I wrote this on Friday, before this week’s college games, but I have a bone to pick with the AP top 25 from last week. Alabama survives by the skin of their teeth against an unranked at the time Texas and only falls one spot? Really? Ohio State handily beats sixth ranked Notre Dame and stays put? Georgia plays the little sisters of the poor and only wins by double digits, 33-0? And they get placed #1? Sorry, The Ohio State should be Number 1 in my book.
With the producer price index down, can we say we are past peak inflation? Not really. Getting behind the reason for the decline of the overall PPI indicates inflation will be here for quite some time. The only reason the PPI dropped in August was the fall of energy prices. Gasoline alone fell by more than 12.7%. This was after a drop of 7.7% in July. Food prices actually increased .2% in August. The rate of decline in energy skewed the overall number. When you look at the core, less food and energy, the PPI rose .4%. While the level of acceleration appears to be moderating, supply issues as well as government spending continue to feed inflation. We are also starting to see the wage/price spiral beginning with recent union settlements. With the recent legislation that was approved, debt forgiveness as well as the wage contracts that are being approved, inflation is going to be with us for some time.
The inflation impact continues to decimate the mid, middle class and lower households. We saw this first a couple of months ago with shifting buying habits. More people are shopping at lower cost retail providers. We saw the early warning shoots of lower discretionary demand on lower cost items. More recently two red flags have been raised. The first is the increase in buy now pay later programs offered by many non-bank credit providers. This is a sign that consumers are short of cash and need some time to pay for purchases. Because the program offered no interest charge, only fees, many opted to use these programs instead of credit cards. However, if you miss the payment, the fees will bite big time, well in excess of the credit card interest levels. Originally these, buy now pay later programs were for larger purchases such as appliances, furniture, lawn mowers etc. In the past two months more consumers are using these programs at grocery stores, buying perishable items that will be long gone before they are paid off. This is especially dangerous for a family budget. Since June the level of past due payments on the Buy Now, Pay Later programs have skyrocketed, well above even credit card delinquencies. This is a big warning that many are no longer living pay check to pay check, but rather debt to more debt.
The level of overall delinquent loans in the US is also rising. The most recent report on credit card delinquency is at 1.81%, up from 1.56% just a few months ago. Specific banks, including Synchrony, are currently seeing credit card delinquency rates over 3%. Bread Financial is currently experiencing a 5.3% delinquency rate. The current default rate on auto loans has now hit 2.9% while Gen Z and Millennials are showing a staggering 4.35% default rate right now. While mortgage delinquencies are down from a year ago, they are still stubbornly high historically at 2.9%. Mortgage loans held by banks and thrifts are doing much better with a delinquency rate at .49%. These are typically loans to the safest of borrowers. A rise in this area would clearly indicate a very nasty period is ahead. For now we can say that the inflation rate is having a significant impact and will continue to do so, likely driving demand lower and producing a very difficult economic period for the next year or so.
While I like to use the corrugated paper numbers as a leading indicator, when they are not available, I look at delivery demand. Worldwide, companies like Fed Ex, UPS, DHL and others are all seeing demand soften quickly. Even Amazon is noted as seeing fewer orders. The consumer is cutting back, but it is more than just that segment. Businesses are not transporting as much as they have in the past via the normal delivery channels. With demand down and supply chain issues limiting the ability to sell what you do not have, shipping companies are watching revenues soften. Margins are also being squeezed as higher labor and fuel costs can not be fully passed on. This could be the Winter of our discontent.
Have a great week.