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Suggestions of Risk In Consumer Credit

This is a syndicated repost published with the permission of Alhambra Investments. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

Despite last month’s substantial revisions that wiped out most of “residual seasonality” from the seasonally adjusted revolving consumer credit series, it still remains for this year. The Federal Reserve staff eliminated the large swings in credit card use pivoting around the Christmas holiday. Consumers buy up a lot of stuff in advance of it, and then spend some several months after paying for it in either the literal sense (credit card bills) or foregone spending.

That much remains in the current series even if lowered to a considerable degree. The adjusted overall balance (which is different than the monthly “flow” series) fell in March for the second straight month. Revolving credit was up only slightly in January, meaning that, as of the current data set (who knows how it might be revised next year), consumers are behaved for all of Q1 according to our definition of residual seasonality (that isn’t residual but is seasonal).

What we are interested is not so much the level of decline but that there is decline at all. The possible reductions in revolving balances aren’t so much of an issue by themselves, rather they corroborate our view of consumer tendencies. As noted before, the reason we are seeing a more pronounced residual seasonality in the consumer credit data is surely income.

Last year was truly one of the worst non-recession years in a long time for the labor market. Consumers appear to have noticed despite what is surveyed, tabulated, and printed in consumer sentiment indicators. Incomes were bent down to a lower growth trajectory (which has amounted to, essentially, no growth at all) during the downturn 2015-16.

At least one group of issuers in the consumer credit universe appears to have noticed. While traditional banks (depository institutions) and credit unions continue to write new balances (both revolving and non-revolving), these important peripheral players are subtracting from their lending portfolios.

The series (blue line above) is an interesting one in that it follows the contours of the mini-cycles displayed in all the economic stats that are missed in mainstream commentary. From the 2011 crisis forward, they cut back on consumer credit if only slightly, until early 2014 when it had appeared recovery was imminent (according to Economists’ narrative).

That risk taking abruptly reversed right where you would expect – all the “global turmoil” stuff that we were supposed to ignore following the Chinese currency “devaluation” that wasn’t a devaluation.

More interesting still, this group further accelerated their exit last summer when it appeared the economy had hit a lull, and liquidity risk began to sneak back into the equation (especially early September 2017). These particular credit vehicles are far, far more sensitive to money conditions than banks and credit unions.

It can be, of course, difficult to untangle credit from liquidity risk. Delinquency rates have ticked up a bit in the consumer credit space; the Fed reports that delinquencies for consumer loans was 2.24% of all loans as of Q4 2017. That’s down a fraction from Q3, which was figured to be 2.26%.

The rate had risen from a low of 1.98% in Q2 2015, right at the period in question, but even following what looks like an inflection (toward higher charge-offs) these are nowhere near concerning levels. Delinquencies remain close to those historically low rates.

Maybe these credit providers are anticipating a more determined cyclical turn in the quarters ahead, but I doubt it. I have to think that the combination of a considerably weaker labor environment (and the impact on things like credit scores and even overall employment at the margins) combined with a change in liquidity risk (particularly late last year) would be the more likely case.

It is potentially an interesting combination that doesn’t exactly add up to a booming economy, nor one that is about to start. It doesn’t point to imminent recession, either, but that’s not what’s weighing on funding of late (re-rising dollar). Risk perceptions are shifting merely because the promised acceleration (inflation hysteria) of the past two years remains absent, and incoming data this late into 2018 continues to suggest there is no reason to expect it.

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