The recession hiding behind Wall Street’s record highs – The Washington Post

Wall Street may have set new record highs this week, but the rally is masking an uncomfortable truth: Corporate America is still in the midst of recession.

Companies have begun announcing earnings for the second quarter, and the results are not expected to be pretty over the next few weeks. Analytics firm FactSet estimates profits in the Standard & Poor’s 500-stock index will fall 5.6 percent compared with a year ago — the fifth straight quarter of decline. The contraction has been so prolonged that investors consider it an “earnings recession.”

[Dow follows S&P to record high]

Corporate earnings are supposed to be the bedrock of stock market value, but at the moment, they appear to be pointing in opposite directions. Energy companies have been devastated by falling oil prices. Multinationals have been hamstrung by the stronger dollar. Banks have been hammered by ultralow interest rates.

The gloomy reality comes amid growing warnings that the risk of a full-blown recession is rising — not only for the United States, but also the broader global economy. Britain’s decision to leave the European Union is also sowing uncertainty in financial markets and threatening to undermine the recovery in the United Kingdom. One of the most pessimistic forecasts came from Deustche Bank this month, predicting a 60 percent chance of a downturn in the United States over the next year.

That all sounds pretty dismal, and it makes the record highs set this week by both the S&P 500 and the blue-chip Dow Jones industrial average even more perplexing. At least part of the rally — and, some analysts argue, most of it — is the result of the signals from the world’s central banks that the era of easy money is far from over. But investors are also betting that corporate America and the broader economy are turning a corner, if they’re not already back on track.

Many analysts think the earnings contraction that started in the second quarter of 2015 bottomed out early this year. Profits fell 6.7 percent in the first quarter compared with a year ago, which makes the 5.6 percent estimate for this quarter look a little rosier. The outlook for the third quarter is even better, with analysts forecasting a milder decline as oil prices and the U.S. dollar stabilize.
Then there was a blockbuster report from the Labor Department showing rock-solid job growth of 287,000 jobs in June. That gave many investors confidence that the U.S. economy was weathering the global storm, especially after the exceptionally weak addition of just 11,000 jobs in May. On top of that, a new prime minister has been selected in Britain, a step toward resolving the political turmoil that has roiled markets.

[Opinion: Theresa May must contain the Brexit damage — and more]

Anthony Valeri, investment strategist for LPL Financial, analyzed the S&P’s 12 earnings recessions since 1954. Nine of them were accompanied by economic recessions a year before or after, although the depth and duration of the downturns varied widely.

Three earnings recessions have not been tied to broader distress. The first two occurred in 1967 and 1985, which he notes are periods in which the federal deficit was increasing, rather than decreasing as it is now.

The third is the one we’re in right now, and it is not done playing out.

 

U.S. Regulator Flags Concerns About Growing Auto-Loan Market

 

WASHINGTON — A U.S. financial regulator is growing worried about increasingly risky practices in the auto-lending market, an area of growth for banks.

The Office of the Comptroller of the Currency, in a report released Wednesday, singled out concerns in the “indirect” auto lending market, in which banks buy up loans originated by car dealers. The regulator said it’s concerned about signs of loosening lending standards, including more loans to borrowers with weaker credit.

“These early signs of easing terms and increasing risk are noteworthy,” the banking regulator said.

Associated Press

Banks saw auto lending grow nearly 13% compared with a year earlier in the fourth quarter of last year and the OCC said it’s worried about growing losses in the industry. Average losses per vehicle have “risen substantially in the past two years.”

The average loss on a defaulted auto loan rose to more than $8,500 in the first quarter of this year, compared with $7,400 a year earlier, according to a May report by Experian PLC.EXPGY +0.18%

Auto lending has been a big area of growth for banks as demand for credit cards and other consumer loans has remained tepid.

U.S. Bancorp USB +0.14%, the largest U.S. regional bank by assets, has been “moving more aggressively in auto loans,” Chief Executive Richard Davis said during an investor conference earlier this month.

Wells Fargo WFC +0.21% & Co., the fourth-largest U.S. bank by assets, has expanded its auto-lending business significantly. The San Francisco-based bank’s auto-loan portfolio increased 11.3% in the first quarter to $52.6 billion.

Wells Fargo has improved its credit quality in the auto-lending business in recent years, Thomas Wolfe, executive vice president of consumer credit solutions for the bank, said during an investor presentation in May. “We have moved upstream slightly,” he said, adding that the bank does “a lot more prime financing than we do non-prime or subprime financing.”

Total outstanding U.S. auto loans have risen to $875 billion in the first quarter of 2014, the highest level in more than a decade, according to Federal Reserve Bank of New York data.

Earlier this month, General Motors Financial Co. sold off its largest bond backed by subprime auto loans since 2007, garnering the lowest yields in more than a year compared with an interest rate benchmark.

Bond investors have gravitated to auto loans because delinquencies are low and the bond deals weathered the financial crisis with few rating downgrades, a stark difference from bonds backed by home mortgages.

The auto-lending market faces regulatory inquiries as well, The Justice Department and Consumer Financial Protection Bureau have been investigating whether lenders’ practices have led to discrimination against women and minorities.

 

Bloomberg: Americans Due to Replace Oldest  Goods Since JFK; Jewelry? FDR

By Michelle Jamrisko – Dec 3, 2013 8:37 AM ET
Victor J. Blue/Bloomberg
Customers try out mattresses in the showroom of an Ikea store in the Brooklyn borough of New York City.

Americans have been holding on to their wobbly washing machines and sagging sofas even longer than their grandparents did 50 years ago, setting the stage for a rebound in consumer spending as old household goods wear out.

The average age of consumer durable goods — long-lasting items such as furniture, appliances and computers — is the highest since 1962, according to data from the Bureau of Economic Analysis dating to 1925. Among things Americans are keeping for the longest time: jewelry and wristwatches and home and garden tools like lawnmowers.

Replacement purchases, overdue after the worst recession since the Great Depression, would boost the consumer spending that accounts for 70 percent of the economy. Automobilesales are headed for their best year since 2007, showing Americans have the financial security to buy more expensive items, and economists say that means household-goods sales will pick up.

Such purchases are “postpone-able for only so long,” said John Silvia, chief economist for Wells Fargo Securities LLC in Charlotte, North Carolina, the biggest U.S. mortgage lender. Increases in home values, along with gains in consumer confidence, incomes and employment from recessionary lows, make “people sense it’s worth putting money back into that house” with purchases such as appliances, he said.

Cars and luggage were the only two of 17 categories the BEA tracks that saw a decrease in average age in 2012, according to the data released Nov. 14. The average age of jewelry was 5.3 years, the oldest since 1942, while that of home and garden tools was 5.1 years, the highest since 1961. The categories include products that typically last at least three years.

Replacement Pattern

The data show a replacement cycle that started in the post-World War II era as people moved to the suburbs and made purchases to set up their households, said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.

The average age of goods rises during an economic downturn, and “towards the middle of an expansion, you tend to see these numbers start to come down, and that means people are buying more stuff,” said Dutta, who projects durables purchases will pick up next year.

Appliance maker Whirlpool Corp. of Benton Harbor, Michigan, expects bigger gains in 2014 from people replacing aging goods, Bob Bergeth, the company’s general manager of national contract builder sales, said in a telephone interview. “There is quite a bit of pent-up demand,” he said.

Broken Burners

“People who have lived with one burner or two burners on their stove that have been working now feel more secure in their job outlook and employment and even wage increases,” Bergeth said. “They’re increasingly coming back into the market and replacing that range.”

Manufacturing in the U.S. accelerated in November at the fastest pace in more than two years as companies boosted production to keep up with growing orders, figures from the Institute for Supply Management showed yesterday.

Steven Orlikowski, a software developer in Houston, said he’s ready to replace the five-year-old computer he’s been getting along with since he “rediscovered thrift” after losing his job in 2009.

The 36-year-old, who has since found a new job, said he’s shopping this week to take advantage of holiday discounting.

“I’ve got to replace it, because that one is pretty much dead in the water,” he said. “I’m in a good position right now” to make more expensive purchases.

Lifting Growth

A jump in household durable-goods demand would help lift U.S. growth that is little changed from last year’s 2 percent average annualized rate. Gross domestic product expanded at a 2.1 percent rate so far in 2013 and 2.3 percent since the recession ended in June 2009.

Consumer spending in the three months ended September rose at the slowest pace since 2011. That reflected the weakest gain in four years in expenditures for services such as haircuts or consulting and doesn’t mean Americans aren’t willing to make lasting purchases, Dutta said.

Rising property values and sustained home sales in the face of climbing mortgage rates give businesses such as Lowe’s Cos. confidence that consumers have only started to swap out old household goods.

There is “an emerging willingness among consumers to finally replace items that are worn or outdated or to make significant enhancements to their homes,” Gregory Bridgeford, chief customer officer at the second-largest U.S. home-improvement retailer, said on a Nov. 20 earnings call.

Slow Build

Even so, “it’s a slow build,” he said.

One reason: Consumers are reluctant to take on more debt after the recession forced them to clean up their finances.

Household debt as a share of income was 92.2 percent last quarter, a decade low and down from its peak of 114 percent in 2009. The debt-service ratio, which measures how much income is devoted to paying off obligations, has also steadied after dropping last year to a record low.

Thirty-six percent of consumers listed keeping current on bills as their top financial priority, according to a Bankrate.com survey conducted Nov. 7-10. Twenty percent prioritized paying down debt and 18 percent said they were most concerned with saving money.

Revolving debt, which includes credit-card spending, shrank by $2.1 billion in September, the fourth straight month of declines and the longest such stretch in almost three years, according to Federal Reserve data. Non-revolving credit, which includes financing for college tuition and autos, increased $15.8 billion.

Casual Spending

Those figures show consumers are less likely to run up credit-card balances with casual expenditures such as movie tickets or restaurant meals, Silvia said. That doesn’t mean they’ll continue to put off major purchases, he said.

“A number of people will have to come back and say OK, I’ve postponed this now for three to five years, we really need to get it done,” Silvia said.

If so, they may find financing more readily available as banks ease standards for consumer loans. Among 70 banks polled for the Federal Reserve’s quarterly senior loan officers’ surveyin October, all said credit standards for consumer loan approvals were either unchanged or had eased somewhat. All 65 banks who responded specifically about approving auto loans also said the standards had stayed the same or loosened.

Cars and light trucks sold at a 15.2 million annualized rate in October, the 12th consecutive month above the 15-million mark for the longest streak since February 2008. The rise has supported companies such as Fort Lauderdale, Florida-based AutoNation Inc., the largest U.S. retailer of cars and trucks.

“The auto-credit environment remains strong,” Chief Executive Officer Michael J. Jackson said on an Oct. 24 earnings call. Further sales gains are “dependent upon the fundamental strength of the economic recovery in the U.S. and whether the employment picture has significantly improved from what it is today.”

To contact the reporter on this story: Michelle Jamrisko in Washington atmjamrisko@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

AUTO THERAPY Americans are bingeing less on houses and more on cars

AUTO THERAPY

Americans are bingeing less on houses and more on cars

By John McDuling @jmcduling 7 hours ago

Easy street. Reuters/Rebecca Cook

November sales figures for Detroit’s “big three” automakers are out, and like last month, they’re looking good:

It’s a good sign for the US economy, given that automakers are both a huge employer and a major customer for other industries. It’s also further vindication for the Obama Administration’s 2009 bailout of the sector.

But as we’ve previously discussed, there’s good reason to be at least slightly concerned: The boom in auto sales coincides with a massive increase in cheap auto loans, many of which are subprime. These loans are packaged together and sold on to increasingly yield-hungry investors. Issuance of securities backed by subprime auto loans have more than doubled since 2010 to $17 billion this year, but remain below their 2005 peak, Businessweek reports, citing Deutsche Bank.

What’s more, a recent survey of auto dealers by UBS found that lending standards for financing auto purchases have been easing since mid-year. The chart below shows the percentage of auto dealers who think lending standards are getting tighter versus more lenient:

​UBS

Neither Wall Street or Main Street seems all that concerned. UBS is forecasting arecord year for GM in 2014, with its North American profit to increase by some $2 billion, up 27% from this year. Auto dealers, according to the UBS survey, expect industrywide car sales to increase by 2.6% in 2014.

Of course, surging auto debt comes at a time when falling credit card debt has been falling sharply. Slate’s Matt Yglesias has argued that credit card lending standards have tightened far more than auto lending standards have since the financial crisis. He puts this down to the greater strength of the car lobby relative to the banking lobby. The UBS survey supports this notion. Most dealers say warnings from the Consumer Financial Protection Bureau have had no impact on lending practices this year, as shown in the chart below.

​UBS

The pressing question these numbers raise is whether consumers are shifting their spending and debts from credit cards to auto loans. The New York Fed’s latesthousehold debt and credit report shows that while housing debt has fallen since 2008, non-housing debt, which includes credit cards and car loans, is actually back at pre-crisis highs.  If consumers are piling up on auto loans, the economy may have moved on to its next bubble.

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