downturn show losses topping 12 per cent.

That explains Capital One’s “conditional” passing score, a black eye that prompted a reduced share buy-back plan and no increase in its dividend.

Most economists today applaud the resilience of the current recovery, which has stretched into its eighth year, the third-longest in postwar history. Resilience and rising household defaults, though, don’t tend to go hand in hand.

Pressures have been building in the background for some time. When adjusted for inflation, credit card usage has grown faster than incomes for 18 months. According to Fed data, that time frame coincides with the upturn in revolving credit, a proxy for credit card debt.

In November 2015, outstanding revolving credit crossed above the $900-billion threshold for the first time since December 2009. By May of this year, annual growth was clocking 8.7 per cent.

Meanwhile, credit card balances hit $1.02 trillion, the highest level in almost eight years.

Whether by choice or force, the aftermath of the financial crisis prompted households to ratchet back their usage of credit cards. As the recovery got underway, frugality prevailed, punctuated by an increase in debit card purchases.

It is thus notable that Bank of America data find debit card usage has weakened in recent years as households grew more comfortable rebuilding their credit card balances.

“Confidence” is the term most associated with the rising credit card debt. But it’s fair to ask why confident households would choose to pay so dearly for the privilege. At 15.83 per cent, the average rate on credit card balances is at a record high.

It is more likely that households are increasingly tapping their credit cards to cover the cost of necessities, that they are less confident and more anxious about their future finances.

The latest University of Michigan consumer confidence data suggest anxiety is indeed setting in. At 80.2, the expectations component is at the lowest since October and running below the 2016 average of 81.8.

According to the University of Michigan: “The data indicate that hopes for a prolonged period of 3 per cent GDP growth sparked by Trump’s victory have largely vanished, aside from a temporary snap back expected in Q2. The declines recorded are now consistent with just above 2 per cent GDP growth in 2017.”

The US retail sales report for June corroborates the forecast for continued muted economic growth. In constructing gross domestic product, statisticians net out auto, gasoline and building materials purchases from retail sales to arrive at a “control group”.

At 2.4 per cent, the annual growth rate of the control group has fallen to the lowest since January 2014.

The renewed weakness in consumption prompted the economists at Bank of America Merrill Lynch to reduce their forecast for second-quarter GDP to 1.9 per cent. The Atlanta Fed’s GDPNow forecast is a bit higher, at 2.4 per cent, but that’s a far cry from the robust 4.3 per cent rate anticipated on May 1.

In her recent congressional testimony, Fed Chair Janet Yellen expressed continued optimism for a strong second-quarter rebound in GDP growth. If the Atlanta Fed’s forecast pans out, first-half growth will stumble in at a 1.9 per cent rate, hardly reflective of accelerating economic activity.

Even the ebullient home builders have begun to concede that there could be more than just a supply shortage at the root of the slowing housing market. Pending home sales have fallen for three straight months and are now 1.7 per cent below their year-ago level.

The National Association of Realtors acknowledged that “weaker financial and economic confidence could also be playing a role in the slowdown in contract activity.” The NAR added that they had “found that fewer renters think it’s a good time to buy a home, and respondents overall are less confident about the economy and their financial situation than earlier this year.”

With rental inflation running 3.9 per cent above its year ago rate and homes priced out of their budgets, renters are effectively trapped in a budgetary vice. Housing costs consume about a third of households’ average budgets and largely dictate consumers’ wherewithal to finance the discretionary purchases that make the consumption-driven US economy hum.

Suffice it to say, when the costs of other necessities such as health care, the food you put on the table, your car payment and mobile-phone bills are also running high, it’s difficult to make ends meet. In a survey conducted by Survata and released in late June, 49 per cent of households said they were living paycheck-to-paycheck; six in 10 reported that their rainy-day funds could not cover six months of living expenses.

What’s a household to do under such circumstances? It would appear they’ve had to rely on credit cards. The eventual price tag for the economy remains to be seen and won’t be known until the next recession has come and gone.

As for how high the bill will be in the end, its likely Capital One already has that answer.

— Bloomberg





























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