to the Bureau of Economic Statistics, buyback programs increased from around 90 billion US dollars at the end of 2017 to approximately 225 billion dollars at the end of 2018, exceeding the record high of 175 billion dollars posted in 2007 by around 50 billion dollars.
As reported by the University of Michigan index, business and consumer confidence has dropped sharply from 35 points at the end of 2018 to around 10 currently, indicating that firms and private households now see less favorable economic prospects for the US economy. Given a slump due to heightened political uncertainty about future trade agreements and a cooling of our economy, capacity utilization in the US has also started to trend down, currently standing at 78% of total capacity. At the same time, the growth rate for manufacturers' new orders for non-defense capital goods has reached its lowest level since early 2017, while the rate for consumer durable goods has already dropped into negative territory.
Meanwhile, consumer-borrowing costs have started to rise. The commercial bank interest rate for credit cards reached 17% in the first quarter of 2019, while interest rates on car loans climbed by two percentage points in 2018 and now hover around 5%, reflecting the deterioration in consumer credit quality. For instance, the 90+ day delinquency rate on auto loans moved higher in 2018 and now stands at around 5%, very close to the level seen during the Great Recession of 2008. As 85% of new cars sold are financed by consumer loans, you can imagine what might happen if unemployment starts to rise. Delinquency rates could accelerate, credit supply may shrink, disposable income will likely plummet, and consequently private consumption could decelerate and push GDP growth into negative territory – causing a recession in the US.
Should such an event occur, we would likely recommend a reduction in real estate investments. However, from a practical short to medium-term perspective, resolution of the trade tensions between the US and China is of paramount importance to real estate. This should include removal of the tariffs recently imposed by the US and of the retaliatory ones by the Chinese government. Such a deal on the future structure of trade between the US and China would reduce uncertainty and hence unfreeze investment spending.