Macro-Level Credit Trends Affecting the Telco / Utility Space
You may have heard the stories from grandparents or great-grandparents who were Depression-era babies: tales of the “use it up, wear it out, make it do or do without” mentality were born from tough times. For the 13 million Americans facing unemployment in the 1930s — one-quarter of the workforce — it was a stark poverty that most of us would find hard to imagine these days. The Great Depression fundamentally changed the behavior of a generation.
The global financial crisis and ensuing Great Recession ended more than four years ago, but Equifax’s Credit Trends show the nation’s economy is still healing. In a manner similar to the Depression — but, of course, to a much lesser degree — the financial meltdown has also impacted the American psyche.
The disciplined consumer
Amy Crews Cutts, senior vice president and chief economist at Equifax, has examined the macroeconomic fundamentals and says a very consistent story has emerged: Consumers are buying, but promotions and sales are driving demand almost exclusively. This discount-driven economy is to be ignored only at the peril of stubborn retailers attempting to swim against the current. J.C. Penney is a high-profile case in point.
Dr. Cutts defines this new economic behavior as the “disciplined consumer.”
Imagine a person suffers a sudden medical scare. Even if the ailment is nothing more than a false alarm, it likely will inspire a campaign of self-preservation. The person begins an enthusiastic diet and exercise program to lose weight and increase cardio capacity. The fear of mortality truly serves as an effective motivator.
Financial fear can trigger the same defensive mechanism. Even if a worker remained employed during the Great Recession — and was never late paying on any credit obligation— the very idea that a way of life and financial security could be in peril causes a change in behavior.
So even though the stock market has rebounded and the unemployment rate has dropped 2.8 percentage points, American consumers are still acting as though they are suffering financially. Older workers are delaying retirement. Consumers may apply for and accept a new credit card, but they aren’t using it — or if they do, they’re paying the balance off in full before interest charges are incurred. Or they are opening retail card accounts for major purchases, segmenting them from their general purpose credit cards either to take advantage of special financing terms or to compartmentalize these expenses and reduce interest rate charges.
It is a new consumer paradigm.
Household growth: The fuel that drives telco/utilities
The telco/utilities industry cannot expand faster than household growth. Though the housing market has seen significant gains in all metrics, Dr. Cutts says every major indicator points to a prolonged recovery phase. Take for example the recovery in housing starts, which is an indicator of housing demand. As of August 2013 (the most recent information available, given the government shutdown), which is 51 months into the economic recovery, single-family housing starts are up 77% from their Great Recession low point set in March 2009, but we only surpassed the 50-year low, set in 1981 at 523,000 starts, in June 2012. That is, though we’ve come a long way in the housing recovery, we’ve really only improved to the previously worst bad point!
New homes are built because there is demand for them. Thus, there is significant pent-up demand for household formation. Based on averages from the early 2000s, the U.S. has an estimated deficit of nearly 3 million households that should exist but don’t because young people have returned to their parents’ homes or failed to set out at all when they reach adulthood, in addition to couples who want to separate but can’t for financial reasons.
Student loans: The next gen problem
Student loans are the only tradeline balances that have risen steadily since July 2005, when Equifax began tracking such information. Today, student loans outstanding total nearly a trillion dollars — $886 billion to be exact. At the start of 2007 they totaled exactly half that amount. This rise is due to more students taking out loans as other sources of family funds went away (financial investments, home equity, compensation bonuses, etc.), more people attending college or professional training than in pre-recession times and ever higher costs of tuition.
Meanwhile, the job market has not been kind to young people in particular, as they face a very high unemployment rate, and competition for jobs has kept salaries down for those lucky enough to get a job offer. According to calculations by the New York Federal Reserve Bank, using Equifax data, the average total student loan debt per person who had such debt was $25,000.
Being burdened with such a heavy debt load early on likely means that these students, particularly those in their early 20s, will delay major milestones of adulthood: getting their own place (rented or owned), buying a new car or starting their own business. On the whole, more investment in human capital benefits us all, and the person in particular, but if the returns to that investment are reduced or delayed by a weak job market, all of the economic benefits will also be delayed.
Job turnover: Rocky roads ahead
As a part of Equifax Employment Verification Services, our databases include detailed employment and income information provided directly by participating employers that is updated every time the employers pay their employees. Analysis of this data reveals an intriguing trend: Workers with long tenure in their current job — not their career, but in their current position — perform better with credit responsibilities. This includes credit cards, auto loans and mortgages — all facets of credit. Analysis on telecommunications populations shows a similar relationship between longer job tenure and better account performance.
Analysis also shows that employees who had a disruption in employment (quit, were fired, retired or were laid off) very recently (within the past 3 months) are 1.7 times more likely to go at least 90 days delinquent on their accounts than workers who are still employed. Higher risk among those who recently had a job disruption is evident in both prime and subprime populations. While overall delinquency rates are considerably greater among subprime consumers, the relative risk is greater to those who are very prime, i.e., prime consumers have a larger percent increase in delinquencies after a job loss than subprime consumers. Analysis on telecommunications populations shows a similar relationship between employment disruptions and increased write offs.
American consumers have been pummeled, but they are resilient. Capturing their now closely-held dollars will require timely promotions, tactical marketing and the exploitation of opportunities identified by insightful data.
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