This week we will have a look at some data which shows how painful the deleveraging process is for US consumers.
We have talked about the deleveraging process of Average Joe already a few times. Like the Rolling Stones song “Between a rock and a hard place” the US consumer is getting squeezed between his employer and his banker. And the situation is getting more than worrisome.
The global economy is simply looking for a new equilibrium now that the Shadow Banking system has disappeared. Cheap credit was the fuel for US consumption which in turn gave the opportunity to Asian export-led economies to build up huge reserves. Simultaneously in order to meet this high demand, expansion was necessary and production capacity was increased to historically high levels. However, US companies (as a matter of fact this is a global phenomenon but let’s focus on the US situation for now) are now faced with overcapacity and they simply do not need such a large workforce anymore. As a consequence they are still laying off people on a daily basis.
The unemployment rate has been rising since the beginning of 2008. From around 5 % in Jan 2008 this rate has been rising to 9.6% last month. And there is no sign this trend will be reverted any time soon. But instead of showing you an unemployment rate number which might be a bit abstract, let’s translate this into a number for people who are sitting at home.
The total number of US unemployed workers is now at 14.5 million. Figure 1 shows the staggering spike unemployment is taking. This is the first way to visualise the de-leveraging process. In the late 80s we experienced a similar process when the US economy was dealing with the Latin America Banking crisis and later on with the Saving and Loan crisis. Earlier on in that decade we also had the period when former Fed Chairman P. Volcker was fighting an epic battle against inflation.
Figure 1 Total US unemployed workers
Source: © Bloomberg L.P. Used with permission. Visit www.bloomberg.com
However, one immediately notices that the spike we are seeing right now is much more severe. This is simply because of the avalanche of cheap credit created by the Shadow Baking system has been unseen in history. By the end of 2008, total credit outstanding in the US was 3.7 times the US GDP. In real numbers this is between $ 50 – 52 trillion. Figure 2 shows you the breakdown between US households, financials, Government and GSE (Fannie Mae and Freddie Mac).
Figure 2 US Total Credit Debt as a % of GDP
Source: Morgan Stanley
As far as financial institutions are concerned they are in the midst of their deleveraging process. Over the last couple of months we have already seen the pain they have to accept on their balance sheets going through this process. The government is actually more or less taking over this debt mountain. So this is more the law of communicating barrels that we are seeing.
But how is Average Joe doing? We saw the savings rate in the US is rising again. At this moment it is back around 5-6%. But we are not there yet. A lot of people simply do not have the luxury to save. There is an interesting data index which gives a good indication how hard people are feeling the pain on their monthly payments. It is called the exhaustion rate Index and represents the rate at which people who started collecting unemployment benefits have used up their allotted payments before finding a job. This number is showing that the water is above their eye balls. It is at 49.17 % or to put a real number on it, of the 6.96 million people who were receiving benefits aid last month there are 3.42 million people who have used up their payments and desperately need to find a job, otherwise they will have to fall back on family aid to make ends meet up or even worse a bench in the park is waiting for them. Bear in mind the total amount of people who are in a similar condition is much higher. These numbers do not reflect those who have been kicked out of benefit aid programmes or those who are still combining 2-3 jobs a day trying to keep up with their mortgage payments but are on the verge of foreclosure.
The latter is also a painful situation as the government programmes in place to give debt relief is for those who have hit rock bottom and have digged a whole in the ground. To qualify for government aid you don’t only have to fall behind of your payments. You must be delinquent. If you’re trying to cut on your food budget, or selling you’re wedding dresses and jewelry just in order to keep track with your mortgage payments, you will simply not qualify! We are talking about several millions of people here on top of these numbers.
The latest developments on the mortgage market is not helping these people either as the US 30-year average mortgage rate has surged from an April low of 4.85% to a high of 5.74% before falling back slightly. Current levels of US mortgages are still around levels last seen in 2001.
Figure 3 US Exhaustion rate
Source: © Bloomberg L.P. Used with permission. Visit www.bloomberg.com
As long as this keeps on deteriorating one cannot expect any improvement in sustainable growth on the consumer side. Neither can Asian economies, which are highly export dependent, expect that there will come a recovery in international commercial trade. The demand which has to come from Average Joe, who has funded their enormous reserves over the years, is simply not there anymore. With less supply for credit (due to the disappearance of the Shadow Banking system), these economies shift towards a new consumption equilibrium, which exporters are not prepared for.
Do not get us wrong. We probably see some slight recovery in growth, but this is only inventory driven. The so called green shoots that some people might have seen were based on this global inventory rebuild. This is not an abnormal phenomenon. One needs to bear in mind that the global economy around October last year came to a total stand still and inventories were build down very slowly. Around March the store shelves around the world got finally empty (depending on which products you are looking at as in the car industry the parking lots are still full with cars assembled in August-September of last year) and this needed to be restored to some extent.
For a full sustainable recovery we first need the housing market to restore and this goes hand in hand with the labour market as there is a high correlation between delinquencies on loan payments and losing one’s job.
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