Signs of fatigue in the world's economic locomotive

The stock markets have continued to be as pathetic as day-old pastries.

In this post, let's highlight some interesting graphs on the market. Then we look at the poor news from the eurozone. Finally, we turn to the US, where the decline in households' appetite for borrowing and the rise in payment problems may point to economic fatigue. If the world's economic locomotive coughs, the rest of the world will get the flu.

Miscellaneous matters worthy of mention

I have collected a few individual graphs that I want to show to you, my esteemed reader, but this time I couldn't connect them to a larger whole. So, in this section, a bunch of disconnected topics and ideas will follow.

If your stock portfolio is flatlining, you're not alone. The average global equity is slumbering below its pre-pandemic highs. In fact, the investor has received zero return for the last six years if dividends are ignored. This graph shows equally weighted version of the global stock index MSCI World, where each stock has the same weight. It’s not dominated by large cap tech companies and therefore better reflects the fortunes of the average stock. The average share is going nowhere.

 
One reason behind the rise in global indexes (driven by large caps) this year may be portfolio managers jumping back on board. I often highlighted in this spring's posts how international portfolio managers with billions in assets under management kept equity weighting at historically light levels, according to the Bank of America Global Portfolio Manager Survey. At the same time, private investors did not budge. Now portfolio managers' equity weighting has started to rise again in a FOMO-like fashion, feeding the rise in share prices.

 

The same survey shows that after a brief period of distaste, portfolio managers have started to overweight technology stocks again. The sentiment bottomed out at the end of last year, when many technology stocks also bottomed out at the latest. Time will tell whether the overweighting of tech in institutional portfolios that prevailed in the 2010s will continue, or whether the recent popularity is just a momentary boost following the AI hype. Professional investors face intense pressure from clients to make money every week, which naturally makes them chase short-term returns.

Eurozone economy stalls

Yesterday's release of fresh purchasing managers' data for the eurozone for August reinforced the picture of a stagflationary economic environment, where the economy is contracting but overall price levels are rising. So, in layman's terms, conditions are getting worse.

Manufacturing has been in recession for some time, with the index reading below 50 for a long time, indicating a decline from the previous month.

The big news is that the much larger services sector is now also showing signs of shrinking. Overall, orders are falling and hiring is stalling, even as wages and costs continue to rise at a painful pace.

Nasdaq Helsinki and Finland are particularly affected by the news from trading partner Germany, where the figures were particularly poor.

All in all, the news points to a weak eurozone economy that may not be able to escape the recession unscathed. Time will tell when economic weakness cools prices and thus the European Central Bank could loosen the squeeze on interest rates in the economy.

Borrowing interest stalls in the US

In the economic system, debt is money. Borrowing fuels the economy in the form of consumption or investment and signals confidence in the future. A situation where debt is no longer palatable may imply budding economic weakness.

I read the New York Fed's latest report on the US household debt situation and debt growth seems to have stalled. This graph shows the total household debt, which is around $17 trillion, or $17,000 billion. It's easy to get carried away with such big numbers, but the entire US economy is about $25 trillion a year, or about 85 times the size of Finland's economy.



A breather of a couple of quarters is not yet a new trend, but debt growth has stalled in the past when the economy has started to weaken. Or economic growth starts to stall when the debt mass stops growing.

The largest chunk of the debt mass is mortgages, which shrunk in the second quarter.

Scorching house prices, brought on by a red-hot economy, could put the brakes on lending. In the face of high prices, the average 30-year mortgage rate in the US is hovering above 7%. The index measuring the affordability of housing relative to household income is at an all-time low.

Since house prices have not come down terribly from their pandemic-era bubble levels, the average American is unusually ill-equipped to buy a home. In fact, the housing price index has started to rise again, perhaps helped by limited supply.

In addition to housing, a critical expense for motorists is cars, whose prices have also gone through the roof. The average car loan carries an interest rate of 9.5% and the average monthly payment takes $750 from your wallet. That's a pretty hefty sum for the average Joe in the US. It’s no surprise that car loan payments that are more than 30 days overdue have seen a sharp upturn recently. This is despite a strong employment situation, which is interesting. I wonder what these statistics will look like if the employment situation would get worse.

Overall, the share of overdue loan payments has not yet risen above the very low level of a couple of percent, but if more wrinkles appear in car loans and student loans that will soon return from repayment holidays, this statistic will start to sour.

The mirror image of household loans is, of course, the stock of bank loans, which is updated weekly on the FRED website. The annual change in the stock of loans has turned negative for the first time since the financial crisis. Borrowing also grew furiously during the pandemic, so a small atrophy may be a normal breather. Time will tell how the crisis that shook small banks in the spring will be reflected in banks' appetite for lending.



To put it bluntly, the real printing of new money into the economy happens when a person or company walks into a bank to take out a loan. The central bank does not print money in the real economy, so to speak, but only an agent of the real economy can do so. This is why it is important to monitor the slowdown in loan growth.

Finally, as a reminder of the larger trend, although debt levels are at record highs in absolute terms, the major development since the financial crisis has been the moderation of relative debt levels. The ratio of household debt to GDP is hovering below 80%, compared to over 100% in the financial crisis. Many households' mortgages are locked in for years to come at a previous lower interest rate. The pandemic-era stimulus strengthened household balance sheets and borrowing as a share of total income remains at historically low levels. Thus, the recent deterioration may also be a return to normality.

Hence, households are much stronger to weather future economic storms than in the financial crisis, to which economic downturns are still often compared.

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