You know how I’ve been saying we’re headed toward a recession of some sorts?
Well, I think it might already be here… but not officially.
To explain what I mean by that, let me tell you about “Dean.”
Dean has got it made, financially speaking. He started out owning some retail stores, got into the hotel business, and now owns a large subprime car lending business.
And he’s making money hand over fist there, as far as I can tell.
His business is expanding at a very nice clip, and he’s relocating his headquarters to a new building in Spartanburg, South Carolina, where I live. I’ve been watching the mixed-use project unfold in real-time.
That’s great for Dean, and I truly wish him the best. But I don’t think an expanding subprime loan company is a good indication of economic health for the larger country.
To be clear, subprime loans are those made at higher interest rates to people with lower credit scores. And because the borrowers in question have damaged or less established credit history – not to mention the higher lending fees that make it more difficult to pay down their debt – they tend to default more.
We saw how poorly this kind of setup ended in 2008, when the housing market bubble didn’t just pop. It exploded.
There were simply too many people taking out too many bad loans… and too many people profiting from a system built on those bad loans (myself included, I’ve come to realize)… to keep the housing market sustainable.
Today, of course, the housing market isn’t booming. There’s no house flipping. No real estate overbuilding, either on the residential or commercial side.
But that doesn’t mean people aren’t living on borrowed money. Or that the economy isn’t operating on borrowed time.
Redefining Recessions
Now, I know the idea of being in a recession or not being in a recession is a sore point for many.
Back under Biden, we had two consecutive quarters of negative growth in 2022. Yet the National Bureau of Economic Research, which officially announces such things, refused to do so.
Whether correctly or not, it said that other factors indicated needed to be taken into account. In which case, I’ll use the same kind of argument for today’s analysis.
GDP might not be shrinking, but other areas of American existence indicate economic issues. And some of them are significant.
The subprime loan situation is one such consideration.
We learned last month, for instance, that the 60-plus-day delinquency rate for subprime auto loans jumped by 6.15% in December. That’s an all-time record increase, according to ratings agency Fitch, which has been studying such data for more than 30 years.
Now, it should be noted that prime auto loan asset-backed securities ("ABS") continues to look “pristine” as Wolf Richter of Wolf Street recently reported. Those came in at 0.37% in December: nothing to talk about at all.
So the rich seem to be doing just fine, by that indicator. But even then, we have to recognize a few qualifiers.
For instance, Walmart (WMT) has reported the last several quarters that families making at least $100,000 in annual income are contributing more and more to its growth story. It’s only once you go up another wealth tier or two that the story shifts dramatically.
Earlier this week, everyone was reporting on Moody’s Chief Economist Mark Zandi’s latest remarks. With good reason considering the dichotomy he found.
Almost 50% of U.S. GDP, it turns out, is coming from those making $250,000 or more – a bracket that only accounts for about 5% of Americans.
At the risk of stating the obvious, that’s not good.
A Bumpier Recession Road Than Previously Thought?
Zandi told The Wall Street Journal that, “The finances of the well-to-do have never been better, their spending never stronger, and the economy never more dependent on that group.” That’s thanks to their tendency to own more investments and property – which are appreciating intensely.
But what happens if those fall?
Making the situation even more concerning is how this isn’t a new phenomenon. At least the lower classes struggling isn’t.
Even The Washington Post admitted 14 months ago that most Americans were hurting. “Rent, groceries, and other basic necessities still haven’t fallen back to pre-pandemic prices,” it noted. “And consumer confidence doesn’t match the sunny economic outlook for 2024.”
Truth be told, it’s been a struggle ever since inflation began ramping up in 2021… and one that keeps building off itself, as evidenced by how U.S. credit card debt hit $1.17 trillion in the third quarter of 2024. That was a $24 billion uptick over the second quarter and 8.1% higher than the third quarter of 2023 and a record amount.
At the time.
Two weeks ago, we learned that figure rose again in the fourth quarter, this time to $1.21 billion. In addition, the Federal Reserve Bank of New York reported, auto loan balances rose $11 billion to $1.66 trillion. And overall household debt came in at $18.04 trillion – a $93 billion increase.
So, yes, it’s no wonder that Dean’s subprime loan business is growing. Because the number of distressed consumers is growing first.
Now add in President Donald Trump laying off tens of thousands of workers all at once. I fully support his efforts to clean up the federal government, but we do have to recognize the short-term consequences. And those are that the number of distressed American consumers will rise even more.
So are we in a recession?
Not an official one. Not yet.
But it might as well be one for millions of Americans.
I have full confidence in President Trump to make the longer-term picture intensely worthwhile. Please understand that all the optimism I expressed going into this year hasn’t gone away.
I just think we might see more significant bumps before we get there. In other words, prepare for some short-term before the long-term gains.
Remember that during recessions interest rates usually decline as demand slows, bond prices increase and the central bank eases monetary policy.
Accordingly, interest rates affect business cycles as well as real estate cycles. And as I explained in a recent article “U.S. consumers are feeling the pinch” and “we’re a bit overdue for a real estate recession.”
While the housing subprime meltdown set off the Great Recession, it could just be that Dean’s subprime car lending business is the tipping point for the garden variety recession that I’m predicting later this year.
Meanwhile, I’ll keep my eyes open for the brand-new office building…
Regards,
Brad Thomas
Editor, Wide Moat Daily
MAILBAG
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