Household Debt Hits $13.87 Trillion In Q2

Redbook Sales Growth Falls Again

In the all-important back to school shopping season, Redbook yearly same store sales growth declined from the prior week. In the week of August 10th, yearly growth fell from 5.1% to 4.4%. In the past few weeks, it has been mostly below 5%. In rate of change terms, that’s weak, but in absolute terms, it’s still solid. It’s great to get an updated picture of how the consumer is doing with the backdrop of new tariffs in place.

The next report will include more of how the decline in stocks has impacted spending as well as if the partial tariff delay helped spending. The tariff news is probably confusing to consumers so it might hurt spending. However, the biggest impact will depend on how much tariffs actually increase prices. The July CPI report showed a mild increase in inflation. Ultimately, tariffs only have an impact on targeted items, so the impact on overall inflation is muted. The 10% tariff in September was about to have a big impact on consumer prices, but the partial delay will mute that.

The July retail sales report which will be released on Thursday is expected to have 0.3% headline monthly sales growth which is down from 0.4% and 0.3% monthly sales growth in the control group which is down from 0.7%. These are reasonable estimates as the monthly comp is tough unless there is a big negative revision.

Q2 Consumer Debt Update: Housing Debt Not Yet At A Record

The NY Fed updated its household quarterly debt and credit report on Tuesday. In Q2 non-housing debt increased from $4.02 trillion to $4.06 trillion. Housing debt increased from $9.65 trillion to $9.81 trillion. Non-housing debt is at a new record, but housing debt is still below its record high of $9.99 trillion in Q3 2008. Of course, as a percentage of GDP and in real terms, housing debt is down huge from that peak since it was over 10 years ago. Unlike last cycle, we actually want to see more housing debt because it implies more people are buying houses. Housing demand has been weak this cycle unlike last cycle in which demand was artificially high.

Speaking of housing, in the latest MBA applications report, yearly purchase growth and weekly refinance growth were strong. In the week of August 9th, the composite index was up 21.7% weekly which is on top of 5.3% growth. Most of that growth came from the refinance index which was up 37% weekly after increasing 12%. On August 8th, the 30 year fixed rate was 3.6% which is a 3 year low. Since the 30 year treasury yield is at a record low, the average mortgage rate will fall further (probably below 3.5% and maybe to a record low). The record low is 3.31% in November 2012. That will spur housing demand unless the labor market weakens significantly. The purchase index was up 2% after falling 2% on a weekly basis. Because of weak comps, yearly growth was 12%.

Details Of The Household Debt Report

Let’s look at the latest changes to the categories within non-housing debt. Student loan debt actually fell slightly from $1.49 trillion to $1.48 trillion. Going back to Q1 2004, student debt has never fallen sequentially. This is significant, but doesn’t imply student debt is going to start shrinking. According to FRED, student loans owned and securitized, outstanding were up 5% in Q2 on a yearly basis. That’s up from the 4.9% growth in Q1, making it the 2nd lowest growth rate since at least 2009.

Credit card debt increased from $850 billion to $870 billion. Auto debt increased from $1.28 trillion to $1.3 trillion. There wasn’t much change to the percentage of balances that are 90+ days delinquent. The student loan delinquency rate fell from 10.9% to 10.8%. The credit card delinquency rate stayed at 8.3%. That’s relatively high as it bottomed at 7.1% in Q3 2016.

Auto loan delinquencies fell 0.1% to 4.6%. They peaked at 5.3% last cycle. Being near last cycle’s peak is a red flag as that was a terrible recession; currently the economy is only in a slowdown. In July, motor vehicle sales fell from 17.1 million to 16.8 million which missed estimates for 16.9 million. Vehicle sales have been range bound for a few years.

The main reason I mentioned we want to see housing debt increase is because delinquency rates are low. Obviously, if standards lower enough to spike the debt, that would increase the delinquency rate. There is a limit to how low standards can go which will prevent another housing bubble from occurring.

The chart above shows the percentage of newly delinquent loans. The picture looks a bit worse for student loans than the 90+ days delinquency rate did. As you can see, student loan delinquencies rose to 10.01%. Auto loan delinquencies don’t look as bad as they fell to 6.93%. Finally, the credit card delinquency rate looks high just like the 90+ day rate. It increased to 6.86%.

Fund Managers Love Cash & Hate Equities

As you can see from the chart below, fund managers are taking a cautious approach which looks increasingly wise as the August correction gets deeper. Cash has a z-score of about 1.5 and equities have a z-score of about -1.7. America has a modestly positive z-score. There is a negative net percentage of fund managers saying they are overweight global equities. That’s similar to, but not as bad as sentiment was in 2008.

Conclusion

The economy will rely on the consumer as the increased uncertainty caused by tariffs should hurt business investment. The decline in stocks has catalyzed tighter financial conditions which will also pressure business investment. Credit card and auto loan debt are issues to pay attention to as their delinquency rates are relatively elevated compared the strength in consumer spending and income growth. Housing debt won’t become an issue in the next recession. Finally, it’s notable how bearish fund managers are as they are long cash and underweight equities. 

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