Welcome to the Market Pulse podcast.
I'm your host Thomas Aliff, team lead
for the Equifax Risk Advisors team.
This group identifies economic considerations and leverages
data and analytics to translate into industry
insights and recommendations, ultimately to support our
clients during economic uncertainty while uncovering growth
opportunities in consumer credit risk.
I am pleased to welcome back our panel
of experts in the risk advisors group, Jesse
Hardin, Tom O'Neill, Dave Sojka, and Maria Urtubey.
Welcome all.
So I guess as we get started here, does
anyone have any fun trips for the summer?
Yeah, I think I just really
excited about this Atlanta trip.
I may or may not have already taken it
and I may or may not already be here,
but Atlanta seems great this time of year.
I may be going to the one place hotter than Atlanta
and I'm going to New Orleans in a couple of weeks.
So looking forward to that.
Sounds very jazzy, amongst other things.
Yeah, I just got back from a wonderful
vacation with my children at Tybee Island.
It was a nice time.
It's outside of.
It's kind of an island off
of the Georgia coast by Savannah.
I had to look it up, Tom, but now I know where it is.
It's quite fun.
You can go on haunted ghost tours
of Savannah and things like that.
It's quite, quite enjoyable.
Yeah, we decided this year we were
going to take a fall vacation.
So we're going to see how they.
I've always wanted to do that.
I figured to miss the lines and the, and the heat.
And I'm going to Disneyland with my kids and
my nephew that is visiting, so should be fun. Awesome.
Cool. Thanks. Thanks everybody.
So in today's market pulse, we will
hear some prior excerpts from economic experts.
Doctor, uh, Amy Cruise cuts, Doctor
Rob Westcott and doctor Mark Zandi.
And the risk advisors will be able to provide
some commentary on the interpretation of the various findings
that they've been able to share with us.
So, Tom O'Neill, we've talked about the k shaped
recovery and yeah, I guess as we're, you know,
considering that there was a clip from, you know,
Mark Zandi in our last market pulse where he
went into some of these considerations.
Can you, can you weigh in on that a little bit?
Yeah, I'd love to.
And actually it was more than Doctor
Zandi himself, but also the other economists
also had some points to make.
So maybe we'll play a clip for that before digging in.
I think it's useful.
I'm trying to understand what's going on with
the consumer and affordability to really think about
the thirds of the income distribution.
If you're in the top third of the distribution.
I don't think this is hyperbole.
I think you're in as good a
financial shape as you've ever been.
I mean, literally, wealth has risen. No debt.
If you have any debt, it's a 30
year fixed rate mortgage locked in at 3.5%.
You got a job, your wages are rising, you
got plenty of cash sitting in the bank account.
Of course, I'm generalizing, but that top
third is in a very good spot.
Middle third, okay, kind of typical.
I wouldn't characterize it as being overly good or bad, is
what we would expect to see in a typical time.
Bottom third a problem.
The bottom third is struggling, and that's
where the affordability issues are really paramount.
As the economists during our last market
pulse were referencing the k shaped economy.
The k shape is a very useful tool and something
that's been helpful over the last few years to really
describe the people who have been flourishing over different economic
periods and those that have been struggling.
But what we've been finding is
that that's really not enough anymore.
When we look across different wealth tiers
and different income tiers and things like
that, we see that different populations are
impacted differently by these different events.
So even on a surface level, we may see
something like wealth increasing over the last few years
and say, well, things are going really well.
Populations have more wealth at their disposal.
But when we dig in a little bit deeper,
we see that that's really not the case.
And so that k shaped economy, while it's been
useful, it's really not describing the full picture anymore.
Hey, Tom, you and I, obviously, we have
a joint responsibility with our credit union folks.
And the talk over the last year or so has been
around deposits and really kind of as the, you know, as
the consumer, as the average american, manages their money.
And, you know, the upper part of that
K branch still has money deposited at those
financial institutions, inclusive of credit unions.
But then there are those that are, that
have kind of run, run through that.
So, you know, do you think that's
a concern as well on financial institutions?
Yeah, absolutely.
So something interesting that we've seen, looking at what
the financial institutions may be focused on, they may
be seeing what's in someone's savings accounts, their deposits,
and in a lot of cases, they're seeing those
amounts grow over the last few years.
And so at the surface level, you may
be thinking, this is a good thing, right?
Someone has more wealth to draw upon
than they had three years ago.
But again, it's important to put that into context.
When we account for inflation and we see what those
dollars are worth today as opposed to what they were
back in 2020, we see that it's a very different
picture, that while I may have more aggregate in my
account, that money isn't worth the same amount that it
was three, four years ago because of the impact of
inflation, I'm actually less able to meet those financial emergencies
or the day to day realities of my financial life
than I was maybe three or four years ago, even
though on paper it looks like my wealth has increased.
Sorry.
We were discussing that rule of thumb
cushion for emergency funds, the six month
savings ideal of monthly expenses.
And even for some households, getting just to
three months is a luxury, an indicator. Yeah.
Or maybe theyve still been going with the six months,
but those six months now will only cover three months.
What used to cover six months three years
ago isnt meeting the same thresholds today. Yeah.
And I guess when you think of the breadth
of inflation as well and just the notion that
so many different goods and services have increased in
price, I can see, Tom, to your comments about
the, across all the income bands, you think the
higher income bands, theyre dealing with inflation certainly differently
than those that have less income.
And it seems like even though lower incomes
are outpacing potentially inflation, those stressors are still
there when its so pervasive and everything that
you have to buy to live nowadays.
Yeah, thats an interesting point, too, Jesse.
And we heard the economists talk about that during
the last market pulse in saying that, maybe surprisingly,
the income tier thats had the most appreciation in
terms of their annual income are those bottom tiers.
Hourly workers and service sector employees have
actually grown in terms of their incomes
over the last few years.
And so youre thinking, well, thats great.
They must be in a better position to, to
make ends meet on a month to month basis.
But to your point, thats also the sector thats
most impacted that are seeing the biggest portion of
their incomes going to those daily needs things, the
things that have been most impacted by inflation.
Again, its putting all of that into context and
realizing that while it is true that wealth has
grown, that income has grown, that doesnt mean that
people are happy about their financial situation.
Yeah, I find a lot of that quite interesting.
Specifically, we talked about a number of things,
income, wealth, credit, even the k shape is
essentially what im hearing is a flattening of
the distribution across all those things.
And then tying that nuance together is really the
way to manage through that, with respect to understanding,
how can we understand where income is comparatively with
respect to inflation, how does the wealth picture tie
in and then ultimately credit, and then thinking about
that through the underwriting process, with things like debt
to income payments income, and do they have the
disposable income to be able to cover their debts
appropriately?
So let's go ahead and pivot. Maria.
With inflation coming down substantially, we're hearing
about the disconnect with consumer sentiment and
the k shaped recovery, and it's likely
even that, given where things are sitting.
I'm hearing some chatter about some potential interest
rate reduction, but I'm not quite sure where
we might be sitting with that.
But maybe you can comment on that.
It really comes down to a disconnect between the concept
of falling inflation, which is prices are still going up,
but at a slower rate and the level of prices.
So eggs are up 49% versus where
they were two or three years ago.
Gas prices are up.
These high frequency things that we look at,
if you just got your car insurance bill
like I did, that's up about 50%.
So a lot of these things that we're
paying for are at much higher prices.
And even if we've been lucky enough to have incomes
that keep up with it, it still seems to hit
us emotionally, even if we're maybe holding up financially.
Yeah.
The June number was released last
week, and it was at 3%.
May was at 3.3.
We were at 3.4 in April.
We've been in the three since June of last year.
We're getting close to the Fed target of two.
But while income growth has outpaced inflation,
it's not the case for everyone.
We're going back to the k shape economy.
We just heard from AV on the
rise of eggs, let alone auto insurance.
We have heard from some of our market positives
whose incomes have not kept up with inflation.
And while car prices have dropped, if you need
to buy a new car at an average of
48 to 50,000, it's nothing considered affordable but necessary.
And we have even heard from older,
stable, near retirees households, for example, postponing
the retirement plans as a result of
the how they're impacted by inflation.
We also hear, and we read about
some consumers even becoming more price conscious.
Dave, you shared even people are limiting
spending on areas such as chips, right?
So these nuances of minute, you
know, grocery shopping, everyday items are
under surveillance and being looked into.
Hey, Maria, I've got a question for you.
Given that you're our resident argentinian, do you
just laugh at the notion that we're worried
about two to 3% in a way.
But it makes sense, again, how that in a
way triggers these more conscious and more in a
way, again, decisions on what is luxury versus what
is an expense that you need to afford. Yeah.
And it sounds like the good news is that the
recent comments from Chairman Powell seemed to indicate maybe more
of a focus on 2% or somewhere north of 2%
than that hardened fat number of hitting 2%. Yeah.
It is encouraging Jesse to hear the comments coming
out saying, look, we're not going to assume that
there's a magic target that we have to meet.
And if we don't, then we stay the course
that it's going to be a matter of looking
across the entire landscape and across all of the
data and say, okay, when is the right time?
How many times should we do this?
And also related to that understanding that there's less
of an aversion, it seems like to the political
schedule as typically we would hear, and that there's
comments being made saying, look, we're going to do
this when the time is right and we won't
let other factors weigh in on that.
So it seems like while we're not there, there's definitely
a lot of nice movement in the direction that we
want to be going, you know, for this with back
to school coming up, it's kind of interesting to, you
know, I've been looking at the things that I have
to get for my kids this year and the prices
for school supplies increased, I think, by about 24%.
And, you know, it's quite interesting.
I think it's, you know, with, you
know, within the framework of inflation increasing
to the levels that it has.
There's a lot of things like that as we,
as we move through the, through the year from
a seasonality perspective on, on some of those impacts.
And specifically even like, if we look at educators, a
lot of them are having to buy a lot of
their own school supplies or find ways to that.
A lot of my, you know, just various people
I know, friends are starting to advertise on like
social media that can you, can you help buy
these supplies for us and things?
So it's quite interesting to see some of those
impacts that, you know, that have been occurring.
Well, frankly, Tom, as the spouse
of a teacher, that's nothing new.
Yeah, I was going to say same here tomorrow. Same.
Just maybe, maybe it's how many things are
in the list that you asked for.
Maybe that's what's changed.
Yeah, we didn't do that when I was a kid, you
just had to walk 5 miles both ways in the snow. Yeah.
Fairfax. Yeah. So.
All right, Dave, we've seen some categories of delinquency at
or near peaks and that we saw during the great
recession and the start of the pandemic, and some of
those are on the rise or moving down.
Can you start the discussion around that? Yeah.
Thanks, Tom.
So obviously, we've been talking
about delinquencies for several months.
It's been in the news.
And then I think we've got a quote
from Mark Zandi, and I think it's around
whether he thinks delinquencies have reached their peak.
So let's listen to that.
I do think delinquency rates on consumer credit
are peaking in addition to the solid job
market and expectations for, for, excuse me, for
interest rates to come down.
That should be enough to allow delinquency rates to
moderate here as we move forward, I think there's
a story to be told in terms of how
we got here and where we need to go.
So obviously, during the lockdowns, consumers weren't
spending and we had supply shortages.
Adding to the reduction in spend, a lenders realized
people weren't working, there were layoffs and so on.
So again, and there wasn't really a desire
to grant new credit, and so there was
a pullback in terms of lending.
Once stimulus funds were issued,
consumers started to spend again.
Eventually, for some, that stimulus dried
up and they needed new credit.
Lenders seeking an opportunity resumed lending to
take advantage of a fruitful credit seeking
market, and that started the problem.
While delinquencies have run up over the last nine
months or so, there's been a recent improvement.
We've seen bank card, private label and
auto delinquencies rise above 2011 levels.
But first, mortgage and personal loans saw
delinquencies that rose but remain well below
those of the previous peak.
We've been discussing for several months now that the
2022 and 2023 vintages are performing worse than earlier
vintages and are likely caused by a loosening of
credit standards and some score inflation. Steven? Yeah.
One of the things I was thinking about as well,
when we think of what Maria was saying in terms
of hitting maybe the 2% inflation target and seeing rate
reductions, when we think about the types of loan products
that were most impacted with increasing rates, you think of
the, certainly credit cards, you think of personal loans, some
of those products that had variable rates.
I do wonder as we start to see a reduction
in potentially the Fed funds rate thats going to translate
into the rates that overall loan holders are paying.
I wonder if that would have a potential
impact, maybe in delinquency as we start to
see a decrease in the interest portion of
the payment that, that Lindy would make.
Any thoughts on that? Yeah, thanks.
Obviously, that's the hope, is that as rates
come down, and obviously the direct correlation to
that rate is the minimum payment requirement, specifically
on a credit card revolving debt, obviously from
the auto, from the mortgage side, those are
fixed, but that might encourage, as those rates
come down, the entrance into the market.
For the people that have been on the sidelines
that have been priced out, there's some impetus there.
So I think having rate reduction will help.
Unfortunately, we all know as prices go up very fast,
they don't like to come back down very quickly.
And so we'll see how soon lenders react to
reducing the interest rates on the revolving products, on
the fixed products, once the fed starts cutting.
And we have seen overall, Dave, when we were
discussing delinquency, even at that sub, at the subprime
level, over at least the last five to six
months, there has been some flattening.
So even though some asset classes have
exhibited higher than ideal delinquency levels, they
seem to be more under control.
Lenders have responded, adjusting
their underwriting procedures. Right.
And a question on that, Maria, and maybe this is
to the whole group, but as we see some signs
of softening in the delinquencies and some positive movements there,
do we feel that that's seasonally impacted or do we
think that it's more than just what we would naturally
tend to see this time of year? Yeah.
So what we've seen is that year over, you know,
every, every, we'll say January through May, if you will.
There's a, that period, that five month
period, within that month, sometimes it's three
months, sometimes it's two, sometimes it's four.
There's a reduction, a cyclical reduction, seasonal reduction,
right around tax season, consumers are taking their
tax returns and are paying down their debt.
So we see delinquencies fall.
I think it bears in mind, kind of comparing what
that rate of decrease in 2024 has been versus others.
It's a little bit less than what we've
seen in years past, in years past, going
all the way back to, say, 2013, 2014.
But I think it's on the right track.
I just wanted to, before we leave the
delinquency point, I wanted to go back to
Maria's point on subprime, and that's really where
we've seen lenders react to the rising delinquency.
They've cut back on the subprime lending.
And that's really where a lot
of the delinquency has been.
You see that across the various outlets
talking about subprime delinquency is a real
cause of concern, and lenders have reacted
by restricting the volume associated with that.
So kind of tying up to Mark's comment about whether
it's peaked or not, I think I'd offer cautious optimism.
Unemployment is lower, inflation is slowing.
But obviously, Tom, as you pointed out, with
the k shape out there, some Americans are
doing great and their credit reflects that.
And unfortunately, on the lower side of the
decay, that group bears more closely monitoring.
I think as we're watching the delinquency
levels, it's critically important for us to
see how payment hierarchy pans out.
And specifically when there's often like, as credit card
utilization rises, what the delinquencies are oftentimes a fast
follow for anyone who's on the cusp of not
being able to pay their credit card.
And then once that starts happening, then they'll have less
available credit based income for them to be able to
cover various debts as we think about inflation.
So watching and observing, especially with student loans
coming back into repayment in a few months,
to see what is the peripheral impact of
student loans as it carries through into credit
card, as that carries through into the other
asset classes like auto mortgage, etcetera.
So let's pivot with one more
question here and talk about spending.
So, Jesse, we've seen retail spending continue to stimulate
this economy with some of the recent data trends.
Do we see this continuing? Yeah. Thanks, Tom.
It's almost like we planned it today, but
we had a new release of the Census
bureaus advanced estimate of retail sales.
And on the month there was no growth.
So it was actually 0%.
We saw an increase from last month, a revision
to the number of 0.3% month over month.
So year over year were still
seeing growth in retail spending.
Thats certainly a good sign.
I think its really important to go back and
look at what we talked about last year.
And the health of the economy was really propped
up by a couple of things, really the american
consumer and the way that they were spending.
And then also that Americans were employed.
And we saw that as Americans continue to be employed,
then they continue to spend on goods and services.
And so certainly we look to the labor markets to
kind of see if there are any warning signs there.
Labor markets, I think, have been reaching a
normalization more than theyve really been pulling back.
And thats a good thing.
That certainly decreased some of the stress on the Fed in
terms of how they had to manage the, the economy.
But I think were also seeing that consumers
are really starting to be more choosy about
where and how theyre spending their money.
And so I think many have decided really to not
buy in certain segments or they choose different choices to
mitigate some of the costs that theyve seen.
And I think producers are really
starting to take notice of that.
And so we see some producers have talked about
lowering prices, which is obviously a good sign.
Amy, I think, said it best in the clip.
Lets take a listen to this clip here.
Prices are not falling and we
shouldn't expect them to fall.
The best we can hope for is
that the prices kind of steady out.
And we get back to the Fed's
target inflation rate of about 2%.
So I think we have to remember,
really that prices ran up very quickly.
They increase very quickly into 2021 and 2022.
And so it's going to take time
for those prices to come back down.
Remember, when we talk about inflation, we're really
just talking about the growth of prices.
Were not talking about the deceleration of prices.
And so I think we're going to continue in
the long run to see that Americans, they're doing
quite well and they're going to continue to spend.
But I think in the short term, I think we
will see these prioritization and even pushback of where consumers
are looking to spend their money as they feel the
prices have just gone out of whack. Yeah.
Jesse, I think one of the biggest
indicators of that would be vehicles.
I think we've seen the average vehicle
on the road is twelve years.
And so many Americans are keeping their vehicles longer
rather than looking to purchase that new car.
So going back to some of the origination fioms I was
talking about, and so, again, how much money can I afford
for repairs versus trade in and get a new car?
Oh, but it's, you know, it's
a 9.510 percent interest rate.
My payment's going to be upwards of $750.
And so how do I do the math there
to decide where do I spend my dollars?
Yeah, I was just going to say.
That's a good point, Dave.
I think it was a point that Rob brought
up in terms of the consumer looking at new
vehicle prices, and those are falling to some extent,
lots of rebates that dealers are offering.
And so hopefully, the notion that Maria
talked about when we talked about the
interest rates potentially falling as a result
of the fed movement, fed potential movement.
Hopefully, we'll see that trickle down
to auto prices as well.
Thank you to my friends Dave, Jesse,
Maria and Tom for joining me today.
To our listeners, I hope you enjoyed today's topic.
If you have questions, suggestions for future podcasts,
please reach out to us at riskadvisors@equifax.com.
dot we look forward to hearing from.