Attention K Mart Shoppers, there is a blue light special going on in Westwood, New Jersey. Come and get the deals, including all the store fixtures, before the specials are gone. As recently as 1994, there were 2,323 K Marts across the nation. With the closing of the Westwood store there are only two left, Miami, Florida and Bridgehampton, Long Island. Sadly, K Mart is a case study in how marketplace impacts affecting the company, combined with questionable management decisions can tank a profitable firm. For bankers, it is an example of what to look for in managing credit risk. Location dynamics changed, the stores were located in transitioning neighborhoods that deterred customers. Competition arrived in the form of Walmart, which offered about the same products for less. A stronger economy moved customers to higher quality, pricier stores. During all the changes, management doubled down on doing things the same way they had since the 1960’s, assuming the marketplace was static. In 2002 the firm filed its first bankruptcy petition. At that time lenders suffered a 60% charge off on the debt that was owned and had to take stock in exchange for writing off the other debt that was owed. Well over $10 Billion was charged off over the years. Another warning for bankers—-K Mart did not miss a debt payment prior to any of its bankruptcy filings. Another case that a late payment is not an early warning sign that a company is in trouble.
US Consumer credit rose by $17.8 Billion in June. This is about half of the highest rise in a month which was $35 Billion last October. Revolving credit such as credit cards fell by $605 Million. It was the term debt related to housing, auto and student debt that rose by $18 Billion. While new and used car prices are experiencing a season of de-flation, down over 11% in the past 12 months, the price points are still much higher than pre-pandemic levels. Housing prices have continued to hold at very high levels, resulting in larger loans on average. The numbers appear to indicate that people are not having to make ends meet using revolving debt, but rather are confident that future earnings will support larger purchases right now.
At the end of the second quarter consumer debt hit a new record of $17 Trillion. 70% of this total amount is related to mortgage debt. That along with auto loans accounted for the increase in the prior three months. Student loan balances declined in the second quarter due to fewer new originations along with select forgiveness programs kicking in.
Analyzing the consumer debt does point to a possible return to normal on credit card delinquencies. From 2017 to the start of the pandemic, credit card delinquencies held in a narrow range around 2.5%. The stimulus programs allowed consumers to both pay down debt as well as keep current on the balances. This is a clear indication that the stimulus was well in excess of what was needed. During 2023 credit card delinquencies have risen to 2.43% from 1.57% at the start of the year. Keep in mind, 1.57% was an all-time, historical low and was not sustainable. The key will be to see where the delinquency rate goes from here. Over 3% puts us in the historical range of 2000-2008. 2.5% to 3% was the average for 2012 to 2020. Over 5% was the average for the Great Recession.
Based on the first seven months of the year, 2023 is working on an inflation rate of 3.7% give or take. While the interest rate increases by the FED work in some areas, they have little impact in others. What is extremely concerning right now is that the rate increases do not appear to have had much if any impact on the housing market. Increasing rates should be slowing down the activity as well as dampening prices. In the July number, housing costs went up significantly in spite of the higher interest rates. 90% of the increase in the .2% inflation rate in July was related to housing. A number of areas including food, car prices and service sector prices all showed declines in pricing. Now in August fuel prices will be rising, so that will have an impact. Until the housing prices start to fall, it is going to be tough to get the inflation rate down to the 2% target.
Have a great week.
