Today’s WSJ has an optimistic view of consumer credit amidst the current recession. It appears a bit too rosy. Is it that consumers are borrowing less, or is it that lenders are lending less? That is the real question. According to the Federal Reserve, 38.5% of consumer lenders reported tightening standards in credit issuance in Q2 2020, up from 13.6% in Q2 2020
- When unemployment soared this spring at the start of coronavirus lockdowns, credit-card debt and delinquencies were widely expected to surge as struggling households borrowed more to make ends meet.
- Instead, amid the deepest economic crisis since the Great Depression, the opposite happened. Credit-card debt in the U.S. and other advanced economies has fallen. Fewer people are late on their credit-card payments. Consumer demand for new borrowing—through credit cards, personal loans, and even pawnshops—is down sharply.
- “We’re not seeing consumers increase credit-card balances; in fact, they’re continuing to pay down balances,” said Peter Maynard, senior vice president at Equifax, the credit-reporting firm that tracks consumer borrowing in the U.S., Canada, the U.K., and other countries.
The article cites debt from Equifax, similar to what the Fed presents in its G-19 report. The indication is that revolving credit is decreasing, from the trillion-dollar mark to the $800 billion range. Note this is the same trend experienced during the Great Recession.
And, while the WSJ points out:
- Just four months ago, large credit-card issuers expected Americans’ debt levels to be a problem and forecast surging missed payments by the second half of the year. Millions of cardholders had signed up for deferment programs because they were unable to make their monthly minimum payments.
- U.S. government stimulus has delivered an immediate economic boost worth more than 9% of gross domestic product, according to economists at Brussels-based economic think tank Bruegel. That includes $1,200 checks sent to eligible adults, the extra $600 in weekly unemployment benefits, and $500 for dependent children.
We say that the economy is being propped up by the funds, which will not last. The $600 benefit ended in July, and a replacement is still in the works. When it returns, it will be less generous. The WSJ reported on “Fed Chief Jerome Powell” that the economy is on an “Extraordinarily Uncertain Path.”
Small business bankruptcies are expected to surge. If you ask N.Y. Times, you will find headlines like “Hiring Outlook remains Dim with ‘Scarring in the Economy.’”
The biggest driver in consumer credit is how much debt goes to charge-off. That is one of the driving factors for net profit in the business. The latest numbers, published by the Fed on June 15, 2020, for Q1 2020 indicate a healthy loss rate of 3.61% for top banks, which is only slightly higher than the previous period. Smaller banks, however, are twice that rate at 7.41%.
Then look at other factors like rent payments. Here, the San Francisco Chronicle notes that “Rent is coming due in California: Two Weeks to Avoid Complete Catastrophe.”
- Millions of residents who lost their jobs this spring as the state shut down to slow the spread of the coronavirus now fear they will lose their homes as well. One in 7 tenants in California did not pay rent on time last month, according to a survey by the U.S. Census Bureau, and nearly 1 in 6 doesn’t expect to pay on time in August either.
I’d say the WSJ is probably too optimistic on this topic. Look at loan loss reserves- that is where everything comes out in the wash. For that, I suggest reading Standard and Poor’s market view, which carries the headline “U.S. Bank Loan Loss Projections Tower Over Allowance Levels.”
We still need another stimulus package, but the long-range concern is how economies can handle it. According to Statista, the U.S. now has 13.2% of its GDP committed to COVID. That certainly is a record for the United States, but other countries are worse. Canada is at 15%, and Japan is a whopping 21.1%. …Watch those loan-loss reserves; that is where the risk sits.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
