Cass Freight Index Craters: Economic Slowdown Worsens

Cass Freight Index - Q1 Household Debt Report: Debt Totals

Before getting into the Cass Freight Index, let's review the NY Fed’s household debt and credit report. It gives us details on delinquency rates, nominal debt, and the credit scores of debt holders. Also, it gives us color on strength of the consumer. In the Q1 report released this week, total household debt increased from $13.55 trillion to $13.67 trillion. 

Don’t be fooled by the bears into thinking that household debt being at a record high means the consumer is in trouble. Wealth is also extremely high because of the rise in asset prices like the stock market. Non-housing debt increased $10 billion to $4.02 trillion which is a new record high. It’s being driven by student and auto loans.

Specifically, they increased from $1.46 trillion and $1.27 trillion to $1.49 trillion and $1.28 trillion. Student loan debt increased 5.67% yearly. That’s a slight acceleration from 5.34%. I’ve always wondered if the trend in yearly growth would fall to the negatives. 

It makes sense that student loan debt can’t increase at a double digit rate anymore. 

It would encompass the whole economy. However, if debt were to decrease, it would imply more students are paying for college out of pocket, there are more scholarships and aide, or that less people are going to college. To be clear, the cost of tuition is going up. It will probably always go up. If the economy is rough, colleges might increase tuition at a lower rate and give out more aide.

Cass Freight Index - Finally, housing debt increased from $9.54 trillion to $9.65 trillion. It’s still below the peak of $9.99 trillion in Q3 2008. That’s a testament to how big the bubble was. Even after 10.5 years the total hasn’t exceeded the previous peak in nominal terms. Consumers have deleveraged. Investors expect a new record to be hit sometime in 2021. 

If that time horizon is accelerated, it still doesn’t mean the consumer is overleveraged. Wealth is so much higher than it was in 2008. In Q3 2008, the net worth of households and non-profits was $61.689 trillion. In Q4 2018, it was $104.329 trillion. That’s a huge increase compared to the decline in housing debt.

Delinquency Rates

Cass Freight Index - The 90+ day delinquency rate on loans is interesting to review as it tells us if the consumer’s balance sheet is getting worse or improving. Ideally, we’d like to see across the board low delinquency rates. In the past 7 years, student loan delinquency rates have been elevated and in the past couple years, auto loan delinquency rates have been increasing. That’s partially why I think the auto market is going to be weak this year.

The good news in Q1 was that the 90+ day delinquency rate for student loans fell from 11.4% to 10.9%. That’s the lowest reading since Q2 2018. Since Q3 2012, the lowest rate was 10.7%. That shows you how good this reading was compared to the past few years of data. 

However, it’s still above last cycle’s mortgage delinquency rate peak which was 8.9% in Q1 2010. Unfortunately, it’s not all good news for student loans as the percentage of loans in transition to 30+ day and 90+ day delinquency both increased.

The 90+ day mortgage delinquency rate fell from 1.1% to 1%. That’s the lowest rate since Q2 2006. 

It’s no surprise housing is the least problematic category because it caused the last crisis. 

The biggest problem area was the credit card delinquency rate as it increased from 7.8% to 8.3%; that is the highest rate since Q2 2015. It has increased from its cycle bottom of 7.1% in Q4 2016. This explains why the net percentage of banks reporting tightening standards for credit card loans increased from 6.4% to 15.2%.

Cass Freight Index - Finally, we have auto loans which have been a growing issue for a couple years. The 90+ day delinquency rate on these loans increased from 4.5% to 4.7%. That’s nowhere near the rate of credit card and student loans, but it is close to its previous cycle peak of 5.3% in Q4 2010. This is the highest rate since Q4 2011 when it was in the process of falling. 

As you can see from the chart above, it’s not a huge shock the delinquency rate is increasing because the growth in loans given to borrowers with a sub-660 credit score is higher than the growth in loans given to borrowers with above a 660 FICO score. Poor credit score loan growth is in the middle of this cycle’s range. It appears in the past 12 months, there has been a concerted effort to lower lending standards to sell more cars because demand growth from borrowers with good credit has fallen.

Cass Freight Index - Disaster

April Cass Freight report was terrible as shipment growth was -3.2%. 

As you can see from the chart below, this was the 5th straight month growth was negative. Expenditures growth was 6.2%. In Cass Freight’s comments you can see the firm went from thinking this was a one time blip lower earlier in the year to realizing this is a sustained slowdown. 

The firm stated, “We also submit that at a minimum, business expansion plans should be moderated or have contingency plans for economic contraction included.”

It explained how without trade and inventories, Q1 GDP growth would have been 1.5%. April isn’t even in Q1, so I don’t see why it needed to explain this. I’ve explained how Q1’s GDP report was weak in previous articles. Investors are focused on how Q2 will turn out. 

This is just one more indicator that suggests growth will be much lower than the 3.2% rate it was at in Q1. According to CNBC, the median of 8 GDP estimates is for 2% growth. 

Atlanta Fed GDP Nowcast saw its estimate for Q2 growth fall from 1.6% to 1.1% because of the retail sales and industrial production reports which I will discuss in a future article. At this point in the quarter it’s still not accurate, but it tells us GDP growth will be weak if the data continues at the same pace. 

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