Federal Reserve Chairman Jerome Powell and US Treasury Secretary Janet Yellen.
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Torsten Sløk, a chief economist, shared at a forum his 10 “downside risks to the US economic outlook.”
Climbing delinquency rates for consumer loans is one risk.
Sløk also sees the federal student loan payment restart as another risk.
Over the past few months, economists have been noting how the economy’s progress has shattered expectations. The next year, though, may not be so smooth sailing.
Torsten Sløk, chief economist at Apollo Global Management, highlighted at the Fall 2023 Stern Economic Outlook Forum on Tuesday, hosted by the NYU Stern School of Business, some risks to the quickly improving US economy. That included the resumption of student loan payments, rising delinquency rates, and slowing economies of US trade partners.
Inflation has generally been coming down since peaking last year, in part due to 11 interest rate hikes by the Federal Reserve. Many believed that to bring inflation down, unemployment would have to rise and stay elevated, though this has not happened so far, and economist Paul Krugman even said on Wednesday, “the war on inflation has been pretty much won — without a recession.”
But despite the current run of pretty good economic news, Sløk sees trouble ahead. By raising interest rates, the Fed “wants us to buy fewer cars. They want us to buy fewer homes, they want us to spend less money on our credit cards,” Sløk said at the forum on Tuesday. “They want companies to spend less money on capex,” or capital investments. “They want companies to hire fewer people. That’s exactly what’s happening.”
At the Tuesday forum, Sløk talked about “downside risks to the US economic outlook,” from the impact of higher-interest payments to the price of oil increasing.
Sløk said taking all the risks he described together, “the near-term outlook is unfortunately still that we are about to see some more downside risks to growth.” Below are the 10 risks he noted.
1. Households running out of excess savings
Sløk pointed to a San Francisco Fed report suggesting that US households are running out of their excess savings accumulated during the early stages of the pandemic and amid waves of government stimulus.
“Our updated estimates suggest that households held less than $190 billion of aggregate excess savings by June,” a San Francisco Fed blog post published in August said, a big drop from the accumulated excess savings of about $2.1 trillion by August 2021. “There is considerable uncertainty in the outlook, but we estimate that these excess savings are likely to be depleted during the third quarter of 2023.”
Sløk said people ramped up spending after the world reopened — perhaps participating in “revenge travel” after not being able to during the pandemic, watching a concert, and doing other outings.
There are signs that a drop in savings could be making it harder for Americans’ to keep up with paying off debt. “The issue now is that the excess savings running out in particular for some income categories is already showing up in a number of areas, in particular in delinquency rates for consumers beginning to move higher for certain segments of consumers,” Sløk said.
2. Student loan payments restarting
“Borrowers are not ready to resume payments,” Persis Yu, deputy executive director at the Student Borrower Protection Center, said per reporting from CNBC. “Even if the risk from the virus has diminished, the financial fallout has not.”
The new monthly bill for millions of Americans could eat into spending. Sløk said maybe “we will already begin to see the data in retail sales spending and consumer spending more broadly start to slow down over the coming month.”
Jan Hatzius, chief economist of Goldman Sachs, also noted this restart as one reason behind potential “somewhat weaker growth in the next few months.” Hatzius said during the event that Goldman Sachs estimated borrowers will have to pay between $60 billion and $70 billion more on an annualized basis.
“That’s about 0.3% of disposable income,” Hatzius said. “We think it’s probably a hit to consumer spending of about 0.2%. So it’s still a relatively moderate drag and shouldn’t really derail the continued growth and consumption.”
3. Delinquency rates rising for credit cards and auto loans
Data reported by the New York Fed showed the rate for new credit card delinquency was 7.2% in the second quarter of this year, more than the 4.8% in the second quarter last year. For new auto delinquencies, this has climbed from about 5.6% in the second quarter last year to 7.3% in the second quarter of 2023.
Credit card debt also reached a series high that quarter, standing at $1.03 trillion in the second quarter.
Sløk said households falling behind in credit card payments are ones “with generally lower savings, lower incomes, lower FICO scores.”
4. Default rates rising for corporate loans
Sløk said the US is seeing a significant move higher in default rates for business loans. Sløk said news headlines everyday show how there are plenty of companies that cannot get new loans or roll over existing loans.
“In other words, monetary policy is working exactly as it was intended,” Sløk said.
“Now the level of the cost of capital has gone up so much that this is now beginning to have, every single day, implications for corporate spending and of course also for consumer spending,” Sløk added.
5. Interest coverage ratios falling for both investment grade and high yield business debt
Interest coverage ratios compare a company’s income to how much it needs to spend on paying back its debt. These ratios have been falling for both riskier high-yield and more stable investment-grade companies.
“The conclusion, of course, is that we have seen a significant increase in interest expenses also for investment-grade companies, and that’s why you’ve started to see in credit a fairly rapid decline in interest coverage ratios,” Sløk said.
6. Banking sector loan growth slowing rapidly
Sløk said since March, this sector “has been stepping fairly hard on the brakes.”
“That is now beginning to have more and more serious consequences,” Sløk said, adding that’s in terms of new lending to both consumers and corporates.
Fed data on commercial and industrial loans for instance shows some recent slowing. A chart from Insider’s Andy Kiersz also shows the ratio of commercial bank loans and leases to nominal GDP has been pretty much the same recently.
7. Oil prices rising
Additionally, gas prices accounted for more than half of the month-over-month increase in the Consumer Price Index from July to August, a Bureau of Labor Statistics news release said. The index for gas climbed 10.6% month over month in August, and the index for fuel oil surged 9.1% month over month.
8. China, Japan, and Europe slowing
A slowing European economy, in part driven by a looming likely recession in Germany, could have US trade implications. Additionally, though the US has been trying to diversify its supply chains abroad, it still relies on China for many crucial trade goods, which is hurting some major US companies.
“One worry is that with China slowing, that has some negative implications for Europe, and the implication of that for the US is still relatively limited,” Sløk said.
The big problem, Sløk said, is China’s growth slowing because of cyclical reasons, “meaning exports in China at the moment are falling 15% because Europe is slowing and the US is also gradually slowing.”
Sløk also said Japanese investors have been looking to invest in their own backyard and selling US Treasuries, “putting upward pressure on US rates.”
“The conclusion from that is still that global growth outside of the US is trending lower, and that is not a dramatic negative impact on the US outcome, but it’s enough to still make us a bit worried about what the implications are for US exports,” Sløk said.
9. Long-term interest rates rising for non-economic reasons
Long-term interest rates are on the rise, even though economic data on the whole is improving. The Fed is still doing quantitative tightening, which decreases the money supply in the economy. Meanwhile, the US recently received a long-term ratings downgrade by Fitch in August two months after the latest round of debt ceiling squabbling in Congress.
10. Higher-interest payments for the US government
Sløk also noted higher interest payments for the US government as another downside risk to the outlook. Projections published by the Congressional Budget Office show increasing estimates for the upcoming decades for federal interest payments as a share of GDP.