April Odds and Ends

I enjoy examining data. It used to be a hobby that I got paid to do. Now, it is just a hobby. Below are some random sets of data of that I found interesting. Perhaps some others will, too.

As shown in Chart 1, starting in 2022, household interest payments as a percent of their after-tax income (Disposable Personal Income) started rising after declining in 2020 and 2021. By Q4:2023, household interest payments as a proportion of after-tax income had moved up to 5.4%. This compares with 5.0% in Q4:2019, just before the Covid pandemic hit the US. Notice that the main driver in of this proportional increase in household interest payments has been non-mortgage debt. With many 30-year home-mortgage rates locked in at around 3% in 2020 and 2021, households have been able to increase their spending relative to their after-tax income by increasing consumer loans, such as credit card and auto debt. Although household debt-service ratios are rising, they are a far cry from those that obtained just before the onset of the Global Financial Crisis, but …

… banks are starting to report rising delinquency rates on consumer loans (see Chart 2). For all insured commercial banks, the delinquency rate on consumer loans in Q4:2023 reached 2.62%, surpassing the 2.47% of Q1:2020. Again, 2.62% is a far cry from the 4.50+% delinquency rates experienced in 2009. The biggest delinquency problem seems to be housed in smaller banks (the blue line in Chart 2). At 2.97% in Q4:2023, the consumer-loan delinquency rate for smaller banks is closing in on 3.17% set in Q4:2008.

The Federal Reserve Bank Quarterly Report on Household Debt and Credit shows balances delinquent at least 30 days but less than 90 days as a percent of outstanding balances have been rising for both credit card (blue bars) and auto loan (red line) debt (see Chart 3). For both credit card and auto loan debt, newly-delinquent debt balances as a percent of total outstanding balances in Q4:2023 were the highest since 2011.

The Federal Reserve remits to the US Treasury the amount of its revenues that exceed its expenses. The Fed’s principal source of income is the interest it receives on the securities it owns and loans that it made. Up until October 2008, the Fed’s principal recurring expenses were the salaries paid to the largest staff in the world of crack economists, salaries paid to other harder-working support staff, supplies and utilities. Starting in October 2008, the Fed began paying interest on the reserves it created. These reserves are held by depository institutions, primarily commercial banks. As of February 2024, 81.3% of the Fed’s portfolio of Treasury securities had a maturity greater than one-year. Plotted in Chart 4 are the monthly average interest rates on the interest the Fed pays on the reserves it has created, the 1-year constant-maturity Treasury security, the 5-year constant maturity Treasury security and the 10-year constant maturity Treasury security. Starting in December 2022, the interest rate the Fed paid on reserves exceeded the yields on Treasury 5- and 10-year securities. In other words, the Fed was experiencing negative carry on its Treasury portfolio.

The negative carry that the Fed experienced on its portfolio in 2023 resulted in a net operating loss, which, in turn, meant that the Fed was unable to remit funds to the Treasury for the first time since at least 1954 (when the series began). Rather, the Fed, in effect, incurred a debit balance with the Treasury in 2023 to the tune of $115.7 billion, which represented about 1.8% of total federal expenditures in calendar year 2023 (see Chart 5). The Fed will not be remitting any funds to the Treasury going forward until it has a cumulative net operating surplus equal to $115.7 billion and any accumulated further losses. When the Fed does not remit funds to the Treasury, the Treasury either has to borrow or tax more to fund a given level of expenditures.

The Fed’s net operating deficit in 2023 also affected the financial sector’s profits as calculated in the GDP accounts. According to the GDP accounts, the US financial sectors profits slipped by $41.8 billion in 2023 compared to profits in 2022 (see Chart 6). But, this decline in 2023 financial sector profits was due to the Fed’s loss of $143.8 billion, as calculated in the GDP accounts. After excluding the Fed’s 2023 loss, private financial sector profits actually increased by $157.3 billion in 2023 vs. 2022. All that interest paid by the Fed on reserves held by depository institutions probably boosted the 2023 profits of the private financial sector.

As an aside, the Fed started paying interest on reserves in October 2008 in order to induce banks to hold an excess of reserves so as to prevent the federal funds rate from falling below its target rate of 1.00%. By December of 2008, the Fed had dropped the lower bound of its target range for the federal funds rate to zero %. So, the Fed could have eliminated paying interest on reserves at that point. But, if the Fed had ceased paying interest on reserves in December 2008 after having instituted the payment in October 2008, would not that have made the Fed look to be incompetent? Don’t get me started on why the Fed targets an interest rate rather than a monetary quantity.

Lastly, the month-to-month increase in February 2024 Personal Income of 0.28% seemed small to me considering that Employee Compensation increased by 0.70%, the largest monthly increase since January 2023. The mystery was solved when I looked at the component of Personal Income, Receipts from Assets, which includes interest and dividend payments received by households. This component of Personal Income contracted by 2.07%, not annualized, in February 2024 (see Chart 7). Interest income contracted by 0.39%, whilst dividend income contracted by a whopping 3.66%, again, not annualized. When Receipts from Assets is excluded, Personal Income in February increased by 2.35%, not annualized. So, one issue regarding the near future behavior of Personal Income is whether or not the large decline in Income Receipts from Assets was a one-off event. I think so. Regarding Employee Compensation in March 2024, we will get some pertinent information on this with the release of the March Employment Situation on Friday, April 5, 2024. As always, be aware that these are preliminary data. They will revised many times until we know the “true” state of Personal Income in February 2024 or March, for that matter.