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Is There a Consumer Debt Problem?

September 30, 2022

If consumers are spending, that often bodes well for the economy. But is there also a debt problem among consumers? Tune in to the latest episode of TrendsTalk with ITR President Alan Beaulieu to find out!

 

 

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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

 

 

Hi, I'm Alan Beaulieu, President of ITR Economics, and I'm happy to be able to talk to you today about consumers. As you know, consumers are the bedrock of the economy. Consumer spending, in and of itself, is not two-thirds of the economy, but consumerism is, and consumer spending represents that rather well. If the consumers are in a good place, then that really bodes well for the economy, especially if the B2B is doing well, which it is at the moment. B2B new orders on a deflated basis are still ascending, and that's very encouraging in terms of keeping the economy on a growth track, mild as it may be. Let's get back to consumers.

Consumer spending in August was good, and it was good in July. July, the retail sales number deflated, went down, but that's perfectly normal, and the July decline was milder than 2021. The August spending went up, which is also normal, and it was steeper than 2021. The seasonal rise is on par with the pre-COVID 10-year average. So what's it all mean to me? The consumer, despite all the nuances or maybe overt headlines you're reading, is saying, "Yeah, we can still spend." Now I'm aware and we all are aware here at ITR, that doesn't mean everyone, and I don't want you to think we're saying everyone. But on a macro basis, on the world that matters to most of our clients, it is a function of there's enough going on to keep the economy going forward, albeit at a mild pace.

Now you're going to hear, because of the interest rate rise announced by the Fed yesterday, that 75 basis points, you're going to have some people writing about all the consumer debt and the consumer weight and the problems that'll be foisted on the consumer. So I thought we would tackle that. Is there a debt problem among consumers? The answer's absolutely not. It's amazing to me how good a shape a consumer is in. And when you look at the auto delinquency, which is over 90 days past due on an automobile loan, it's at the 3.86%. It's the lowest in five years. And the rate was climbing from July of 2014 to COVID, to March 2020, and it's been declining ever since, and it's still low. So we're not seeing that disinflation, we're not seeing that whatever worry there is out there is costing us to fall behind on our car loans. And that's a key metric as we look at the future.

When we look at credit card delinquencies, it's equally encouraging. It's at 1.71% up just a little bit from the April low of 1.48%, but that 1.48% was the lowest in 30 years. I mean, we're up just a little bit off of a 30 year low. And in case you're wondering, the pre-COVID level is 2.76%. So consumer's credit card debt, we're handling it. And by the way, that means that if interest rates go up some on credit card debt, what we might see is that delinquencies go up a little bit but we're still at very low levels, and that's very good for the economy.

How about real estate? I mean, housing is in a lot of people's minds. We get housing questions all the time. When should I buy? Should I buy? What's the future going to be? That sort of thing. Let's look at real estate delinquency rate. This is from commercial banks. The automobiles and the commercials was from the Federal Reserve Board, the credit card and the automobiles was from the Federal Reserve Board. This is from commercial banks and it looks at not just mortgages, it's all real estate debt and whether there's a delinquency problem going on, I thought you'd like to know, that is at a 15 year low of 1.91. It is absolutely amazing that we are paying our mortgages and that's at a 30 day delinquency. So we're within 30 days except for 1.91%. Autos are good, credit cards are good, so consumers obviously are spending, they're keeping their debt in line and their problems in check. That bodes well for the economy.

There is one problem though, and that's quantitative tightening. The availability of consumer loans is getting harder, tighter. A survey by the Federal Reserve Board shows that the availability has decreased rather noticeably over the last few months. It's gone from a June 2021 rating of 24.6%, which is high is good here, that means that there's money available and it's gone down to 5.2%. That's the lowest in 18 months. That's quantitative tightening. And there's even more quantitative tightening going on by the Fed when it comes to business loans. So if there's some slowing going down and there is, it's has a lot more to do with quantitative tightening, it would appear to this economist than it does to the consumer's ability as we go forward.

Thankfully, the consumers are in good shape. Thankfully businesses are continuing to spend and the quantitative tightening, if it doesn't go too far, won't derail this upward movement in the economy, this growth. If they go too far with interest rates, if they go too far with the quantitative tightening, of course they could squeeze off this growth. I wish I could tell you we could read the mind of the Federal Reserve Board. We cannot. But we can watch it carefully for you and report back to you. And at the same time, we can assure you that this doesn't happen in a vacuum and it doesn't happen overnight. We will have signals, we will have signs. We will see the impact of too much in the way of interest rate rise, too much in the way of quantitative tightening, and we will convey that in time for you to adjust to that reality.

One of my favorite expressions is you can't change the wind, but you can adjust the sales. We're the weather forecaster. We'll help you know when is time to adjust the sales so as you can see what's going on. But for right now, fair seas and following winds. Have a great day. I'm Alan, ITR Economics. Thanks for listening to this episode of TrendsTalk.

 

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.