Economic Update
- The economy continues to defy the more pessimistic market narrative, most recently evidenced by a blowout January jobs report
- Household balance sheets were buoyed by significant stimulus during the pandemic, and consumer credit fundamentals still appear strong
- An earnings announcement from New York Community Bancorp raised fresh concerns of commercial credit exposure in the banking industry, but their issues appear to be more idiosyncratic
The dovish Fed pivot narrative that has been prevalent in financial markets over the last few months took another hit with a blowout January jobs report. While there were seasonal factors and benchmark revisions at play, as is typical for January employment data, the U.S. labor market and the overall economy remain far more robust than market pricing has suggested. As it relates to Fed policy, the January 31 FOMC meeting effectively closed the door on any last hopes of a March rate cut, but fed funds futures continue to price a greater than 50% probability of a rate cut at the following meeting in May. The official statement from the January meeting shifted further to a more balanced/neutral assessment of growth and inflation risks, implying that the rate hike cycle is indeed now behind us. At the press conference, Fed Chair Powell acknowledged the recent declines in inflation but said the committee is not yet confident that we are on a path of sustainable 2% inflation, at least not confident enough to begin a cycle of rate cuts. All of this preceded the release of the January jobs report, which likely did little to dissuade a more cautious approach from policymakers.
Household Balance Sheets Still Appear Strong
As we have highlighted several times over the last couple of years, robust household liquidity and, consequently, robust consumption has fueled above-trend growth and inflation in the post-Covid era. As noted in the December commentary, much of this excess liquidity appeared to have eroded for most income brackets thanks to heavy spending and inflation effects. However, measures of household net worth remain above pre-Covid levels across the income spectrum. In fact, on a percentage growth basis, the bottom three income tiers have experienced the largest increase in net worth since the end of 2019 according to Fed data (Exhibit 1). This is largely attributable to rising home values, which is the largest asset for these households by a wide margin. Despite sharply higher mortgage rates, the lack of supply has continued to fuel price appreciation in the national housing sector. This positive equity provides a solid credit buffer in the event of lost or reduced income.
Exhibit 1
Delinquency rates for aggregate consumer debt remain below pre-Covid levels, including auto loans, credit cards, mortgages, and student loans. Exhibit 2 tracks 90+ day delinquency rates over the last 10 years for multiple consumer loan categories, and all remain below early 2020 levels. Student loan delinquency has fallen sharply thanks to pandemic-related payment suspensions. Subprime and near prime credits have experienced higher rates of delinquency of late, particularly for autos and credit cards, but recent research from the Federal Reserve suggests the increased rates may be attributable to credit score migration (https://www.federalreserve.gov/econres/notes/feds-notes/the-effects-of-credit-score-migration-on-subprime-auto-loan-and-credit-card-delinquencies-20240112.html).
Regional Banks Back in the Headlines
Regional/community banks were back in the news after New York Community Bancorp (NYCB) saw its share price fall 42% intraday on January 31 after reporting the charge off of two large commercial credits (1 multifamily and 1 office). NYCB acquired the failed Signature Bank last year, and in addition to the charge offs, the bank also cut its dividend 71% to improve its capital position. The news brought renewed attention to commercial real estate worries in the banking sector, but the issues seemed more unique to NYCB than a sign of broader contagion. To be clear, commercial exposure remains a primary source of concern in credit markets, particularly relative to consumer credit as discussed above. However, relative to its peers, NYCB had lower loan loss reserves and overall capital levels. Institutions with higher commercial exposure will continue to be under the microscope of regulators and investors, particularly if not perceived to have adequate reserves and capital.
Exhibit 2
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