The lingering discord between the PMI surveys in the US manufacturing / non-manufacturing sector and the steady dynamics of consumption is probably the only thing that contains recession fears. As Morgan Stanley noted, the foundation of the current expansion was the absence of consumer shocks, which, in fact, began most of the past recessions. A few weeks ago, in an interview with CNBC, Fed official Richard Clarida even allowed himself a statement that “households are probably in the best shape in their history”. Of course, under this he meant balance sheet of households, record low unemployment and high levels of consumer confidence. Interest rates at a historical minimum allow to repay debts at cheap costs, and the rate of private savings is in the uptake restraining the risks of “individual defaults”:
It can be noted that the four previous recessions were accompanied by a decrease in the level of savings, which, of course, enhances the amplitude of the crisis due to the lack of an important “spending buffer” for households.
The low risk of household defaults is even better seen through well-known investment metrics, such as the ratio of debt service ratio to income (DSR) or the rate of private delinquencies. Carrying a debt burden for a consumer has become easier than ever, again, due to low interest rates:
In other words, in aggregate terms, US households spend 1/10 of their income on various interest payments.
But if the Fed was able to reduce the burden of debt servicing, the burden of other “fixed payments” on household income dipped to a lesser extent. The subject of interest this time will be the ratio of financial obligations to income. Financial obligations include rent payments, insurance, car leasing payments, etc. The biggest part of this obligations are rents.
If we compare the width of these two channels of “leakage” of income (the cost of servicing debts and financial obligations), we can see that relative to the first, the second channel becomes wider. In the graph below, this is expressed in the growth of the green curve to its maximum level over several decades:
But why it is important?
It can be argued that by summing up the widths of these two channels we get a lower share of them in household income than before the crisis (peak + peak in 2007 is higher than trough + trough in 2018). However, these dynamics are important in the context of a fall in the level of home ownership in the United States, or in other words, an increase in the share of households that have to pay for rental housing:
Moreover, the decrease in this ratio is due to increasing number of young households which usually do not own real estate (and do not have mortgages), because they are at the bottom of the income spectrum and have a low credit rating.
In other words, the composition of households paying interest payments is more “diluted” than the composition of households that bear rental expenses — their composition is more represented by young families with lower incomes and lower credit ratings. At the same time, we see that the relative share of financial obligations rose, which include exactly the rental payments.
Here is a simpler analogy: suppose that the ratios of robbers in the city and in the forest relative to the total population decreased, but the second ratio decreased slower, so that relative to the robbers in the city, the number of criminals in the forest increased. If more and more civilians want to walk up in the forest, the number of robberies may even increase in the end, despite of a smaller number of criminals as a whole.
This is really an unobvious increase in instability in the position of US consumers which cannot be caught with wide metrics.
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