Q2 2019 data releases are complete, and that means it’s now time to review second quarter market conditions for the U.S. accounts receivable management (ARM) industry and discuss what you should look for in the second half of 2019. Following a few historical revisions to prior quarters’ data points, we saw continued growth in market conditions for the second straight quarter with consumer demand serving as the largest overall driver for growth.

More importantly, Q2 2019 came in at an index value of 123.19. This indicates that the ARM index grew by 1.7% on a quarter-over-quarter basis with an annualized growth rate of 6.9%, which may sound great, but aligns with historical trends for a strong second quarter performance. However, the second quarter – typically the strongest quarter – performance didn’t have as much growth as the first quarter of 2019. While this could be a matter of future revisions, it may be an indication that U.S. economic conditions could be deteriorating.

Overall, the four key indicators contributing to our index – consumer bankruptcy filings, retail sales, official civilian unemployment rate (U3), and home price index (HPI) – should be closely monitored as the year progresses. Here are a few of our notes on the current trends within each variable:

Consumer Bankruptcy Filings

In any given year, the first and second quarters tend to be the highest points, while the third and fourth quarters trend downward through the remainder of the year. 2018 marks the first year in quite some time that bankruptcy filings were up, and the first half of 2019 shows that this trend is continuing, albeit only marginally, with a net increase in filings year-to-date. While some volatility and growth in bankruptcy filings is considered good for the ARM industry, more systemic increases are an indication of an overheated consumer credit market that is trending towards a recession. As such, increases in bankruptcy filings over the next two quarters would serve as an indication of deteriorating market conditions and warrants a closer look at monetary policy by the Federal Reserve.

Retail Sales

While retail sales tend to maintain a long-term steady growth rate, the greatest period of growth is, unsurprisingly, concentrated in the third and fourth quarters of the year, while the first and second quarters are, on average, flatter. As of Q2 2019, retail sales are up on a quarter-over-quarter and relative to the same quarter last year basis. However, the rate of growth is slowing. It’s not clear if this has more to do with an overextended consumer segment, pricing pressure from trade wars, or some other factor. That said, consumer spending patterns are essential to the growth of the U.S. economy and ARM industry, so a slowdown is never a good sign.

Official Unemployment Rate (U3)

The unemployment rate came in at 3.7% for Q2 2019 – among the lowest rates recorded in the last 20 years. As always, the quality of employment and corresponding labor force participation should be examined since they call into question the value of the official unemployment rate. With the labor force participation rate perennially stuck at roughly 63% and real median weekly earnings for 2019 increasing only marginally, the state of the U.S. labor force could be better (or worse) depending on the analyst. However, one thing is clear. The Tax Cuts & Jobs Act (TCJA) is not a driver of growth for consumers as the Trump administration claimed and the Federal government’s deficit is increasing at a more rapid rate than prior to the TCJA’s implementation. Under the circumstances, it stands to reason that consumer delinquencies will increase in the coming quarters as wages remain relatively stagnant in the face of outpaced growth for consumption, and thereby supporting the trend towards increased consumer bankruptcy filings.

Home Price Index

The home price index is positively correlated with the ARM industry and facilitates consumer confidence – especially in their ability to leverage debt – since homes account for the majority of most individual’s wealth. In Q2 2019, the index increased from 205.99 in Q1 2019 to 210.71. On the surface, this increase suggests a strong housing market. However, a closer examination of comparable quarter-over-quarter growth for the last 10 years shows a decline in the growth rate for HPI that may suggest a weakening housing market – something that aligns with a pending recession. Given current housing trends, monetary policy, and other economic indicators, it appears that the housing market will level off between late-2019 and early-2020. The element that isn’t clear is how long the period of decline will last or the degree to which this will impact the consumer credit market.

If the decline is marginal and only serves to correct prior periods disproportionate growth, then the effect on consumer credit markets should be minimal. Conversely, a correction like the one associated with the Great Recession would limit consumer credit markets, lower wealth, and diminish the ability of consumers to manage their financial leverage. As such, it will be interesting to see how builders respond to these trends since that may give an indication of their confidence in the housing market.

What to Look for in the Second Half of 2019

2018 was a stronger year for the ARM industry than many expected, and the first quarter of 2019 looked to continue that trend. While the data suggests that the ARM industry is well-positioned for growth in 2019, indicators suggest that the consumer credit market and larger U.S. economy could shift relatively soon – a fact that is magnified by trade wars, diminished monetary policy tools from the Federal Reserve, and the “new normal” expectation of consumers that interest rates remain low. From a strategic planning perspective, owners and operators may want to examine the cost-benefit of investments based on business forecast scenarios to ensure profitability even if the business takes a slightly negative turn in the coming years since the ARM industry tends to lag behind the U.S. economy in its response to changing conditions.

Contact us at hq@kaulkin.com if you have any questions.