MacroMonitor Market Trends May 2008

MacroMonitor Market Trends highlights topical news and trends of interest to you and your colleagues. If you would like more information about the items in the newsletter or would like to discuss other ways that we can assist you in your research and marketing efforts, please contact us.

In this issue:

The upheaval in the financial markets, triggered by the subprime mortgage crisis, continues to roil various sectors of the economy. This newsletter highlights three areas of potential consumer anxiety resulting from the current credit crunch's domino effect:

Higher Education: Further Out of Reach for More U.S. Households?

For the estimated 20 million U.S. households with children ages 12 to 17, planning for college just became a little more worrisome. Many financial providers are exiting the student-loan business as investors, spooked by the mortgage crisis, shun bonds backed by student loans. This contraction in the student-loan market heightens the uncertainty for many households whose home equity may no longer be a viable source for funding their children's college education.

Middle-income parents who may be too rich to qualify for need-based loans but too poor to afford the full cost of higher education will face an increased quandary about how to fund their children's college education. If their home equity can no longer serve as a cash cow, will they risk dipping into their retirement savings to send junior to college? The 2006–07 MacroMonitor estimates that about 46% of U.S. households with children ages 12 to 17 (more than 9 million households) are middle-income households.

For the estimated 4 million U.S. households with children ages 12 to 17 that are low-income families, the viability of their children's going to college has become more uncertain than ever. Given that government studies show that "the more you learn, the more you earn," the contraction in the student loan market potentially threatens the prospect of economic mobility for a growing number of households.

Figure 1: U.S. Households With Children Ages 12 to 17, By Socioeconomic Level

Vehicle-Loan Deals for Credit-Challenged Consumers

As the U.S. economy continues to falter, vehicle manufacturers report a declining demand for autos and trucks in the United States. At the same time, the American Bankers Association reports increasing delinquency rates on auto loans. Amid this environment, Chrysler recently announced a plan to offer lower car-loan rates to people with B-tier credit—that is, to people with less than stellar credit ratings.

This bid to help credit-challenged customers may prove to be both a boon and a bane for the industry as well as for the consumer. Although lower interest rates may bolster short-term auto sales, dealerships and auto-finance companies may find themselves more exposed to loan-default risk. For most U.S. consumers, a vehicle is necessary transportation to work, and the chance to buy a new vehicle with low monthly payments certainly will help the household budget. But just as many people found themselves with more house than they could afford, many people may find themselves with more car than they can afford. This prospect does not bode success for the financial stability of many households or for the economy.

In 2006, among the MacroMonitor Age Cohort segments, Gen X/Y households have the highest average monthly car-loan payment ($558). Moreover, between 2002 and 2006, this segment's monthly average loan payments increased by 36%, in comparison with a 14% increase among households overall. Given that Gen X/Y households generally have lower incomes than older working households (in 2006, the average household income for Gen X/Y was $68,000, in comparison with $80,000 for Boomers), it will be no surprise if companies financing auto loans experience higher default rates in the coming months among this younger group of consumers.

Figure 2: Average Monthly Auto-Loan Payment among Vehicle Owners, by Age Cohort

Cloudy Retirement Prospects for Women

Declining stock values and lower interest accruing on conservative investments are contracting retirement savings balances. For the 22 million U.S. households with a primary head on the verge of retirement (that is, 55 years of age or older and not currently retired), the prospect of retirement could be daunting given that little time remains for the household to recoup losses to its investments. For the subset of households headed by a single woman, retirement anxiety is likely to be more intense.

According to the MacroMonitor, among households nearing retirement and headed by a single woman, the 2006 average retirement savings balance is a mere $86,000. This amount is roughly half the balance held by households with a male head only ($175,000) and just more than one-third of the balance held by those households with two heads and wherein the primary head is nearing retirement ($224,000). Women's low retirement balances are likely the result of their historical lifetime earnings' being lower than those of men and their being more likely to work at low-wage or part-time jobs. Moreover, women in general are more likely than men to drop in and out of the work force to take care of children or aging parents. So, although many older workers are anxious about their ability to retire comfortably, older women who are single, divorced, or widowed face a much more dire situation.

Figure 3: Average Balance in Retirement Savings among Nonretired Households with a Primary Head Age 55+ Years