In an environment where the Fed recently described household spending as "growing strongly," we have often questioned why consumer delinquencies would continue to grow (see "Subprime Auto Delinquencies Soar Past Crisis Levels, Now Highest In 20 Years" and "Subprime Snaps: Largest US Subprime Auto Lender Delays Earnings Due To "Accounting Matters"") if household financial conditions were truly improving. It turns out that UBS pondered the same question and agrees that deteriorating lending standards just might have something to do with it. Matthew Mish of UBS, recently updated his strategy piece on the health of the US consumer and the results are less than stellar with Mish concluding that consumer incomes are not expanding in line with consumer credit and therefore "consumer delinquencies…will not fall in coming quarters, consistent with our broader thesis that the credit cycle is in the later innings". Mish found a growing divide between consumers that are financially sound and those at the lower end of the earnings spectrum where financial conditions are deteriorating. So while aggregate data may suggest improvement in the consumer overall it's unlikely to impact deteriorating delinquency rates on consumer loans. Per Matthew Mish of UBS:
Our analysis of the consumer lending environment and stressed US consumer fundamentals seems to support the thesis that while lending is extending to riskier consumers, the finances of those consumers are not materially improving. The recipe is likely to result in consumer delinquencies that will not fall in coming quarters, consistent with our broader thesis that the credit cycle is in the later innings as ebbing fears about a corporate earnings recession are offset by rising concerns over higher delinquencies and tighter credit availability.
In a survey of 2,100 US adults over the age of 21, UBS found that nearly 70% of the respondents, with incomes under $40k, either couldn't cover their monthly expenses or were breaking even each month. Moreover, a comparison of historical results seems to imply that the financial situation of these folks is deteriorating as the survey found QoQ and YoY increases in "stress" levels in June. In his view, Mish believes this deterioration in consumer health is due to the fact that costs of living, primarily the cost of housing and healthcare, are outpacing wage growth.
When asked whether their financial situation was getting better or worse roughly 85% said their financial condition had stayed the same or gotten worse over the previous 6 months.
And finally, since nearly 70% of people in the lowest earning bracket say they're either breaking even or burning cash each month it would stand to reason that they're probably not contributing that much to retirement savings. In fact, the survey found that less than 20% of respondents in the lowest quartile of earners even had a retirement account (much less a meaningful balance in the account) and practically no one had other savings in the form of stock/bond portfolios. Perhaps even scarier is that the other quartiles are not fairing that much better at saving for retirement.
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