“The problem with tempering demand is that you never get it right,” the executive at the National Association of Credit Management told us. “When this feeds through, I think we very much will have a demand-led recession, without a material impact on inflation.”
The reason for this, our expert said, is that supply constraints across many industries “are not going away”. Supply chain fragility is among the leading causes of inflationary pressure, and can be driven by components “five or six layers deep in the vendor chain”, they added. The Russia-Ukraine conflict is also disrupting food production cycles and there is growing fear that famine could occur in many parts of the world.
According to our expert’s estimates, there is a 70-80% probability of a demand-led recession in the US in the next year as central bank policies prove ineffective at addressing supply-driven inflationary pressures. “There’s a reluctance, I think, to understand the severity of the supply constraints,” they said. “The shutdowns in China are very meaningful, both on the production side, as well as the shipping side.”
Consumer credit markets: a closer look
US consumer debt is “now at an all-time high”, driven by a run-up in mortgage credit and automotive debt, we were told. However, the “key question” regarding a potential recession and its impact on consumer spending and credit is how the labour market responds, as delinquencies typically follow lay-offs. “If we don’t have layoffs, we likely won’t see a big increase in delinquencies,” our expert said. “It all hinges on the labour market there.”
Wage increases are currently not “coming even close” to addressing labour market challenges, our expert said. Although employment is back to pre-pandemic levels, “that doesn’t account for the jobs that should have been created since that time” and “we’re still several million down from where we should be”.
Additionally, the specialist sees the US as being on “the cusp” of a labour revolution as employees demand a greater share of company returns. “This discussion about CEO compensation will once again come to the forefront, especially if, as we look at how much the low-paid workers vs how much the executives are making, will become a bigger and bigger part of the ESG investors’ and activist investors’ [due diligence] in companies.”
What remains to be seen is whether, given the hiring challenges of recent years, large-scale layoffs would indeed take place during a recession. Our specialist said: “If quits start to fall and openings start to decline, even without a rise in lay-offs, I think that’s the start of your labour market recession.”
Turning to the housing market, our Interviews point to a stagnation in price acceleration, but no price crash. We heard the number of new homes “greatly trailed off” after the Great Recession and is still “nowhere near trend”. Supply constraints are particularly severe in highly urbanised areas. “We’re still seeing very depressed construction.” Refinance activity has also been “extraordinarily strong” over the last two years, with interest rates declining to historical lows from as far back as 1947.
In the event of a recession, mortgage delinquencies could rise “a little bit more than normal”. However, “extraordinarily low” interest rates could mean that this trend will not hold up. Mortgage debt quality is not expected to deteriorate meaningfully in the mid-term, but newer vintage debt could be more sensitive to a recession in light of increasing mortgage rates. And in March our expert estimated that “two-thirds to three-quarters” of all debt outstanding is new money. “The newer ones are probably going to have, from a vintage perspective, much worse default performance than the ones that originated last year and prior.”
While there could be a rise in foreclosures in the near term, these are likely to be a “blip”, we were told, stemming from pandemic-related filing restrictions. Ultimately, any effects on the mortgage market could “be slow to develop and pretty far out”.
In terms of what to look for in consumer spending overall in the current macro environment, we heard that behaviour is “based a lot more on what’s happening to the value of stock market indices”, which can be partly attributed to the “news effect”. Following stock market trends offers greater insight into “what consumers are actually doing”, our expert said, rather than sentiment indexes – although the two are often correlated.
On the regulatory outlook, Interviews suggest there could be “pretty heavy crackdowns on consumer-unfriendly fees”, such as those charged by airlines to enable families to sit together during flights. Our expert also anticipates further specialty credit bureaus will come on scene, “whether it’s types of rent reporting or other types of consumer credit”.
Our expert also took a deep-dive into the automotive, student loan and credit cards/personal loan landscapes. Get all the insights now by clicking on the Forum Interview transcripts below.
Related Transcripts
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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