By L. Burke Files
It is easy to feel that the economics of our current business climate are not good. But let's go from general malaise to some hard numbers.
- According to the U.S. Bureau of Economic Analysis article published in April 2023, the seasonally adjusted annual personal savings rate was 4.6% in February. That's well below the average annual rate of more than 8%, according to the data dating to 1959. In June 2022, the rate had dipped to 2.7%, a 15-year low!
- According to Bankrate - Americans, overall, are saving less. Nearly half, or 49%, of adults, have fewer or no savings compared to a year ago.
- According to the latest consumer debt data from the Federal Reserve Bank of New York. Americans' total credit card balance is $986 billion in the first quarter of 2023. That's unchanged from the fourth quarter of 2022's record number, leaving the balance the highest since the New York Fed began tracking in 1999.
- Over one-third also now have more credit card debt than emergency savings, the highest on record.
- Vanguard reported that the average 401(k) dropped from 141,542 on December 31, 2021, to $112,572 on December 2023, a drop of 20%. Over that same time period, Fidelity reported a drop from 130,700 to 103,900, a drop of 21%. A portion of this drop is tied to market forces and withdrawals – early or scheduled. According to Bankrate, the number of early or hardship withdrawals over doubled the previous year's number. Now think of the loss across 100 million retirement accounts., 60 million 402(k), and 40 million IRAs.
Those last five statistics show that the average U.S. consumer is under adverse economic pressure. They ceased saving, tapped into what they had saved, and began filling in financial needs with credit card debt and retirement savings.
It is no wonder Chapter 7 bankruptcies are up and is expected to go higher.
- According to USCourts.gov, in May 2023, corporate bankruptcies were up 23% from May 2022. Individual Chapter 7 bankruptcies are up 7% over the same time period.
- On September 01, 2023, the COIVD era moratorium on student loan debt will expire, and payment will resume in October 2023. From 2015 to 2020, the average default rate was about 10%. Under the COVID era forbearance, the default rate dropped to 2.3%. The default rate is expected to skyrocket come October. There are 31 million who are in default, 90 days delinquent, and paying their loan, but the overall loan balance is growing. Only 11.5 are paying down their balance. Almost exactly 75% of student debt is in jeopardy of default. Those we spoke to estimate that with the very generous definition of default for student loans, the default rate will not hit 75% but may range between 20% and 30%.
- According to Moody's, in 2003, the average family paid 23% of their income on housing. In 2022, that hit 30%. The increase is due to the cost of money, property taxes and insurance costs, and a shortage of units. In some cities like New York, 68% of income is spent on housing.
- Lastly, The Conference Board's Leading Economic Indicators turned negative. The US LEI signals a recession for later in 2023.
What does this signal to the investor?
Consumer spending will continue to soften. The industries that suffer the most are dining, bars, leisure, and hospitality. Even major players can get hit hard during the 2020 recession. The Bureau of Labor Statistics showed the U.S. economy shed 450,000 jobs just in February and March of 2020
Retail is vulnerable – consumer shift from luxury to more economically minded brands and stores.
The entire auto industry suffers, as well as other expensive durable goods manufacturers and retailers. People shift from new to used cars and postpone repairs and maintenance.
Lenders to the subprime markets are already experiencing increasing default rates.
Financiers to the sub-prime lenders could see entire portfolios fall out of compliance with debt terms trigging additional fees, higher interest rates, and the acceleration of payment due dates.
As interest rates rise, home sales will continue to stall. Families are essentially trapped in their homes. They cannot sell and buy a comparable home at the same cost per month because of the rise in mortgage interest rates. A caveat is that this is highly location dependent. Many news stories focused on the exodus of Democratic Controlled big cities.
The reasons? Crime, affordability, and cost of living. A recession will make all of those problems worse. Look to exit or short developers active in the shrinking cities and states and explore developers in the expanding states.
L. Burke Files CACM, DDP
Originally published in The Irresponsible Investor