John Kemp, senior market analyst of commodities at Reuters, says in a new report that US borrowers as a whole look stable but there are signs emerging that point to trouble, especially in the farm sector as a result of the trade war, and among a robust jobs market and some wage growth, consumers are nearing maximum leverage.
Kemp first talks about the positives in the lending market. He notes the number of commercial bank loans and leases 30 days or more past due in 2Q19 is at 1985 lows.
The percentage of all bank loans and leases in arrears was 1.50% last quarter, down from 1.64% over the same period in 2018. The high was seen at 7.40% in March 2010 after the previous recession.
Commercial real estate loans and commercial and industrial (C&I) lending is healthy as well, with delinquency rates at multi-decade lows.
But Kemp notes, other signs of stress are building that could produce spillovers.
First, the trade war continues to batter farmers in the Central and Midwest states. Farmland loans continued to deteriorate last quarter, now have 2.32% in arrears, up from 2.15% a year earlier and the highest since 2013.
The default rate on these agricultural loans jumped to 1.82% last quarter, from a low of .77% in 2015.
Besides the farmers, another concerning trend is the jump in delinquency rates for credit cards and other consumer loans, which have been above trend since 2015.
Consumer delinquencies are at several decade lows thanks to a robust jobs market and some wage growth, but the current state of the consumer, Kemp says, "may not have the capacity to take on much more debt without running into trouble."
Commercial banks charged off 3.74% of all credit card loans last quarter, the growth rate of bad loans write-downs was at the fastest pace since 2012.
With manufacturing in a recession, the new economic narrative is that consumers will carry the economy through 2020. But that in itself could be flawed since consumers are at or near maximum leverage and have already seen their sentiment peak. What's more troubling is that while the jobs market looks robust from the outside, employment growth rates are declining, will soon weigh on sentiment, which will alter spending habits. And it doesn't help when the mainstream financial media talks about the word "recession," something the consumer hasn't heard in nearly a decade.
The most important takeaway from Kemp's report is that consumers are at or near maximum leverage, making the narrative that consumers will save the day a little hard to believe. So it should now make sense why President Trump is calling for 100bps rate cuts, negative interest rates, quantitative easing, and emergency tax cuts, it's that he too doesn't believe the consumer is healthy enough to rescue the faltering economy and a recession is nearing.