Yesterday we had durable goods orders for January tumble by 4.6%–oh wait the headline number is misleading and looking at the numbers less transportation we see orders were up .7%. On the other hand there are so many qualifiers to every piece of economic data released one doesn’t have enough hours in the day to decipher all the possibilities. The data is here.
The debate goes on day in and day out–hard landing or soft landing? Each week the 1st time unemployment claims number is released and we see no weakness at all – I can all but guarantee that the Federal Reserve FOMC group is not going to take the pedal off the metal until we see some weakness in employment–and I am not talking about a few thousand workers being laid off by tech companies. I am talking about auto assembly plants being closed down etc.–and not just one of them, but maybe 1/2 of them in the country (not permanent closures).
I see some data related to consumer debt – i.e. credit card data and vehicle loans that would seem to indicates something is going to ‘break’, sending us in a recession. For instance credit card debt is up 18% year over year. This debt will kill the consumer eventually–at a 20% average interest rate. The average new vehicle loan is over $40,000–this is incredible and those with the lowest credit ratings borrow over $44,000!! In the last 2 years we have bought 2 vehicles–used of course, for a total of $60,000 and we paid cash (I simply hate ‘payments’ even though we could have borrowed at a very low interest rate)–I realize many people can’t pay cash and that loans are necessary, but there will be a price to be paid for all those giant sized pick up truck loans.
So with economic data remaining strong (or at least not weak) the Fed will continue to raise interest rates–it could be 50 basis points at the next last March meeting, but certainly it will be 25 basis points I would guess for the next 3 meetings – at a minimum. When 2023 comes to an end in 10 months rates will still be high, but something is going to ‘break’ in the second half of the year and it isn’t going to be pretty.
I don’t see anyway we will avoid a recession–the question is how deep it will be given the level of debt consumers and governments are racking up. We wait–wait for something to ‘break’.
My wife bought a new car late last year. She ordered it and it took many months to come in, so the “factory incentives” had completely changed from the time she ordered it. I took my checkbook to pay for it when it came in, and they offered zero percent financing for 5 years. We took it and put the money we were going to spend into treasuries. Nice “discount”.
I don’t like payments either, but you can automate so much nowadays that it can all be pretty painless.
Another unexpected “bonus” – our credit score went up! We don’t carry any consumer debt and we paid off the mortgage years ago. Just monthly credit card bills (paid off each month) – so our score had slowly declined over the last few years (still excellent) – so adding debt apparently helped us.
Crazy.
Private–you did he wise thing–my exceptional dislike of ‘payments’ over ruled the wise thing to do.
Crazy it is, P….. If you want to raise your credit score you have to be willing to be more debt laden…. Makes sense, doesn’t it? When we first refinanced this house, we ended up having to delay because we were told we didn’t have enough debt sources so we were forced to open another credit card account… Now we have 5 but still only use one essentially… Even crazier still, when we first came back to the US and bot this house, we knew we were going to have to have a mortgage because we were not going to be able to sell our house in the Caribbean…. once we determined the cost of the house we were buying and the amount of the mortgage, we told them we wanted to use a 15 year mortgage, not a 30, for the discipline of it… We were denied… We had to take 30 year because “with a 15 year, your payments would be too high.” Go figure
I was reading some survey reports on the run up in credit card debt. Disproportionate increase among millennials.
Talking with an acquaintance who does credit counseling – he thinks too many young people borrow to support a lifestyle instead of cutting back their spending to match their income. Its like they don’t want to let the “real world” impinge on their desired lifestyle. Totally different way of thinking.
Also seeing people who got very comfortable during the pandemic – enhanced unemployment and snap, no need to pay rent because of eviction moratoriums, etc. Now that those programs are winding down, those people are borrowing to maintain their lifestyle instead of getting jobs or reducing spending.
One of my son’s down-the-street neighbors is in precisely this problem. I was helping another neighbor (cutting up a tree downed in the big storm last week) and talked to this couple. Husband and wife basically stopped working and took all the gov. money from pandemic programs (so they could stay home and smoke pot all day), quit paying their rent because they couldn’t be evicted, and are now that the moratorium is ending, they are facing eviction. To their surprise, they are having a really hard time finding a new place to rent because they don’t have a good record, and their landlord is not willing to just forgive all the back rent. Wife seemed baffled that the landlord wouldn’t let them stay if they started paying current rent (and just let the back rent go). They are also both struggling to find good jobs – (I think) in part because they stepped out of the job market for almost three years (she is a technical writer and he does marketing for Silicon Valley companies).
Just anecdotal.
Private: Right on target with your young neighbor couple. A very popular mind set with the younger folks. They do not have 30 years of experience in the economy to draw from. Many did not leave home until they were 30 and then at 40 they only have 10 years of real world experience. It is laughable to think a landlord would simply say “oh yea just forget the $30k you owe me in back rent” So glad my landlord days are behind me.
There is no way I would ever rent out a home again when courts can up and decide to refuse to issue summons for an eviction case as they did in my State during the “pandemic”. I feel incredibly lucky that my tenants moved out voluntarily when their lease was up (August 2020) so I could move back into my own home. If my tenants had been deadbeats, they could have stopped paying and lived rent free for at least 2 years and the only recourse would have been to get a judgement for the back rent. (good luck collecting that)
Never ever again would I put myself into such an arrangement.
So true Derek. It is sad our government can pick winners and losers on a whim. The ramifications of those emergency mandates will be felt for year to come.
There are quite a few articles around on the use of “buy now , pay later” plans like Affirm, Klarma, Afterpay and others by the younger generation. These plans offer 4 or 6 equal payments, no interest, no credit checks etc. If I remember these articles correctly, these plans are not necessarily reported to the credit rating agencies so they do not show up as debt if one were financing a major purchase like a house or a car. So you’d be able to qualify for a marginally larger loan.
While the total BNPL dollars outstanding are not large, IMHO, off-balance sheet obligations of this type weaken the ability of individuals to repay and together create a systemic underlying weakness in the banking system. Less politely: a possible “tide going out / bathing suit” risk for the banks if a hard recession hits.
The NY Post had an article about someone who just had to have a $2,000 dress she couldn’t afford. More interesting to see who’s covering basic expenses, like groceries, with BNPL. For fun, Google around something like “Can I order on Uber Eats and pay later?” Eat now, default later.
I looked at some of these “buy now, pay later, no interest” companies. their dirty little secret appears to be that if you are late/miss a payment, fees and interest pile on.
I think their goal is to get kids hooked on “just buy what you want and worry about paying later” and then fleecing them down the road when their balances become more they can pay. Reminds me a bit of payday loans….
They are spending all that money that they plan on saving when the government pays off thier college loans. Of coarse they also are not using that college degree they got for some pie in the sky major that has no use in the real world.
Tim mentioned credit card debt increase and also the size of new vehicle loans. I was at car dealership talking to the finance officer and noticed a loan rate sheet on his desk. Loan rates ranged from a few percent to 14.5%. I asked if anyone actually took a car loan at 14.5%. He responded that occasionally someone with a poor credit rating will do it. Regular credit card rates can pass 30%. Not a good sign if credit card debt is up 18%.
IMHO…
I’ve preached an Einstein premise that inflation has been low for 30 years for two reasons: the internet and excessive labor supply (china). Also, I think productivity numbers are actually higher than reported (for example, my company produces the same annual $ with 1/3 the employees we had in the 1990s – all due to the internet and computer efficiencies). Covid and the war are the geo phase transitions back to higher inflation numbers until we hit another productivity spurt: some technological advancement, and/or lowering of energy costs. And again, we need high immigration or the debt shell game is not sustainable.
Holding off on new investments for now. I’d love to see IG prefs >7% again. I can only own so much CSHC, but will get more if we get another 1/2 % on yield.
Some other factors that are going to impact many consumers is that Covid relief will be ending which allowed millions to not pay rent or mortgage payments for the past three years. In addition to student loan payments we’re not paid for the same period.
Rates higher for longer. Economy is not weak and employment strong but the Wall street gang wants investors to stay in the game so they keep putting out “analysis” after analysis of why the fed will soon cut rates only to push that timeline out further and further as evidence of the supposed recession doesn’t materialize. Fed will keep raising rates till the inflation threat is clearly gone by which time we’ll get a hard landing (Fed is fine with this if the alternative is out of control inflation). Meanwhile stocks will chop chop bulls and bears but I expect a smackdown at some point.
Just commenting. Not really debating with you.
I have to wonder if we think the economy is strong because the normal family in the USA is not even trying to save a bit for a rainy day. Just continue on as normal, spending freely, and not really noticing they are getting close to the edge of a cliff if something negative were to happen. We have endless amount of statistics to show our point of view if you think this way. For example 63% of Americans are living check to check. How is that a strong economy? Half of six figure earners say they are stretched too thin. (Lending tree survey for both. You can pick your source for things like this.)
I get the feeling everything will be strong right up until it is not. Very slowly and then all at once. I am not a doom and gloom type person but I can easily picture a chain reaction of slow motion events dragging us down without us realizing it until something breaks.
On the bright side for 2024 is that then we get to look forward to all the government handouts, bail-out programs, PPP loans that give forgiveness with no questions asked, and 90 billion/month in government buying of mortgages. :-). I mostly look forward to mulling whether I want to buy that 3% preferred from PSA…
A large subprime vehicle lender / retailer shut down.
https://www.bloomberg.com/news/articles/2023-02-25/subprime-auto-lender-american-car-center-closes-for-business#xj4y7vzkg
I seem to remember some recent news reports that American Car Center was having some big legal problems because of their business practices (preying on the poor). I could be mistaken.
Private, my daughter’s neighbor moved in with a guy and married him so he could get citizenship. Rent paid. She plans on divorcing him at the end of 3yrs coming up. Doesn’t work, only child and her dad works for United so gets discount air tickets. Left for a week and went to Burning Man. Comes over to my daughter’s apt drinks her fireball whiskey and crashes on the couch. My daughter finally told her to quit coming over.
With divorce she can get support and file for taxes as low income and get money back. We have become the land of the Lotus eaters
That divorcee should hook up with George Santos