Juggling Dynamite

While Washington deflects attention with yet another government shutdown standoff, US economic data deteriorated further in September; see US Consumer Confidence Falls to Five-Month Low on Job Concerns.

The latest published U.S. Consumer Confidence (Conference Board) index came in at 94.2, down from 97.8 in August (on the lower left since August 2023).

The share of respondents claiming that economic conditions are “good” fell to a five-month low of 19.5% from 21.8%. The share expecting things to get “better” dropped to just 18.7% from 20.2% in August.

The “jobs are plentiful” index (upper right above) dropped to 26.9% from 30.2%; while the share saying “jobs are not plentiful” rose to 54.0% from 50.7% and is now the highest level since March 2021.

The share saying jobs were “hard to get” stayed at 19.1%, tied for a four-and-a-half-year high. The gap between this series and “jobs are plentiful” reached a level last seen in February 2021, when the unemployment rate was 6.2%.

The share believing that we will see “more jobs” ahead dipped to a three-month low of 16.1% from 17.9%. At the same time, higher income expectations dropped to 17.6% from 18.8% in August, tied for the lowest level in five months.

The University of Michigan’s consumer sentiment measure for September was 55.40 (down from 58.20 in August).

We also learned that the US private sector shed 32,o00 jobs in September, the most since March 2023, and a big miss from the +50,000 jobs that were expected. At the same time, August’s reading was revised to -3,000 from +50,000, as previously estimated (chart below, since December 2022). See, US Firms Shed 32,000 Jobs in ADP Report After Data Adjustment.

Industries such as leisure and hospitality, business services and financial activities, as well as goods-producing sectors like construction and manufacturing, all saw payroll reductions. Education and health services were one of the few areas to add headcount.
As Lance Roberts points out this morning, past similar 6-month contractions in core payrolls have corresponded with NBER-defined recessions, during which payrolls continued to decline.

Also, so much for tariffs being a boon for US manufacturing, this morning, we learned that US factory activity shrank in September for a seventh consecutive month. The Institute for Supply Management’s manufacturing index edged up 0.4 points to 49.1. Readings below 50 indicate contraction, and the measure has been stuck in a narrow range for the last three years (as shown below since September 2019).

In related news, it’s a weak ‘economy stupid’, research from the Yale University Budget Lab and the Brookings Institution think-tank indicates that, since OpenAI launched its popular chatbot in November 2022, generative AI has not had a more dramatic effect on employment than earlier technological breakthroughs (see chart below).

See, AI is not killing jobs, US study finds. But perhaps, we should add, “yet”:

The mass adoption of ChatGPT is yet to have a big disruptive impact on US jobs, contradicting claims by chief executives and tech bosses that artificial intelligence is already upending labour markets…

The lack of change in the occupational mix suggests the difficulties of finding work for those just out of college has little to do with technological change.

The Pandemic policy response saw a frenzied mix of debt forbearance, government handouts, policies aimed at increasing debt to stimulate home buying and speculation, mortgage rates under 2%, and an immigration surge concentrated in a few areas, especially around post-secondary schools.

Not surprisingly, as interest rates normalize, immigration slows, and the housing bubble deflates, all hell is breaking loose, especially in previous ‘hot’ zones.

My hometown, Barrie, Ontario, located one hour north of Toronto, is an example of the great unravelling now converging in the form of frozen real estate, falling home prices and rents, rising debt defaults, bankruptcies, a weak job market, homelessness making national news, and a college shuttering entire campuses.

See, Georgian College Closes Two Campuses and Decline in international students forces post-secondary job cuts; also, Barrie, ON declares state of emergency over homeless encampments and, Couple faces bankruptcy as Toronto condo market dives, as well as Why are home prices dropping so fast?

Similar problems are evident all over North America.

Where property prices and debt levels rose the most since 2019, affordability remains horrific, and strife is compounding.  It’s a cycle, folks. The more magnified the boom, the more magnified the bust.

John Pasalis, president Realosophy Realty and Steve Saretsky, realtor with Oakwyn Realty talk to Financial Post’s Larysa Harapyn about the state of Canada’s real estate market from coast to coast. Here is a direct video link.

Years of reckless lending and borrowing are nearing another predictable end: surging defaults and losses. As Oaktree Capital Management’s co-chair and credit specialist, Howard Marks, has noted: “The worst loans are made at the best of times,” when credit and optimism are plentiful.

While risk-sellers continue to insist that households are in good financial shape (just as they did in 2007), credit card delinquencies (90+ days late on payments) have increased to a near-record 12%, second only to the 13.8% high in 2010.

Consumers tend to pay auto loans first over mortgages since vehicles are often essential for work. It’s ominous, then, that new auto loan delinquencies (90 days or more) in the second quarter matched the rise in 2020 and 2010 before that. The subprime auto-loan delinquency rate, considered a leading economic indicator, leapt 9.3% in August (ABA Banking Journal+1). See, Auto industry is Flashing a Warning Sign on the U.S. economy:

The auto industry is flashing warning lights on the state of the U.S. economy. Automakers’ profits are getting squeezed by tariffs. A subprime auto lender recently collapsed, and some car retailers are warning that consumers are pulling back.

CarMax , the biggest seller of used cars, said Thursday that its sales and profit plunged in the latest quarter. The company’s results, which sent its stock tumbling 20%, is the latest in a series of unsettling developments in an industry under strain from President Trump’s tariffs and carmakers’ recalibration of expensive electrification strategies.

Profits at CarMax’s finance arm also declined, as the performance of loans originated in 2022 and 2023 deteriorated, and the company increased its provision for losses.

At the same time, Tricolor, a subprime auto lender and car dealer owner, abruptly filed for bankruptcy liquidation earlier this month amid government investigations and a bank partner’s allegations of fraud. The Dallas-based company offered auto financing to customers who lacked credit history or a Social Security number and operated 65 dealerships.

First Brands, a major auto-parts supplier behind products such as Fram oil filters and Anco windshield wipers, is preparing to file for bankruptcy protection, with more than $6 billion in outstanding debt.

In epic complacency, lenders and credit investors have been accepting record-low compensation for escalating capital risk. Investment-grade bonds are paying just 74 bps (the lowest since 1998, indicated by the gold line below) and high-yield investors just 275 bps over similar dated treasuries (the least since 2007, shown by the blue line below). See, The Credit Market is Humming and that has Wall Street on Edge:

One concern is that lending to riskier borrowers has been growing for years, first through traditional bonds and loans, then in the form of private credit and the revival of complex asset-backed debt. The longer that credit boom lasts, the more likely it is that defaults will rise. Likewise, the higher the valuations of corporate bonds and loans, the more susceptible they become to selloffs.

The fate of the market could depend on the direction of the economy. Some investors note that the current benign environment could continue if inflation pressures ease and there is no further deterioration in the labor market, allowing the Federal Reserve to boost economic activity by cutting interest rates and relieving pressure on borrowers.

Credit is the foundation of the economy and financial markets. Leaping loan defaults, along with the lowest risk compensation for investors since past bubble peaks, is a foreboding combination for all risk assets.

High-yield analysts at Barclays compared the current situation—with valuations so high and signs of stress emerging—to being in a Star Wars garbage chute with Princess Leia and Han Solo and “the walls compressing on all sides.”