Rising consumer debt also linked to lackluster retail results

Consumer debt, and not just wicked winter weather, is having a chilling effect on retail sales. Consumer debt rose by $241 billion in the fourth quarter of 2013, the largest period increase seen since the fall of 2007, according to a recent study by the Federal Reserve Bank of New York. 

At the same time consumers were taking on more debt, retailers from Abercrombie and Fitch to Wal-Mart reported lackluster sales largely blamed on inclement weather and deflationary margins. Fourth quarter revenue for Wal-Mart Stores Inc. totaled $129.706 billion, up 1.5% compared to the fourth quarter of the prior year but was below the consensus estimate of $130.23 billion. Operating income during the quarter was $7,347 billion, down 14.4% compared to the previous fourth quarter. Net income during the quarter was $4.431 billion, down 21% compared to the previous year.

Consumer indebtedness rose to $11.52 trillion as of Dec. 31, up 2.1% from the third quarter. The report found that 2013 was first four quarters to register a net annual increase ($180 billion or 1.6%) in debt since 2008. 
                                                                    
While consumer debt remains 9.1% below its peak of $12.68 trillion in the late 2008, relatively stagnant income among the shrinking middle class is problematic for sectors like retail that rely on discretionary spending.        

Rich Yamarone, chief economist with Bloomberg Brief, recently told The City Wire that he expects a tough year for retailers if they are depending on the middle to lower middle class consumers.

“Middle class and lower income consumers are having a tough time, paying higher taxes this year and Mother Nature isn’t doing anyone any favors. Budgets are tighter and there is less fuel in the tank to move this economy forward,” Yamarone said. 

He said as household debt levels rise, consumers will have less money for movies, dinner out or new clothes. 

Analysts note that most middle class consumers did not personally benefit from the wealth created last year with record stock prices and still have most of their wealth wrapped up in their homes. With that, the Federal Reserve study notes mortgage debt stood at $8.05 trillion at the end of 2013. For the full year, mortgage balances saw a net increase of $16 billion, ending the four year streak of year over year declines, the study notes. The balances on home equity lines of credit dropped by $6 billion (1.1%) and now stand at $529 billion.

The biggest drain on consumer balance sheets at the end of 2013 were $18 billion in new auto loans originated in the fourth quarter, $53 billion in added student loan balances and $11 billion charged to credit cards.

Experts warn that as consumers ante up for big ticket items like new cars, those are debts that will stay on balance sheets for an average of 48 months and longer. Phil LeBeau, a CNBC analyst, this week reported that consumers are borrowing a record rate to pay for their new rides. He said the average amount borrowed by car buyers last quarter climbed above $27,000 for the first time ever. Experian Automotive data show that the average auto loan in fourth quarter 2013 was $27,430 — an increase of $739 compared with the same period of 2012. The average used car loan was $345 higher, coming in at $17,974.

The increases mean higher monthly payments for longer periods of time. Experian said monthly payments are rising and expected to top $500 on average this year. J.D. Power said last week that February was on track to have one-third of new car auto loans extended out to six years because of the higher purchase prices and desires for lower monthly payments.

The Federal Reserve report also looked at consumer delinquencies and found auto loan performance to be stable with 3.4% of the notes at least 90-days past due.The number of credit inquiries within six months – an indicator of consumer credit demand – remained unchanged from the previous quarter at 169 million.

Looming student loan debt is also a major concern. Student debt rose $53 billion in the recent quarter to $1.08 trillion. More than 11.5% of student loans are 90-days delinquent or in default.

"Young people with student loans are less likely to buy a house or a car or contribute to a 401(k), said Wilbert van der Klaauw, a senior vice president of the New York Fed's research and statistics group.

The report notes that young consumers with large debts will have less spending power until the debt is satisfied as student loans are not dischargeable by bankruptcy.