Consumers are managing debt and default rates are favorable for economic expansion.
This is an update of our consumer credit report from earlier this year. (https://wp.me/p8toqr-JJ) Our focus is on consumer credit defaults. Measuring defaults over three major areas: Mortgages, bank cards and auto loans is used to create a composite by S&P/Experian and available on the web site, www.spindices.com. We have found the index useful in determining the financial strength of the consumer which is one of the most important factors in the continuing strength of the American economy.
Currently, the index is portraying a consumer that has debt under control and manageable. The composite index is at 0.92 in April which is 0.02 points higher than last year at this time, but 0.04 points lower than just a month earlier in March. Mortgage defaults are lower, year-over-year at 0.68. Auto loans have increased by 0.09 points from last year, but also dropped from last month by 0.06 points to 0.99.
Bank card default rates are continuing to increase on a month-to-month basis by 0.08 points and year-over-year basis by 0.51 points reaching 3.86 in April. This is the highest level since June 2012. The increase is at about the same rate as economic growth so this is not an alarming event, and it is favorable that both mortgage and auto defaults are flat, or improving, given the improving economy.
Many times two concerns are cited when examining default rates. First, housing prices are increasing at a rate that is faster than economic growth. We are not deeply concerned about this increase because it has been a “cited” concern of developed economies around the world for decades. One part of the equation in determining affordability of housing is the fact that other than first time home buyers, the increased value of the sold property should be part of the affordability equation in buying a new property. If the value of the sold property has increased 6% this increased value can be used to purchase the new property. This added value fuels the increase in housing and assists in affordability. It is not exclusively a current income growth rate proposition.
The second concern, which we believe to be a real concern, is that wage gains have not moved upward at a rate that is at, or above economic expansion rates. Usually there is a lag in wage growth, but this lag is getting to be rather long and concerning. Average hourly earnings are increasing at 2.6% annually which is faster than inflation, but not fast enough to provide expanding benefit to the consumer.
Overall, the credit default rates are indicating the consumer is managing debt and hopefully will benefit from increased wages in the near future.