Behind the rosy economic headlines, consumer stresses have continued to build and are likely to worsen.
Is the U.S. economy enjoying a honeymoon, or is this merely a hiatus? Although this isn't a subject of discussion among most economists, there will be both good and bad associated with three hurricanes and the California wildfires.
In early summer, the economic data began to surprise to the upside and the momentum has gained traction. The Citigroup Economic Surprise Index recently hit its highest level of the current cycle. But there are signs that beneath the veneer of healthy headlines, household stresses have continued to build and are likely to worsen as losses related to the storms begin to seep into future months' data.
In tracking its internal debit- and credit-card data, Bank of America observed that much of the September upside surprise in consumption was propelled by building materials and gasoline. Immediate repairs, rushed deliveries of goods and supplies, and storm-victim relocations undoubtedly drove these sales.
In October, Bank of America's data showed payback in these areas but strength in furniture stores and discretionary goods. That also makes sense given how many of those who were dislocated have begun to move back into their homes or outfit new, temporary living arrangements.
The Bank of America report also noted that "While the data are cleaner this month, we still see evidence of hurricane distortions, particularly due to Irma."
It will be some time before the economic data can begin to reflect the full extent of the economic damage inflicted by Hurricane Maria. Puerto Rico remains in such dire straits, the unemployed have had to mail in their initial jobless claims forms, creating long lags in the reported weekly figures.
The full effects of Hurricanes Harvey and Irma are rapidly showing up in the data. In September, according to Black Knight, the number of mortgages either past due or in foreclosure rose by 214,000, or 9 percent, compared with August. At 5.1 percent, the combined rate is far off the previous month's 4.7 percent and the most recent low of 4.5 percent recorded in March 2007.
October's numbers have brought the picture more clearly into focus. More than 229,000 past-due mortgages are tied to the storms. Hurricane Irma accounted for 163,000 and Harvey, 66,000. To place the damage to households in context, before the storms, Florida and Texas ranked 22nd and 20th among non-current mortgage states. As of October, Florida has risen to second place and Texas is in fifth place.
The economy has also enjoyed a rush of car sales as sufficiently-collateralized and insured drivers immediately replaced vehicles destroyed by the storms. According to the latest retail data, car sales slowed to a 0.7 percent growth rate in October, far below September's blistering 4.6-percent pace.
Nonetheless, the next development could be a further deterioration in auto delinquencies attributed to storm victims. The most recent third-quarter data from the New York Fed suggest struggling households continue to buckle under the strains of their monthly payments.
The delinquency rate for subprime loans originated by auto-finance companies, as opposed to banks, hit 9.7 percent in the three months ended in September. With one in four auto loans outstanding going to subprime borrowers, the rate has been rising since 2013 and is at a seven-year high. What's most notable is that these delinquency rates are being recorded outside recession, all but ensuring 2009's peak of 10.9 percent will be breached in the next downturn.
And while credit-card delinquencies are nowhere near their crisis-era double-digit peaks, the New York Fed noted that serious delinquencies have been on the rise for one year. The serious delinquency rate hit 4.6 percent in the third quarter, up from 4.4 percent the prior quarter. Adjusted for inflation, the growth of U.S. credit-card spending has outpaced that of incomes for 26 straight months.
Without a doubt, the availability of credit has been a contributing factor. In its just-released Survey of Consumer Expectations, the New York Fed found that households' perceptions of the availability of credit reached the highest level since the survey began in 2013. As for households' "financial fragility," the average probability of respondents needing $2,000 for an unexpected expense rose to 33 percent from 32 percent in the previous survey, their perceived ability to scrounge those rainy-day funds rose to 70 percent from 67 percent.
The recent income gains among the lowest-earners is probably seeping into households' increased optimism. At the same time, at 3.4 percent, the personal saving rate implies many households have depleted a good portion of their safety cushions.The current rate is not only the lowest since 2007, but one of the lowest on record since 1900.
Hoisington Asset Management's chief economist Lacy Hunt said that in real per capita terms, disposable income fell at a 0.2 percent rate in the third quarter, 0.5 percent below where it stood a year prior.
At the same time, the Federal Reserve is poised to raise interest rates by a quarter percentage point at its two-day meeting ending Dec. 13. This tightening will occur in conjunction with the Fed's continued shrinking of its balance sheet.
"We have seen many instances where spending surges rapidly immediately after natural disasters, but the boost from disaster spending will fade quickly while the intensifying monetary restraint will persist," Hunt warned.
Perhaps the markets are beginning to sniff out that what the storms giveth can just as easily be taken away. |