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Post Recession: Have We Come to the Fork in the Road – How to Choose Which One We Take?

Posted by Jim Eckenrode, executive director, Deloitte Center for Financial Services, Deloitte Services LP, on September 24, 2013

Famous philosopher (and Hall of Fame catcher for the New York Yankees) Lawrence Peter Berra is famous for many quotes. Here are some:

“If the people don’t want to come out to the ballpark, nobody’s going to stop them.”

“Never answer an anonymous letter.”

And, “You can observe a lot by watching.”

Here are a few things I’ve observed recently, which cause me to wonder about the state of things as the U.S. economy continues its long recovery from the 2008 recession:

  • Housing prices in the Boston suburb where I live are nearing their pre-recession highs; 
  • Auto loan balances have been growing over the past 5 quarters at a rate not seen in a decade;1
  • Student loan delinquencies have been increasing steadily for a decade, except for one fairly steep drop from the 3rd quarter of 2012 through the 1st quarter of 2013.2

On the other hand:

  • After reaching peaks in the 3rd quarter of 2007, household debt service ratios and total obligation ratios have been in steady decline and in the case of the former measure, to levels not seen in 20 years;3
  • The Federal Reserve observed that a “modest” net percentage of banks reported increases in middle market and large corporate demand for commercial and industrial loans, as well as personal auto loans and credit cards – indicating that many commercial and retail borrowers remain on the sidelines. This, despite unchanged or easing lending standards.4

In our Banking Outlook for 2013, we wondered whether the changes in the marketplace were structural – and thus perhaps “permanent” – or merely cyclical. Now, what to make of these developments? 

Certainly, some of these trends can be attributed to the ongoing, but gradual, improvement in key economic conditions like unemployment. Looking at the Case-Shiller 20-city housing price index suggests that Boston is not the only place experiencing a rebound.5 Perhaps housing prices finally hit bottom in 2012 and are headed up again.

Pent-up demand plays a role as well; the average age of automobiles in the US reached a record high of 11.4 years in 2013,6 which may be behind the fact that, very recently, new car sales and thus auto loans, are at a level not seen since 2007.7

But in our 2013 Outlook, mentioned above, we also made the case for this being the “age of re-regulation,” where FSI profits might be expected to return to levels seen for most of the previous century. As an example, bank profits, as measured by return on assets (ROA), held pretty steady at an average of around 0.7% from the mid-1930s through to the late ‘80s. The thrift crisis and the rapidly developing impact of technologies, combined with meaningful de-regulatory actions, caused extreme variance in profit for a few years – and then bank ROA increased from 1994 through 2006 to an average of 1.3%, or nearly double previous averages8. So, regulation may also be a major determinant of future direction.

But back to the market – take a look at the attached chart. 

Sources: Personal Savings Rate, Federal Reserve Bank of St. Louis, FRED Economic Data; Household Debt Service Ratios, US Federal Reserve System

It’s pretty easy to discern the trends moving with some semblance of consistency: debt increased and savings rate decreased at the same time. Far be it from me to suggest a causal link; however, as households began to get their fiscal house in order post-recession, we see debt service declining and savings rates increasing. Not to the levels seen in the 80’s, mind you, but a clear pattern has been established. Maybe.

My observation is that we may have reached, at the least, an interesting inflection point. We have indications that the economy in general and the financial services industry in specific, are recovering and that people are getting back to some semblance of normalcy. Whether that normalcy mirrors the one from 1990 to 2006, or is instead some “new normal”, will play out over the next few years. 

Financial services companies would do well to consider whether or not they’re at the bottom of the lending cycle or not. For example, popular observation suggests that younger generations are now less inclined to take on debt for mortgages and cars as part of a lifestyle choice. The rebuttal is that they have little or no choice – that high amounts of student debt and unemployment among this cohort are largely to blame and as these issues are corrected, a new boom will happen. 

Similarly with savings: is saving “chic” now? Or is it merely dry powder that will be spent once consumer confidence is on more solid ground? Wealth advisors, asset management firms and banks might consider how to influence these trends through continued investment in innovative product development, planning tools and service experiences.

Much will be revealed in the coming months as to which way these trends may break. Or, as Yogi himself put it: “The future ain’t what it used to be.”

1 Historical Statistics on Banking, FDIC and Deloitte Analysis
2 Quarterly Report on Household Debt and Credit, Second Quarter 2013, Federal Reserve Bank of New York.
3 Household Debt Service and Financial Obligations Ratios, US Federal Reserve System.
4 Federal Reserve Senior Loan Officer Survey
5 S&P/Case-Shiller 20-City Composite Home Price Index, http://us.spindices.com.
6 “Average age of U.S. car, light truck on road hits record 11.4 years, Polk says,” Automotive News, Aug. 6, 2013.
7 “Honda, Toyota, Nissan set pace as August volume surges 17%”, Automotive News, Sept 4, 2013.
8 Historical Statistics on Banking, FDIC and Deloitte Analysis

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