ELLIOTT D. POLLACK
& Company
FOR IMMEDIATE RELEASE
June 12th, 2017
The Monday Morning Quarterback
A quick analysis of important economic data released over the past week
Advanced economies float on a sea of credit. It is the ability to access credit that allows an economy to expand rapidly. Take away the credit and an economy will not be able to expand at anything but a snail’s pace. No credit and the housing market shrinks dramatically. Same goes for the business sector’s ability to expand and the consumer’s ability to purchase big ticket items. Create too much credit, however, and an economy risks becoming overleveraged. The results can be seen by what happened as a result of the housing bubble.
A successful economy must walk the middle ground. This is a path that the U.S. economy has, for the most part, walked successfully for a long time. In the last 100 years, an event that forces us to use the term “for the most part” has only occurred twice. Both times were exceptionally ugly.
The latest data show that the country continues to walk the middle ground. The percent of people’s income used to pay for previously accumulated debt is now back down to where it was in the early 1980’s and is way below where it was in 2007. Following a significant decline after 2008, revolving credit (mostly credit card debt) is finally approaching its previous peak…..9 years later. This is very healthy.
On the other hand, non-revolving credit (mainly auto and student loan debt) has literally ballooned since 2011. While there has been a significant amount written about the risks of auto loans in this cycle, the fact is that the FICO scores of auto loan borrowers is higher now than in previous cycles. And the auto fleet continues to age, in part, because the quality of autos continues to improve. Thus, the risks to that part of the non-revolving credit picture appear to in the normal range. This is true despite some “sub-prime” auto lending.
As for student loan debt, the amount outstanding continues to swell. It has affected the ability of many to buy homes, furniture, etc. and their ability to live “normal” lives. For those who took out student loans but did NOT obtain a degree at all or who did NOT obtain a degree that was attached to a marketable skill that allows the borrower to generate sufficient income to justify the loans, the burden will take a long time to overcome and could create a permanent problem for the borrower. Even for those who got the benefit of the bargain (a marketable skill that will allow the repayment of the loan and more), it could delay the entry of the borrower in the housing and other consumer markets for years. Since student loans are not dischargeable in bankruptcy, there is no way out like there was for excess housing debt.
The bottom line is that credit accumulation by consumers remains, for the most part, well under control. The exception is student loans. This could affect a borrower for years to come and will change the lifestyles of many for that period of time. This needs to be monitored carefully. Many of those student loan borrowers have exchanged future consumption for classes or a low paying degree that will continue to haunt them and will slow consumer markets.
Arizona Snapshot:
- The share of properties with mortgages that have negative equity in the state declined to 9.1% in the 1st quarter of 2017 compared to 12.6% a year ago and 9.8% in the 4th quarter of last year. The share that was under-equitied was 19.6% compared to 22.0% a year ago and 19.9% in the 4th quarter of 2016.
- The Cromford Report stated that active resale listings in Greater Phoenix continue to decline. In May, there were 24,756 listing compared to 27,318 a year ago and 25,166in April. At the same time, resale activity expanded to 9,817 units in May compared to 8,750 a year ago. As a result, days on market fell from 75.0 days a year ago to 69.2 days in May. Median sales prices increased to $240,000 compared to $225,198a year ago.
- The ratio of the median price of a new home as a percent of the median price of a resale home in Maricopa County fell to about 136%. This is way down from the peak of about 200% and is approaching the long term norm of 120%.
U.S. Snapshot:
- Consumer credit growth slowed in April and was well below expectations. Total consumer credit grew at a 2.6% annual rate and now stands 5.8% above a year ago. Revolving credit grew at an annual rate of 1.8% in April and now stands 5.7% above a year ago. Nonrevolving credit grew at a 2.9% annual rate in the month and now stands 5.9% above a year ago.
- Nonfarm business sector labor productivity was unchanged during the first quarter of 2017 as both output and hours worked increased 1.7%. From the first quarter of 2016 to the first quarter of 2017, productivity increased 1.2% reflecting a 2.5%increase in output and a 1.3% increase in hours worked.
- Unit labor costs in the nonfarm sector increase 2.2% in the first quarter of 2017 and is reflected in a 2.2% increase in hourly compensation and an unchanged level of productivity.
- Manufacturers’ new orders declined 0.2% in April. This followed four consecutive months of increases. Orders are up 3.8% from a year ago. The inventories to sales ratio remained at 1.38 in April compared to March. A year ago, the ratio was 1.41.
- The ISM’s non-manufacturing index stood at 56.9 in May. This compares to 57.5 in April and 53.6 a year ago. Any reading of 50 or above indicates the sector is expanding.
- The rate on 30-year fixed rate mortgages declined last week to 3.89%. This compares to 3.94% the previous week and 4.05% a month ago.
- CoreLogic reported that 3.1 million homes, or 6.1% of all residential properties with a mortgage, still had negative equity as of the end of the 1st quarter of 2017. This compares to 8.1% a year ago. The percent of properties with mortgages that have less than 20% equity (known as under-equitied) remained at 15.1% in the 1st quarter. This is the same level as the 4th quarter of 2016 but is down from the 18.4% reported a year ago.
