Latest / Market Pulse / What Lenders Need to Know About Consumer Stress
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- Equifax Market Pulse podcast Ep. 32 Transcript Hello, welcome to the Market Pulse podcast. I'm your host, Tom O'Neill, and I'm a member of the Risk Advisory Group here at Equifax. Collectively, this team supports our clients by providing guidance and insights on how to navigate uncertainty and uncover hidden opportunities. Today, my panel of experts includes David Shoika, Jesse Harden, and Tom Aleph. Welcome everyone, glad to have you guys on board. Dave Sojka (00:47.689) And I'm Harjo. Jesse Hardin (00:48.095) Hello, Tom. Aliff (00:49.459) Thanks, Tom. Tom (00:50.995) Today, we're going to be talking about the credit and financial stresses facing consumers. Now, that's a pretty broad subject. So what we plan to do is actually address consumer stress as a theme that we're going to be carrying through a series of podcasts that we plan on rolling out over the next few months. Over that coming series, we'll discuss topics such as what lenders can be doing to address the various impacts, how these impacts... are different for different consumers, and what kind of information we can use to distinguish those consumers who are thriving from those who may be struggling. But we want to start off today by discussing what we mean by consumer stress. What are some of the factors causing that stress and how we see that stress taking shape? But before we begin, let's kick things off with a quick economic update from David Fieldhouse, Director of Consumer Credit Analytics at Moody's Analytics. David? Thanks, David. For the past couple of years, consumer spending has been pretty consistently healthy after that initial shock in the early part of 2020. And even as society became more isolated during the pandemic, spending on things like big ticket items remained stronger than expected. Then as we started to resume some level of normalcy, spending on travel, on entertainment, on restaurants, and so forth, those all jumped up. And even with an increasing number of economists predicting differently, consumer spending continued to chug along for a while. But now more retail reports are coming out illustrating a shift in consumer spending, focusing more on essentials than away from luxury items. Economic data is showing that the savings built up during the pandemic period have largely eroded, and that personal expenditures have been outpacing disposable income for the past year and a half. And then when we look at credit trend data, we see that it's showing an increase in revolving credit usage and payment delinquencies. On top of that, you see inflation that's created a need to tighten belts and for an increasingly large number of consumers, it's necessitated the use of credit to cover basic monthly expenses after savings and other assets have been exhausted. You add to these new economic factors, such as the resumption of student loan payments for millions of consumers. obviously noteworthy labor strikes that are happening. And all of this can paint a pretty bleak picture of the financial stress that consumers are facing. But is this pervasive across all consumers? Is this just a matter for lenders, for at-risk populations to be paying attention to? Or is it something that impacts consumers across the credit spectrum? And is the impact consistent? And if not, how can we tell the difference? So with all of this in mind, I'll be asking our panel for their thoughts and recommendations on consumer stress. So Dave, let me start off with you. We hear about consumers being under stress. And the various items I mentioned in my monologue there would seem to all lead to increased financial stress on consumers. But do we see that reflected in the data that we have coming in? What does the economic and credit trends tell us? Dave Sojka (04:26.259) Yeah, thanks Tom. And, you know, as recently as yesterday in our Market Pulse webinar, we talked a little bit about this and, you know, some of the key takeaways from that webinar were revolving debt continuing to grow, increasing utilization on credit cards, lower demand for mortgage and auto, and then higher delinquencies. Now add in the added pressure of that additional student loan payment. Um, and consumers are really pondering. How do they pay their bills? Uh, your earlier point about consumers potentially pulling back. Uh, I think it's been mentioned a lot in the news. Uh, and, um, you know, even the use of credit is not for luxury items. It's for necessities. And so, you know, does the consumer pull back and, you know, Unfortunately, they've been what's keeping the economy afloat. And so as, so I guess the question on that side is as the consumer goes, does the economy go, but in terms of stress, you know, I think, um, I've seen some studies around 10% of consumers live paycheck to paycheck, um, and really are struggling to meet ends meet. Um, You know, on the housing side, I think I just read share of annual income to cover housing costs is now over 40%. They were historically it's typically around 30%. Uh, just today came out 30 year mortgage rates hit 7.75% the highest level since November of 2000. Um, what does that translate to? Well, the payment on a $500,000 mortgage has gone from $2,000 a month to now $3,600 a month and an increase of 80%. And that doesn't even include the insurance side of things. We've seen rising prices on auto. Average new car is somewhere around $750 on used cars. It's about $530, which is its highest in quite some time. Um, and then kind of compounding this is that over 60% of households, according to the New York Fed have said it's harder to get credit this year. Dave Sojka (06:42.955) than it was a year ago. So quite a lot to think about as we go through this. Tom (06:48.019) Yeah, indeed. Thank you for that, Dave. Tom, to build off of that and sort of flesh that out, let me address the next one to you. For several years, it's been helpful for us to use this notion of a K-shape to describe how different consumers are impacted differently by certain economic factors. So for example, when we were coming out of the pandemic period, we spoke of the K-shaped recovery. that sort of signified how some households were coming out in stronger shape than when they went in and how some households were struggling as they came out of that. And conversely, we've spoke about the K-shaped economy where we describe things like inflation and how they have different impacts on various populations. But the reality is more nuanced than that, isn't it? When we speak of all of these consumer stresses, it's more complicated than just saying, some households are doing well and some households are struggling. Can you address that for us? Aliff (07:57.92) Yeah, definitely. I think at the beginning, when we started talking about this and referencing a K-shaped economy, a lot of it is, of course, out of an ability to describe it and to have an understanding of where pivots and shifts are occurring. And one of the key separations that we found at the time was that the subprime market, those consumers that were having a credit score less than 620 had dropped from 26% down to 19. And when we continue to talk about this in that nuance, instead of thinking about us evolving away from, we're evolving with what we're calling that K-shape. And so some key things that we have a lot of hypotheses on that we're observing and we've been hearing in various components with... some of the economic discussions we've had is that consumers seem to be doing better overall. So on average, the consumers are doing well. But what that means is that there's, I guess the rate of consumers that are doing better is higher than those that are doing worse. But there are consumers who are still having quite a difficult time. And we've seen things where consumer spending over the last years has been remarkable. according to Yamudi's analytics as they end up describing with real consumer spending being on the rise. And our next market pulse, we're going to be having a little bit more focus on that with some of our partners to talk about some of the spend trends that do exist. So then when we think and pivot on that is a lot of the strength, of course, when we think about the nuance is driven by access to credit. So those consumers who have... high financial durability. Those consumers, we know that have been locked into a really good mortgage rate. It kind of closes off their opportunity or need to move elsewhere. You know, with 90% of consumers already having a rate in their mortgage less than 6% and 70% less than four. So given where interest rates are, it's kind of holding a little bit of balance in where that exists, but those consumers also aren't going to be experiencing the high rent increases. Aliff (10:00.054) Now, as we talked, Dave shared in our Market Pulse yesterday about the rising delinquency rates in credit card auto and secured. And specifically, those are occurring in places where the consumer is experiencing that subprime credit. So we are having some stress down on the lower end, but the higher end still continues to end up driving a lot of things that you associate with that. And just some key stats that we've noticed are, there's... those consumers that carry a balance month to month, we call those revolvers, it surpassed those that pay their balance in full based on some research that we've been exploring from JD Power. And with credit card debt outpacing, credit card balances, I guess a lot of what we saw that is that balances are over 19% in Q1, while debt jumped 23% according to a Philadelphia Fed poll. Now, we've been talking about student loans for a long time as well. And of course, that's going to be one of the aspects where a consumer is going to have some form of liability. And so, as always, what we want to be able to do is understand what their current credit profile is, what are the various assets they have access to, whether it's income, wealth, and that could be forms of stock bonds, savings, any form of liquid asset the consumer will have access to. And that even includes something like a home equity line of credit. Will they be able to tap into an existing mortgage that has retained some value in their home to have access to credit? So time, I guess, is going to tell, but we're really actively trying to continue to dive in and refine what are some of the drivers behind consumers thriving at the nuance of the upper end of decay versus the nuance of the Tom (11:50.971) Got it. Thank you for that, Tom. Jesse, let me throw something towards you here. It seems like the headlines that we see these days, they're almost designed to add stress to consumers, financial and otherwise for that matter. But to these headlines events, and I'm talking about things like the restart of student loan payments that Tom just mentioned, the UAW strike that's in today's headlines, we see things like global slowdowns. And I'm sure you have. before this podcast is even rolled out, there's probably going to be several others that hit the headlines. Do these actually have much impact to the average consumer? Now, obviously, I know that I'd imagine that a UAW worker is going to be impacted by the strike, obviously. And someone with a large amount of student loan debt is going to be impacted when they have to start making payments again. But do these have a broader impact than that? Jesse Hardin (12:48.946) That's a doozy of a question, Tom. It's a great question, though, and you are correct. There's no shortage, really, of new events to follow. And it's not really just new events. Take all the discussion that we've had over economic downturn. Moods can shift up and down quickly when thinking about the likelihood of a downturn. It just really shows, I think, the complexity and the dynamic nature of these types of events. When I talk to our customers, you know, I'm always trying to start and remind those customers, always work towards what the data is telling you in terms of your business. And with as much data as is available today and the many eyes looking at the data, there's a lot of latitude and interpreting what that data means. We also could certainly have a lengthy discussion then about news and what's generated today. Certainly there are a lot of subject matters which take a life of their own in terms of the news. For example, think of artificial intelligence. It's had a, you know, it's been around various forms for quite some time, but as new innovations have come along recently with AI, we've seen a pickup in news stories, a buzz around the capabilities of AI. So inevitably, news stories suggest impacts with AI to the labor market. AI will probably be more than likely to have a profound impact on some types of jobs. Certainly when you look at the amount of money and knowledge being put into the capabilities now. But is it largely impacting labor? No, not really right now. So instead, we always wanna try and contextualize the point news stories are making. And in our field, how those points may play out to the consumer. Obviously then, some of these economic events, they're gonna have more modest impacts on GDP, but the consumers really who are living and breathing that impact, the feelings they're real, those are real feelings. So it's why businesses I think need to move. and have a strong consumer outreach. And then, we've talked about it, Tom talked about it, you talked about it as well. You brought up some good examples recently in the news. One is student loans, held by 40 million consumers. Many of the loans are in a possible accommodation status, meaning they're gonna see a resumption in that debt load soon to the tune of maybe three to $500 or more monthly. So to someone who's seeing a resumption of those payments, the challenge... Jesse Hardin (15:08.55) with the resumption, it's real and it's disruptive. Economists though, they tend to debate the impact of GDP even though we can't fully measure that for some time. Gas prices, think about where gas prices are, they're more problematic and it's really based on the impact that they have across the board to consumers in their balance sheets. So think about consumers have to pay more for gas, they have less to spend elsewhere and they have a a direct impact on the price that they pay for goods and services. So as we talk about consumers, we remind our customers specifically about the importance really of knowing where the customer's overall financial situation is and then how those challenges might impact the types of customers they work with and the outreach that can help that customer handle that personal financial situation. And with so much news and information that's out there on the topic now, it becomes... really a best practice to try and always evaluate the themes that you're seeing in the news. Specifically, how might those economic events affect the customer base and should I be prepared for those effects? I then would conclude by saying, perhaps what some would say is a non-committal answer. Will these events have a broader impact on the customer? The answer is maybe, but it really depends on determining what that looks like in your portfolio and the level of customers that you have in that portfolio. Tom (16:35.559) Thank you. Thank you, Jesse. I think that's a great point. And the everything you mentioned around contextualization and putting this, you know, you know, on a almost base by base, you know, uh, level is, is important. You know, something like student loans, obviously may have a very deep impact on an individual consumer, but zero impact on, on the consumer right next to that. Whereas something like rising gas prices or other factors may have more of a, uh, a broad impact that, that lenders would need to. take into consideration. Dave, let me go back to some of the things that you were discussing and what you were talking about in terms of what we're seeing within the data and how it illustrates those stresses that we're talking about here. And I'm not going to put you on the spot, because I know Equifax doesn't make forecasts. So I'm not going to ask you to make any predictions. But we obviously do keep a finger on the pulse of the analyst community. What seems to be the prevailing thoughts looking ahead? What are economists expecting in regards to, are these stresses predicted to be rising? Are we going to be seeing more of these, more consumer stress looking ahead as we head into holiday season, for instance? Do we see things leveling off maybe or even getting a bit less stressful as we head into 2024? Is there a prevailing thought? And if so, what is it? Dave Sojka (18:04.983) Thanks, Tom. Before I give my answer, I want to go back and correct something. I think I might have said there were 10% of consumers living paycheck to paycheck. That actually is 60%. So I just want to make that correction. But in terms of where the experts think we're headed, you know, give me give me 100 economists and they'll give you 100 different answers. I think the prevailing view in terms of where the economy is headed more rosy and I'm using that phrase as opposed to the, the R word that we're all trying to avoid saying, um, where that, where that prediction is really down 20, 15, 20%, um, from a negative perspective. So I think the economists feel good about next year and kind of where we're headed. Um, but there's still these factors that are out there, right? And I think, you know, Jesse talked a little bit about gas prices and Tom (18:40.307) Thanks for watching! Dave Sojka (19:04.679) you know, from the consumer side, directly out of the wallet, they see, you know, they drive down the street, they see that gas price, and then they're making a decision. What do I pay? Where do I have to go this week? Um, but then also, you know, kind of indirectly as diesel costs go up, cost of goods goes up. And I think Jesse highlighted that as well is that there's another compounding factor that impacts the wall. Now it's costing me more for the typical uh, you know, bread, cereal, milk, uh, fruit, um, to feed my family. And so I think those pieces are still gonna kind of be at play. Um, I highlighted at the start of this podcast, uh, during my portion, um, talking about rising revolving balances, rising utilization rates. Um, we're heading into the holiday season. Unfortunately, those trends are not gonna change for the next three months as consumers are spending for the holidays, right? And so I really, you know, kind of based upon what we've seen from our trends in the past, I mean, I would expect the trends to kind of remain normal from a spend perspective. I think the revolving product balances and utilizations will go up. Not only because interest rates are now over 25% in credit cards and that minimum payment is a little bit harder to make. Um, and, um, again, I'm using those, my, my card for existing goods and services. Those probably won't come down until tax season. Um, I haven't, you know, in terms of the auto market, you know, I think Jesse touched on the UAW strike. Obviously the foreign cars aren't necessarily as impacted by that. The supply there is good. So we haven't really touched on supply of auto, which was a big issue earlier in the year, and that's really kind of leveled itself out, leveled itself out. But really it's really going to be as the consumer goes, so goes the economy. As I mentioned earlier, does the consumer reach a point where they say I'm done spending and I'm, and I'm going to be paying. And while that's good for them and it's good for delinquencies and it's good for all those other pieces, obviously. Dave Sojka (21:25.419) financial institutions need the customer to use their products. And so I think that's kind of the other piece of that. And I know we're focused on the consumer, but if they decide, if the consumer decides that paying down their debt, getting back to a more normal... Dave Sojka (21:46.683) monthly payment based upon what they can afford, then we might see the certain markets and certain products be hit in terms of sales for the next several months. Tom (22:01.159) Thanks, Dave. And I recall one thing that I know we've probably all talked to clients about at various points is we can speak about the R words, or downturns, or recoveries, or whatever from a macro perspective. But it's also probably even more important to realize that these things happen on an individual basis. And even if. The economy is looking rosy, as you said, and I'm using the air quotes along with that. Individual consumers can still be struggling and individual consumers are in strong position. And it's important for our lender partners and clients to be able to splice that out and distinguish between them. And on that note, Tom, wanted to go back, thank you by the way for the description that you gave about some of the, how the stresses come in different forms and impacts to different consumers. And this question may be better served as a topic by itself that we do on a follow-up podcast, but could you give just a brief overview of how we might be able to distinguish those different impacts? We've talked a lot about the differences and the nuances. How do we go about identifying them and how we approach those differences accordingly? Aliff (23:27.404) That's such a great question, Tom. And I think we oftentimes find ourselves in compare and contrast of how does this current economic time period look compared to pre-pandemic? How does it look? compared to the Great Recession. How does it look even before that as the housing market started booming in the mid-2000s? To me, the biggest difference between the current economic time period and the Great Recession is our ability to access data and our ability to run data at a client level at scale. So we've been able to operate and find those various trends around. Our hypothesis around the K-shaped economy weren't hypotheses. We were identifying that this many consumers were ending back into a student loan payment. We knew how many consumers opened a mortgage. We were able to understand that those student loan payments that are coming back into, going into repayment next month, on average in the auto portfolio is 16%. So we've been able to identify various levels of trends at a nuanced level, very granularly. comparatively to what we were able to do before. Previously, we were able to do things like, what did a payment hierarchy look like? And we could see that consumers were paying their mortgage last, for example. And in many cases, we don't expect some of that to occur this time because mortgages rates are doing so well. But a lot of the stats that we described, we have been actively working on analyses and we're continuing to grow and refine that. And so... a lot of the components that we're looking to pull in and do a little bit more clustering and segmentation is to identify where those pockets exist. When you describe personal recessions that consumers may be experiencing, you can go around the country and see that there's some people who've been in a personal world recession for the last 40 years. They're like, well, what's the difference between now and three or four years ago? It's not that different. And then there are some people who are, you go to other parts of the country where places are thriving quite well. Aliff (25:34.454) there's like not even an understanding that someone could be struggling financially. So it's a very interesting market in that sense. But as you look to combine the data, we can find out what pockets exist and does it matter if a consumer has a mortgage, if they're able to pay their student loan? Does it matter how much financial durability they have from a stock bonds perspective? Does it matter what other debts they've taken on over time? And have they, I guess, do they have access to or have a need for some form of specialty finance like a payday loan? And have they gone and seen that? We were just discussing earlier today about the Wall Street Journal article that came out with, I guess, payday loans being on the rise in the last quarter. And so we expect those consumers starting to have some stress. But that's a very specific consumer set. who is needing to have access into some form of payday loan. So it's really important to understand what those blind spots are, but tying it back to that original opener that I had is the biggest difference between today and the last recession, whether we wanna call this the R word or not, or wherever we end up being, we can identify what those pockets exist, and to know where the stresses are, and to continue to nuance where delinquency is rising and what are the main drivers. Tom (27:00.315) Yeah, thank you for that. Yeah, that's definitely a fascinating area and definitely one that we're going to need to dive deeper into in a follow-up podcast. So stay tuned. Jesse, we've got time for one more. So I'm going to throw something back at you. And I'd like to sort of turn the focus forward looking. You mentioned several of the headlines that we're seeing today when I asked you about it. Aliff (27:12.118) Looking forward to that one. Jesse Hardin (27:21.439) Throw away. Tom (27:28.947) the challenges that those potentially pose on different households. And since it seems like there's new headlines popping up every day, is there a particular theme that you look for in terms of the types of macroeconomic events that are most impactful to the consumer? Jesse Hardin (27:47.358) Yeah, so we've got a great group of listeners here, and I'm sure they're proactively looking at news, measuring impacts on their portfolio. So I really provide this as a way I've found success in looking at themes and stories. So as I'm scanning news stories for new potential disruptive economic events, you know, I try and train my brain each time to do the following. So first and foremost, I'd be hypocritical not to bring up my last answer, which is view and understand what the data's telling you. So is that data intuitive? Does it not pass the smell test? Is there something funny about it? Is that data different from what your portfolio data is telling you? It may be okay. You may find you've learned something new to watch for. You may see an anomaly indicating the story may not apply to your portfolio, but either way, that story has at least gone through the sniff test. Then I try to think about the following, how many potential consumers does this event impact, or put maybe a little differently like what do I think the severity of this risk could be? And equally, how likely is the event to occur and in what timeframe? So put into practice then here's an example back to the student loan payment resumption and elevated gas prices. Both are high on the likelihood of occurring. We know that because they're occurring now. We then established that both are likely events that will need to size. So in the case of student loan, I can size the impact on my portfolio to make a good assumption about my exposure. I can work with bureaus like Equifax then to size that impact on my portfolio and can then think about, you know, how to direct my policies, my consumer outreach to solve for that. So certainly it's a high likelihood event. With gas prices, we know that prices can only go up so far before we see consumer sentiment change really in the form of demand destruction. So gas prices, they obviously play a direct role in most consumer lives, getting places we need to go, driving places, higher prices for goods and services. So that has really a high impact and a high likelihood. And that's a story I'd really wanna watch. So then the barometer becomes how likely is the economic event to occur and how much impact might it have on my customer base? We all do this for a living. So most of us get really geeky about like all the data. Jesse Hardin (30:10.398) the stories and what they mean. So I find it fascinating when we think about like trade policy with China, how it may be impacted by political and fiscal events with the Xi's regime. But the reality is, I can't predict that what's going to happen there. And I also can't really gauge the impact on my customer base. So it's really a good story. It's nice to know, but it's probably not one I'm going to lose a lot of sleep over. So then as we spoke about before, sometimes the hype creates a concern. So I'd again reiterate, don't make a story bigger than it is. And I think if you follow that simple approach, I mentioned sizing the impact, I think you'll better understand then what is concerning as a theme versus what is not concerning. Tom (30:55.931) Fantastic. Thank you for that. That's very insightful. All right. That's all the time that we have for today. As mentioned before, though, we will be rolling out more of these podcasts around this particular theme each month for the rest of 2023. So make sure to keep an eye out for those. I'd like to thank the panelists for joining me today. Thank you, guys. And for our listeners who would like to know more about this topic, please reach out to us at riskadvisors at Equifax.com. or feel free to reach out to your Equifax sales contact. Thank you very much, and we look forward to having you listen in on our next podcast. Jesse Hardin (31:34.378) Have a great day. Dave Sojka (31:35.715) Yep. See ya!