Latest / Leaders in Lending / Charting the Economic Horizon: Resiliency, Risk and Credit Trends

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Charting the Economic Horizon: Resiliency, Risk and Credit Trends · Leaders in Lending

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You are listening to Leaders in Lending from Upstart, a podcast dedicated to helping
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consumer lenders grow their programs and improve their product offerings. Each week, here
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decision makers in the finance industry offer insights into the future of the lending industry,
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best practices around digital transformation, and more. Let's get into the show.
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This is Lend with Leaders in Lending and happy to be joined by Joseph
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Mainz, who's the chief economist for Experience here on the podcast today. Thanks
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for being with us, Joseph, Well, thank you so much for having
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me. Do you know this actually my first big time podcast and then part
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of well good Well, We're very glad that you could be here, especially
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at CBA Live, knowing that you presented earlier so you had a busy day,
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you know. If you could like tell me and our listeners about about
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yourself, about your role at Experience, and about your background kind of what
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led you to being an economist. Yeah, so, yeah, I'm the
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chief economists for Experience North America. We also have great economic teams in the
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kank in Brazil. But really how I landed here? So just quick background,
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So my undergrad is in philosophy and I actually got interested in economics.
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I used to day trade all the time in the life, very well studied.
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I made money, lost money, and I was like, no,
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I need to really kind of fundamentally understand what's happening here. And so that's
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what I got my master's in the econ just fell in love with the discipline,
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and then I went on and did banking policy for the US Senate.
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So I came out out here for DC for a while, and then I
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went to Salt Lake, was an economist out there for a large regional bank.
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Then I started my own economic consultancy company, and then I started working
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with experience in that way, and then now I'm in house with experience.
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I spend majority of my time, about seventy percent of my time working with
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financial institutions all around the country. So I think I did my end of
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year tally. I spoke over one hundred organizations, like last year, from
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the kind of the largest financial institutions all the way down community banks, credit
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unions, spin techs. So yes, it's awesome. Well that's interesting.
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I'm sure you travel quite a bit then, probably to see all of those
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clients, and probably a good exchange of ideas to kind of hearing what's happening
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and nationally, but then also you know regionally and locally what's happening. Oh
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yeah, it's fascinating because each segment of the market is really and they've reacted
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to the market, the environment we've been in less severe use differently. Each
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has its own unique challenges and it's very fascinating to give it to get the
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different perspective. The other thing that, you know, one of the biggest
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thing this is a relatively new role at Experience and one of the things I've
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been focused on is there's so much data within the company and all you have
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to consumer credit data, commercial credit data, rep view of data, you
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know, housing market data, consumer spinning data. But part of it,
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as you know as an economist, it's like being a kid in a candy
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shop. It's how do you bring all these pieces together kind of give a
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richer view of the economy that you can did elsewhere. Sure well, and
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I think it's it's hard to believe that we're really at the almost at the
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end of Q one, so as we think about looking ahead to twenty twenty
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four, we're already part way through it. But you know what are you,
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what are you thinking or what are you seeing as kind of some of
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the key factors or indicators that are that are shaping your outlook, and then
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also what is your outlook for the rest of the year. Yeah, I
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think it's really interesting. You know, I spoke last year here at CBA
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Live and the sentiment was very different. It was right during the you know,
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the regional bank crisis, you know, a couple of bank failures.
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By that point, concern was definitely in the air. If you look back
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in twenty twenty three, much more the sentiment out on the street, among
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economists, among bankers were recessions on the horizons. Sure, right, if
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you look at where we are now, I think everybody I just spoke from
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a room pull of bankers, everybody is has been very surprised at the resiliency.
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And so what you've seen is economic growth is outperformed expectations really again and
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again over the last year. But you know, when I look forward,
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I see that the economic growth continuing. I think if you look at the
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Fund Reserve just put out their latest forecast, increased the path of growth for
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twenty twenty four. Our internal forecast again show a solid, solid year of
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growth. So our view is not is not recessionary this year and we have
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a solid growth picture. I think there's always risks on the horizon to think
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about what are some of the I guess biggest indicators to you then, I
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mean I think there you mentioned earlier just the volume of data out there,
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and I know I you know, I worked in investments for a long time
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and did a lot of due diligence and some of the high frequency traders who
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use a significant amount of data, so there's there's almost an endless amount of
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data points you could look at. But to you, like, what are
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some of your going to top indicators, either leading or lagging indicators that you're
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looking at in your work to come to that that kind of assessment of recession
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likelihood. Yeah, for sure. So I mean they got most interested at
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the moment. I think it's been the biggest driver of our growth and probably
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the most surprising thing is the resiliency of the labor market. So if you
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look back over the last three months, we're adding on average two hundred and
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sixty thousand jobs a month. Prior to the pandemic, where we also had
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a very low unemployment rate three and a half three point seven percent, We're
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adding about one hundred and eighty thousand, so we're we're adding a lot of
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jobs every month. Unemployment overall remains very, very low, and so when
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you think about the economy, consumers, consumer spending drives two thirds of growth.
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That's where kind of that drive has been. And I see continued growth
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this year, and so to that as well, consumer spending has been strong,
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has been stronger than I think many economists would have expected at this point.
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Do you do you think so? Do you think maybe we're seeing too
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much growth? Like do you think there should be a little bit of a
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pullback or or do you are you more kind of reacting to what you're seeing
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versus necessarily have an opinion on where it should go. No, I don't
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think. I don't think we need to see a significant slow down. You
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know, there was a question earlier last year, you know, will the
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unemployment rate need to rise materially and so the economy slow, some inflation slows,
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And I think the answer is no. You've seen inflation make a pretty
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significant progress over the last year. May not be exactly where the Fed wants
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to see. You. Affliction has picked up a little bit in recent months,
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but overall it's been moving in the right direction. And I don't think
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you need to see a big slowdown or changing growth. I think I think
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we're growing at a good rate. And you know, you mentioned the you
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know, the the fence forecast for twenty twenty four and what are your expectations,
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and you know, maybe kind of share with our listeners, like what
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the Fed is saying and then and then what you and your role at experience
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are thinking about interest rate changes. Really just over the year. I think
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farther than that out gets a little bit harder to go. Yeah, yeah,
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you're exactly right. After a year, you know, it's that's that's
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pretty difficult. But you know, I would say, one, there's been
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a shift in the market. In December, the Fed had put out the
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previous forecast where they expected three interest rit cuts this year, and immediately,
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you know, market participants started pricing in six and maybe seven rate cuts this
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year, which was which was I think way too many. Mark got a
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head of itself there. And what you've seen over the In the latest meeting
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when the Federal Reserve just just met and released their latest projective projections, again
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they reiterated three rate cuts this year, and that to me again feels right.
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I think it's pretty it's gonna be pretty close whether maybe they do three,
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maybe do two. I still feel three is the right path, and
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I still think it's probably roughly a coin flip at this time. I think
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they cut in June, I think they cut in September, and I think
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they cut December, and that allows the FED to basically cut weighty meaning cut
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weighty meaning cut. You know, they can take a more cautious approach that
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way then at those meeting, and it also allows them to They released their
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forecast so they can provide more context to their overall view. You know,
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in terms of financial institutions, you know, that first rate cut is going
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to send I think a signal to the market that the FED is now going
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to be moving into this more of an easing cycle at least not keep rits
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so restrictive. And that has all kinds of implications. If you look at
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the challenges financial institutions have had with deposit costs right especially after the regional bank
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crisis, there is a big challenge to retain get deposits. You never want
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to be seen, especially on you know the market is having any challenges there
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and also deposit costs. Obviously it's rates coming out. It helps with consumer
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demand for lending things like that. Sure, Yeah, and we definitely spend
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a lot of time talking about when the bank failures happened, like the worry
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about the contagent is it just going to get worse? And sometimes I think
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it self perpetuates where it becomes a consumers believe in. Enough people believe it,
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it will it will kind of manifest itself. So it's it's I think
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it was relieving to all of us to see that not not cometril and to
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those be a little bit more kind of localized to a few institutions. You
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know, certainly with with with rates kind of being and staying high for consumer
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lending. You know, as you think about just credit growth in the in
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the market right now that I think demand for loans is a little bit less
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and we're certainly seeing that in the personal loan market because rates are high and
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and so people are not borrowing. What are your thoughts about kind of just
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overall credit growth, whether consumer commercial availability of credit and where you might see
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it start seeing some kind of stronger growth areas out there, so I think
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it's been for me. It's the most interesting dynamic that's played up over the
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last year is that you had really a very strong economy, You had really
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good labor market, you had good spending, and yet credit growth has slowed
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quite significantly over the last year. And so what I'm watching going forward.
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It's slowed for a couple of reasons, and it's what I'm watching is that
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Number one is recession concerns. Right especially after the regional bank crisis, everybody's
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concerned about potential for a recession last year, even though the economy was good,
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people are just waiting for the next shoe to drop. And when you
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have the institutions are much more cautious than what they do on their investment lending.
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But the other thing you had was you have delinquencies beginning to rise,
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and as delinquencies rise, institutions tighten their lending standards, they base your lending
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standards, and that reduces the supply of credit. So that's going to slow
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growth. And then you have the interest rates, which remained high, and
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that slows the demand for credit. So you have recession concerns. You had
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reduced supply for credit, and reduce demand for credit. And so what I'm
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looking for this year to anticipate kind of this turnaround is really what develops in
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those those three segments. And if you look at recession concerns, you know,
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just for instance, you know, eight months ago, when I ask
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a roomful of people, do you think there's going to be a recession?
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Every hand realizes Today I just spoke to seventy five many people I asked,
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do you think there's gonna be recession? Not a single hand rais Maybe that
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was a shad group, but that's the sentiment that I've been getting. That's
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that's a good key. And I think things are moving in the right direction.
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And once you know, as you mentioned before, once we get more
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of a staging from the Fed that this higher rate regime is probably coming to
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an end, it gives a little more certainty to the market to kind of
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move forward. And what do you think? I mean, it sounds like
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as you think about like the kind of order of operations, like what has
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to happen first, Like you know, certainly as rates rose, then delinquency
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standards titaned. As defaults rose, then delinquency standard titans. Do you expect
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to see it kind of on the reverse of that coming out of it,
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where interest rates have to be cut and then some timeline before you start to
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see maybe a little bit of easing of lending standards. Yeah. Yeah,
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So I think the two aren't necessarily. I think the lendings standard piece is
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going to be more connected to what happens with delinquencies. And generally, when
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I speak with financial institutions, you know they're anticipating a delinquencies to maybe peak
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at the back end of this year, you know general maybe middle of next
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year, and so you know, thinking about that piece, you know,
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that kind of gets you, gets you going on the lending standard. I've
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looked at historical cycles. So last year I wrote a paper it's called Timelines
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of Recession and Recovery. Well, I started looking at all these variables that
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are important for financial institutions, all kinds of living market variables. And Okay,
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when what happens in the two years leading up to recessionary time period or
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period stress, what happens during recession, we're happens some two years after.
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And so using that context, when I think about it, when I look
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at the lending standard piece, the lending ctenter titaning piece. If I if
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I anticipate in that the delinquencies are probably going to peak the next year or
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so. If you look historically kind of when the pace of lending standard peaks
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too, when year your credit growth or revolving consumer non involving consumer credit kind
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of hits its bottom, it's about five to six quarters. So if you
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think that kind of peek at the early part of twenty twenty, you know,
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first quarter of twenty twenty three, I mean first half of twenty point
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three, it's actually Q two, then you're looking at maybe back in twenty
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twenty four maybe for a credit bottom. And when I speak to our partners,
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they seem to have that share, that same sentiment, and so I
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like to use these kind of tidelines as a baseline view for then you start
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bringing up the variable to say wall maybe that's maybe that's too early, When
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it's too late. The institutions are definitely thinking about that. Are you seeing
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or are you thinking about? Is that is that spread across kind of the
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credit market, the type of consumer. And I think there's some evidence out
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there that like maybe prime or people who appear to be prime borrowers, or
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more stress than historical and maybe performing worse than they were expected to perform in
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credit. Is that something that you're seeing in the data that you're looking at
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and the institutions you're speaking to as well. Yeah, I think that's a
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really interesting question. So if you think about when institutions first, and the
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narrative, narrative has been that inflation, these cost of living challenges has really
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hit that kind of lower income consumer the most. And what you saw is
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when institutions rushed to tighten lending standards to kind of mitigate some of that risk.
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A lot of that tightening was focused in those subprime near prime consumer segments,
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not so much on the prime and you've definitely seen the more stress of
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that segment of the market. But I've been speaking with some especially I hear
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this more in the fintech community about stress maybe starting to creep up a little
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higher in the prime near prime prime segments. And you know, if I
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was looking at the role rates, so the percentage of accounts for credit cards
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that are rolling into higher status of dean see you look at the subprime segment.
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Obviously it's a very it's been more of a steep angle, but recently
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the past couple of months, I've kind of seen it plateau out a little
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bit same from near prime nearpome not quite a steep, not quite a accelerated
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role right there, but it's still a little step. Also started flatten out
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when you didn't see those I looked at the prime consumers over the past three
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months, and that real rate hasn't ticked over, it's just kind of gone
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up a little bit, And so I think there's some interesting dynamics there.
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One thing I'm looking at closely because of that is I'm looking at the role
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of ripped rent costs. So you know, over the since being pandemic,
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rent costs have gone out a by like thirty percent, and a lot of
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times negative rent. You know, you have a if you miss your payment
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or you have an overdy balance that's not always reported to the bureau, so
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it doesn't really reflect on your credit score, but that doesn't mean there's not
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stress there. And when you look at the segments, you know, overall
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rented income has gone you know, from roughly thirty percent, like thirty eight
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percent of medium rent to income, which is pretty pretty high. But if
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you look at the segments, if you look at the the the ringers that
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are renting at apartments that are like fifteen hundred, two thousand dollars, they're
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rental stress or their rate of increase for their negative paintent behavior kind of peaked,
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you know, last year like twenty twenty two, but it's kind of
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moderated. The higher income bucks like twenty five hundred to like three thousand dollars,
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we actually saw a much steeper increase in that it's not quite as high
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overall, but steeper increase and not much We don't really seen much improvement there.
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So to me, that's a little bit of time that kind of that
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kind of hits on the point that there may be a little more stress in
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that prime segment because I'm taking making an assumption that the high people who are
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renting at higher chef levels or higher income probably higher score. Are you Are
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you seeing any difference in geography like I'm you know, I know that unemployment
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obviously very low and continues to be low, but there have been very large
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layoffs, particularly across the tech centertor of relatively high paid employees. Are you
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seeing anything or do you look at that geographically or by industry or are you
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seeing any like pockets of stress that they explain that or is it kind of
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too early to tell. Well, so I think the two parts, going
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back to the rental piece, the Federal Reserve has done a study on this
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that one, renters have seen a higher increase in credit card debt, and
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they've also they also have higher delinquencies that homeowners. Right, that makes sense.
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Homeowners benefited very greatly from the home valuation increases, while renters, I
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just had to pay more. And that stress is even more concentrated in like
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those second home vacation home communities where you have people who've been living there the
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whole life. You know, there's not a lot of housing stock, not
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a lot of renting units, and you have all this work from home.
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People move in to the area, pushes up rental prices. Home prices increase,
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and now if you're a renter there, I've been there for a long
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time. Now you got to eat that cost or you got to try to
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move. So that's one piece. The other piece, you know, yes,
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I mean definitely there's variation unemployment rates across the country, but broadly,
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you know, if you look at the tech layoffs in particular, yes,
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you know they significant within the market, but broadly as a whole, on
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the component of the overall labor market, it's still pretty small, and layoffs
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overall still you know, if you look at the the number of people who
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are filing unemployment each week, it's still below pre fandemic levels. That's interesting.
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It definitely seems like a pretty unique economic environment and with a variety of
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things that as you said, last year, everyone was confident we were heading
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to recession, and this year much less confident. But certainly we can always
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be surprised. And I think you had mentioned that some of the key factors
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really driving that growth, the economic growth for the for the US is consumer
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spending and consumers really driving that. Do you think that that is going to
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continue for the foreseeable future, that we can expect to see that really being
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driven by the consumer spending. I mean, I think so, Like I
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don't think, you know, consumers have been spending at a very strong clip.
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You know, I don't think we're going to see the kind of strength
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of growth like we saw last year. I think consumers they'll still have the
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ability to spend. So if you look at wage growth by income quartile,
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So the Federalserve Bank by land Up puts out a good series on this.
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But basically, you're looking at wage growth from the lowest income and quartile to
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the highest roughly around five percent now, and whatever measure you take of inflation,
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it's wages are cling faster. So wage growth is exceeding inflation. If
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you look at real disposable income, so incomes after tax sudjusted for inflation on
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a year on your basis, that continues to improve and net worth net growth
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networth for households is roughly thirty percent of up pre pandemic levels. You think
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about all the home value gains, you think about stock market gains, those
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those components together tell you that the consumer they have the ability to spend.
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I think the other piece to that that is the next question, and it's
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like, well, you know, you know, have they spent through their
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savings, the finance the spending if they need to. And I think if
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you look at overall on the aggregate debt burdens when adjusted for the incoming increases
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we've seen over the last couple of years, it's basically pre pandemic levels.
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And historically stress a well, now there's definitely different pockets of stress and pick
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up, but I don't aggregate. Yeah, yeah, it is interesting that
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you see. And I think the impact of stimulus during the COVID years was
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probably greater than most of us expected it to be. And then there was
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a lot of anticipation of the student loan moratory ending and consumers having to pay
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those back, and that really hasn't turned out to be a big impact either.
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And we are still seeing condefered by a lot of durables, so the
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durable purchases still remain really high, which I think is interesting. You know,
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you'd mentioned those kind of high debt loads, like our people are people
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maxing out? Uh, it actually made me think of something, you know,
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interesting that you mentioned, Like with rent increasing, that's kind of a
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it's almost like a you know, off balance sheet item. It's not on
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your credit report, so similar to maybe the buy out pay later and some
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of the new fintech offerings that that are not reported in the same way,
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maybe don't show up in a traditional event to income if the credit report is
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the source of that. Like any thoughts on that that maybe there's some like
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a hidden or obscured risks out there that we can't see right now. Yeah,
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I think I think underappreciated risk. I think so. I think I
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think the rental the rental piece definitely bears watching, you know, if you
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look at the buy out pay later space, you know, as an economist,
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and I think we're going to start getting more more visibility into this.
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But whenever you can't see a potential debt load, that's you know, it's
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opaque at the moment, you don't have a lot of visibility into it.
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That's always something that you have to worry about the size of it though,
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you know that and how how much that may impact consumers. I think that's
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kind of speculation at this point, but you you always have to keep that
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in mind when you're thinking about how much debt does consumers have, and you
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know, looking at the overall that overall aggregate debtloads still manageable. If we
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look at you know, kind of our internal data looking at some of the
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debt income for you know, subprime, your prime, that's definitely risen faster
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when I think to some of these challenges, you know, the increase in
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debt, it's if the economy keeps doing well and you know, we don't
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have you know, wholesale layoffs and things like that. It's not it's not
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that big of a problem, especially in the shorter term. Obviously, higher
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debt loads and an environment where you lose your job, you can't find in
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the job when recession, that's more problematic. Sure, so what do you
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you know as you think about like rent is increasing, but there's also some
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obviously housing prices are still very high, and then interest rates for mortgages fluctuate
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a little bit but remain high from what we've seen, not high historically,
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but high from what we've seen over the past several years. Do you think
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that there is a is interest rates come down? Do you think that there's
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a place where where maybe home buying becomes more advantageous again, particularly for people
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who don't own a home. And then there's the you know what about the
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people that are kind of locked into a very low fixed rate and feel like
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they can't move over, can't can't upgrade or move up to a bigger home.
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I just kind of general thoughts on the housing market today. Yeah,
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so I think on the housing market one generally, you know, I think
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we'll see what's the FED makes their first movie start seeing interest rates come down
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a little bit. I think we will see a little bit of a pickup,
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not only just in home building, because home builders have really pulled back
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a lot of affordability challenges, especially for first time buyers and the new home
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market. But I think that I think we will see kind of a pickup
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and growth there, but not a lot because so many of the mortgages,
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to your point, are locked in, like eighty percent of mortgages are locked
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in under five percent or something like that. So there's some there's some room
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for improven in there, not a lot, you know. Honestly, I
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don't feel that bad for people who locked in an interest rates two and a
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half percent. You know, values rise and so yeah, yeah, it's
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it's really it's not a bad problem to have, I guess. So it's
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unless you need to move for work, if you know, something like that's
24:18
true, unless you have to. But there are some there have been a
24:22
lot of articles like, oh no, people can't move because they have these
24:23
great interest rates that locked in for thirty years in this home that was valued
24:29
at twenty five percent. Then today it's like, well that's a that's a
24:32
different kind of if you're going to have a housing problem. So I think
24:37
that you know, we've talked about just that kind of forecast of the economy,
24:41
your ideas for what you you know, your thoughts on what you think
24:42
that the fen's going to do and a credit growth, consumer behaviors. What
24:48
are like some maybe key risks on the horizon, things that you know,
24:52
we we've gone from expecting recessions to know probably not at least imminently respecting expecting
24:57
one, but we it's out there that could I think disrupt that economic stability
25:03
or growth in the coming year. Things that could surprise us, not like
25:07
a black swat event type issue, but it's something more more typical or that
25:11
could surprise us and derail where you think we're headed today. Yeah, So
25:15
one thing I always like to think about is why did the economists and bankers
25:22
and you know, much of the industry get the recession called wrong last year?
25:26
And for me, it's really two reasons. I think that we,
25:32
by the way experience, we did not forecast the recession last year, so
25:34
we were on the good side of that call. But we overestimated the impact
25:41
of great hikes on the labor market. So BED raises rates or five hundred
25:47
basis points unemployments basically where we were when we started, okay, and we
25:51
underestimated. The second thing is underestimated the resilience of the consumer to continue spending.
25:57
And part of that is because labor remain so strong, but part of
26:00
it is because consumers have just had a desire to keep spending and the dynamics
26:06
have shifted to where they can continue spending. But there's a lot of you
26:08
that all of the excess savings has run out, consumers are going to fall
26:11
to cliff that didn't happen. But when I think about that, I think
26:15
about Okay, So in the back of my mind is did we get the
26:19
impact portion wrong or did is the timing wrong? So maybe these stresses that
26:26
we thought when materialized last year are still in our on the horizon. So
26:32
if you look back historically at the previous periods of right height cycles lived at
26:37
the eighties and the nineties on the pre GFC period recovered, you look at
26:41
when the FED started raising rates, so when they stopped raising rates, and
26:47
basically every instance they're un a plane where it was lower. Okay, we're
26:51
not that far from the Feed stopped raising rates, you know, third quarter
26:53
of last year. So but we're in we've been cheering that. I think
26:59
rightfully, so we should be. We should be pleased where the economnists,
27:02
where the labor market is. But then you're thinking, like, well,
27:04
is this really so special, because then if you look three years after,
27:10
or even if you go two years after when the FED stop raising rates,
27:12
in four out of those five cycles we ended up a recession unemployment rate rise.
27:17
So one of the question is is this dynamics so special? Now?
27:21
Have we avoided recession at the moment, I think the answer is yes,
27:25
I don't see a recession this year, but always in the back of your
27:27
mind you have to to maybe we got the time of the impact wrong.
27:32
Consumers too, you know, consumers they don't you know, they don't have
27:36
as much cash on here and as they did last year, and so but
27:40
I still think that the impetition. I think consumers can continue spending this year.
27:42
I don't think it's going to be as much. But I think you
27:45
always have to keep history. I think history can keep you humble in periods
27:48
like this, and you always have to keep an eye on that. No,
27:51
I think that's a great point, and I think particularly there are a
27:52
lot of you know, you mentioned the Great Financial crisis. There are a
27:56
lot of people working and who are adults who are buying homes and starting families
27:59
and who are not working during a great financial crisis, so they kind have
28:03
only seen a positive economic environment and this is maybe the first time that they've
28:07
really seen some stress out there. So well, anyways, Joseph, thanks
28:11
for being on the podcast. Great conversation. Love hearing about your thoughts on
28:17
what we can look forward to in twenty twenty four. Thank you so much.
28:18
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