Economic & Market Insights

For the week of August 15, 2022

Macro update

With personal consumption making up roughly two-thirds of the U.S. economy as measured by GDP, it’s important to keep track of the state of household balance sheets. Although U.S. households entered the year on very strong financial footing with excess accumulated savings of $2.5 trillion, elevated cash balances and low leverage, there are signs this buffer has begun to erode due to higher costs for goods and services. Consumers have been saving less in recent months and increasingly using their credit cards for purchases.

The personal savings rate as a percent of disposable personal income has been on a decline, falling from 5.8% in January to 5.1% in June. This marked the lowest personal savings rate since 2008 and is below the pre-pandemic decade average of 7.2%. In addition, credit card balances have been rising and were up 13% year over year at the end of the second quarter—the largest rate of increase in more than 20 years. Still, absolute credit card balances remain slightly below pre-pandemic levels, after sharp declines in 2020.

Looking at overall consumer borrowing—mortgages, auto loans, credit card, home equity, and student loans—the total is $2 trillion higher than at the end of 2019. Approximately 90% of this rise is due to mortgage debt as low interest rates, migration patterns and other pandemic dynamics drove significant housing activity since mid-2020. Importantly, the average credit score of mortgages originated in the past two years is far higher than the years leading up to the subprime crisis in 2008. Higher auto loans and student loans make up the rest of the increase in consumer borrowing since 2019, as home equity and credit card debt are still below pre-pandemic amounts.

Despite consumer borrowing at all-time highs, aggregate delinquency rates have been stable for five straight quarters at 2.7%, near historic lows, after declining sharply early in the pandemic.

The July inflation report brought mixed news in our view. While the drop in the headline to 8.5% from 9.1% in June was welcome relief, largely reflecting sequentially lower prices at the gas pump, the overall level is far too high, and the persistence of core inflation suggests no quick fix. We still expect a 75bp hike to the fed funds rate in September. As expected, the sharp decline in energy prices in recent weeks came through in the July Consumer Price Index, while food prices—up 10.9% year over year—have yet to ease off despite lower agricultural commodity prices. Recent trends in core goods and services inflation continued, with the former ebbing and the latter rising.

In Washington, the Inflation Reduction Act passed both chambers of Congress along party lines and will head to President Joe Biden’s desk in the coming days. 

Markets update

Stocks gained for the fourth consecutive week and volatility retreated as the decline in July headline CPI and a benign corporate-earnings season were well-received by the markets. The appreciation in the past few weeks means the S&P 500 has now recouped over 50% of its peak-to-nadir trading range between January and June. The tech-heavy Nasdaq has rallied about 23% from the June lows, recouping about 44% of its November 2021 peak.

With 80-90% of S&P 500 companies’ second-quarter earnings reported, results were better than expected, driven by strong top-line performance across sectors and particular strength in energy companies’ earnings growth. Overall, revenue growth came in at 15% year over year, while EPS growth came in at 9%. Excluding the strong energy performance, EPS declined 3% in the U.S.

Commodities broadly rallied over the past week, though most prices across most metals, agricultural commodities and oil remain close to levels in late February before the Russia-Ukraine conflict. Natural gas is an outlier as prices have surged in the past month, given the uncertainty around Russian supplies to Europe.   

In credit, spreads continued to tighten amid light issuance and better-than-feared earnings. The distressed universe of bonds and loans has declined from a two-year high in June to below pre-pandemic levels. Distressed bonds and loans now account for 4.2% of the leveraged credit market. Historically, less than half of this universe defaults over a 12-month period.

Rates markets were broadly stable over the past week. Meanwhile, the inversion of the front end of the Treasury curve—with the two-year yielding more than the 10-year—remains towards the wide end of the year-to-date range and near 22-year highs.

Issuance / M&A volumes

While public markets for IPOs including traditional and SPACs remain very quiet, private capital markets continue to be active. Private market volumes for equity raises are slightly down from 2021-22 Q1 highs, but still above the 2020 trend line. Private markets can offer creative solutions including structured alternatives to bridge the gap on valuation expectations between issuers and investors. Growth equity and private equity investors have been more engaged than public and crossover investors in recent weeks, with records amount of dry powder to put to work.

Chart of the week

Consumer debt levels and composition

Trillions of dollars

_{Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax.}