Is the Consumer Hurting?

Executive Summary

Historically, when the yield curve un-inverts, a recession is soon to follow. In the first graph below one can see interest rates are behaving similar to previous recessions. Note, no recession has currently been declared. Additionally, the National Federation of Independent Business (NFIB) Small Business Optimism Index is below the level at the start of each recession since 1990. Optimism is down because small business sales are down. Consumers are inundated with debt of all types (fifth graph below). With the rise in interest rates, personal debt payments are getting more difficult, which is evidenced by credit card delinquencies rising (last graph). Although one cannot predict if a recession is imminent, one can see consumers are currently hurting.

Please proceed to read The Details below for more information.

“There are three kinds of people: the haves, the have-nots, and the have-not-paid-for-what-they-haves.”
–Earl Wilson

 

The Details

Since the turn of the century, every time the Federal Reserve has started lowering the Federal Funds Rate (FFR) (red line in graph below), the yield curve (10-year Treasury rate minus the 2-year rate) “un-inverted” (blue line below). Normally, long-term interest rates are higher than short-term rates to account for the added risk. When the yield curve “inverts” or short-term interest rates rise above long-term rates, it typically indicates a recession could be approaching. After the curve “un-inverts,” or when the curve normalizes with short-term rates lower than long-term rates, a recession is usually imminent. In the graph below, prepared using the St. Louis Fed FRED database, historically when the FFR began falling and the yield curve un-inverted, a recession was soon to follow. Presently, the FFR is declining, and the yield curve has un-inverted, yet no recession has been declared.

Although it is baffling to some, how the official numbers do not yet indicate a recession has arrived, that does not diminish how consumers are feeling. In the graph below from VettaFi, the Conference Board Consumer Confidence Index (red line) is below or near the starting point of all recessions since 1990. Additionally, the NFIB (National Federation of Independent Business) Small Business Optimism Index is below the level at the start of each recession since 1990. And, it has been below its long-term average reading of 97.9 for 31 consecutive months.

The main reason for the lack of optimism is shown in the graphs below from The Daily Shot…poor sales.

And the reason small business sales are struggling is the consumer is tapped-out. The graph below from @KobeissiLetter, illustrates record debt levels for almost all categories of debt.

The rapid rise in interest rates – after a long period of near zero-percent rates, combined with the dramatic increase in debt levels, has negatively impacted the finances of many consumers. As shown in the graph below, also from @KobeissiLetter, credit card 90+ day delinquencies have soared to 11.13%, the highest since the early stages of the Great Recession.

Many macro indicators are suggesting a recession is here or soon to arrive. Although the official numbers have not led authorities to declare a recession, the economic impact seems to be present. Consumer confidence levels are low, small business optimism is suffering due to increases in debt and interest rates. Delinquencies are at levels not seen since the Great Recession. The consumer appears to be hurting.

The S&P 500 Index closed at 5,871, down 2.1% for the week. The yield on the 10-year Treasury Note rose to 4.43%. Oil prices decreased to $67 per barrel, and the national average price of gasoline according to AAA fell to $3.07 per gallon.