Will 2018 be the year of the household hangover? The latest data on the saving rate, which broke under 3 percent to 2.9 percent in November, the lowest since 2007, suggests that an encore to the ebullient buying over the holidays will not happen in the new year.
Without a doubt, households are as buoyant as they’ve been in years. In the most recent consumer confidence report, only 15.2 percent of those surveyed reported jobs were “hard to get,” a 16-year low. The few economists who have forecast that the unemployment rate would fall below 4 percent are looking prescient.
So what’s to follow? Barring a repeat of 2017’s natural disasters, demand for employment seems likely to ebb headed into the second half of the year. Supply chains will be restored, tempering the need for emergency workers, and the auto recession disrupted by Hurricanes Harvey and Irma appears set to resume.
In a recent report, Moody’s Vice President Rita Sahu maintained her stable outlook for the US banking sector for 2018, citing the benefits of a rising rate environment and that ultralow unemployment rate. Aside from signs that the commercial sector is “overheating,” Sahu pointed to auto loans and credit cards as “negative outliers.”
“Auto loan delinquencies are above pre-crisis levels at around 2.3 percent,” Sahu warned, “and credit card charge-offs have increased sharply to around 3.6 percent as of the third quarter 2017.”
Those levels of distress are tame compared with dedicated nonbank lenders who are seeing 90-day serious delinquency rates run at four times those of conventional banks and credit unions.
Credit cards are merely the next step along households’ path to living beyond their means. The decline in the saving rate is the mirror image of consumer credit outstanding as it’s ballooned in recent years. As has been heavily reported, student loans have been responsible for the bulk of the buildup, followed by car loans.
Over the last two years, however, credit card growth has acted as an accelerant, outpacing income growth at an increasing pace.
What is perhaps most unsettling in the lack of alarm among conventional economists is that so much of the debt in the current cycle is unsecured. In the last run-up, the most prudent households had the equity they had built up in their homes to cushion the downturn.
As for the prospects of building wealth in residential real estate in the current cycle, mortgage lending standards have been easing -- but at what could be the worst time. Home prices are up 6.2 percent over the last year, shutting out first-time homebuyers, whose ranks dwindled to 29 percent in November, matching the lows of the current cycle.
As 2018 begins, concerns are growing that we’re starting to see the underbelly of last year’s natural disasters. According to Black Knight, in November, mortgage delinquencies jumped by 13 percent, the largest monthly rise since 2008, when the financial crisis was beginning to ravage housing. Tellingly, 85 percent of the increase was tied to Hurricanes Harvey and Irma, bringing the total number of homes that are 90 days or more delinquent and attributable to the hurricanes to 85,000.
Echoing Black Knight’s data, the Mortgage Bankers Association reported that in the third quarter, Federal Housing Administration delinquencies spiked to 9.4 percent from 7.94 percent, the highest quarterly increase in the survey’s history. It’s of particular note that delinquencies rose in states not impacted by natural disasters.
As is the case with subprime auto loans, low-down-payment FHA mortgages have been the only accessible loans for those with less than stellar credit in this recovery. By the looks of the data, the party may be ending.
Low saving rates have always gone hand-in-hand with high levels of consumer confidence that give households comfort in levering up their balance sheets. Of course, this strategy holds so long as job creation and income gains continue to surprise to the upside.
But what if 2018 starts with a shakeup in the restaurant industry and continued consolidation in cost-constrained sectors even as the Fed continues to raise interest rates? What if companies don’t use the tax cut to increase hiring for fear that the party is finally ending?
Chances are good households that will feel as if they’ve just woken up after a night of being overserved, while the vast consensus of strategists and economists cringe at being reminded of Milton Friedman’s admonition that there is no such thing as a free lunch.
By Danielle DiMartino Booth
Danielle DiMartino Booth is a former adviser to the president of the Dallas Fed. -- Ed.
