Finance

Americans shopping online after midnight are often making riskier transactions and are more likely to default on their loans, according to Affirm Chief Financial Officer Michael Linford.
“Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day — credit delinquencies spike right around 2 a.m.”
Last week, Affirm reported that 30-day delinquencies on monthly loans held steady from a year earlier at 2.4%, even as total purchase volumes surged 32% during that time.

A young man holds a credit card and uses a laptop for online shopping.
Diy13 | Istock | Getty Images

Americans shopping online after midnight often make riskier transactions and are more likely to default on their loans, according to Affirm Chief Financial Officer Michael Linford.
The fintech firm uses the hour a consumer attempts a transaction as a key data point to help determine whether to approve loans, Linford told CNBC in a recent interview. Other factors include a user’s repayment history with Affirm and transaction data from credit bureau Experian.

“Local time of day is a signal that we use in underwriting, and most times of day have the same credit risk,” Linford said. Between midnight and 4 a.m., however, something changes, he said.
“Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day — credit delinquencies spike right around 2 a.m.”
While the data is clear that late-night financial decisions are riskier, the reasons for it are less so. Shoppers could be inebriated or under financial or emotional duress and desperately seeking credit, Linford said.
Affirm, run by PayPal co-founder Max Levchin, is among a new breed of fintech lenders competing with credit cards issued by banks. The buy now, pay later industry offers installment loans that typically range from no-interest short-term transactions to rates as high as 36% for longer-term credit.

Real-time approvals

Firms including Affirm, Klarna and Sezzle have embedded their services in the online checkout pages of retailers.

A key to their business model is the ability to approve or reject customers in real time and at the transaction level, using data to help judge the odds of being repaid.
“We don’t need to know if you’re going to be employed in two years,” Linford said. “We need to know whether you’re going to be able to pay back the $700 purchase you’re making right now. That is very different from credit cards, where they give you a line and say, ‘Godspeed.'”
The use of buy now, pay later loans has grown along with the overall rise in consumer debt. While the industry touts up-front rates and fewer fees compared to credit cards, critics have said they enable users to overspend.
But Affirm manages repayment risk by either denying transactions or offering shorter-term loans that require down payments, Linford said. Last week, Affirm reported that 30-day delinquencies on monthly loans held steady at 2.4% during the last three months of 2023 from a year earlier, even as total purchase volumes surged 32% in that time.
Affirm has little incentive to allow users to pile up debts, according to the CFO.
“If you can’t pay us back, we’ve lost, unlike with credit cards,” Linford said. “We don’t charge late fees. We don’t revolve, we don’t compound.”

Arrows pointing outwards

The rates at Affirm are in contrast to credit card delinquencies at the four biggest U.S. banks, which have been climbing since 2021 as loan balances have grown. Americans owed $1.13 trillion on credit cards as of the fourth quarter of last year, a $50 billion increase from the previous quarter amid higher interest rates and persistent inflation, according to a Federal Reserve Bank of New York report.
“The job environment is good, so it begs the question, why are credit card delinquencies creeping up?” Linford said. “The answer is, they took their eye off of underwriting and from my perspective, they got aggressive in a time when consumers were beginning to show stress.”Don’t miss these stories from CNBC PRO: More

Wells Fargo said Thursday one of its primary regulators lifted a key penalty from its 2016 fake accounts scandal.
The bank said in a release that the Office of the Comptroller of the Currency terminated a consent order that forced it to revamp how it sells its retail products and services.
Eight consent orders remain, including one from the Federal Reserve that caps the bank’s asset size, according to a person with knowledge of the situation.

Wells Fargo President and CEO Charlie Scharf attends The Future of Everything presented by The Wall Street Journal at Spring Studios in New York City, on May 17, 2022.
Steven Ferdman | Getty Images Entertainment | Getty Images

Wells Fargo said Thursday one of its primary regulators has lifted a key penalty tied to its 2016 fake accounts scandal.
The bank said in a release that the Office of the Comptroller of the Currency terminated a consent order that forced it to revamp how it sells its retail products and services.

Shares of the bank jumped more than 6% on the news.
Wells Fargo, one of the country’s largest retail banks, has retired six consent orders since 2019, the year CEO Charlie Scharf took over. Eight more remain, most notably one from the Federal Reserve that caps the bank’s asset size, according to a person with knowledge of the matter.
In a memo sent to employees, Scharf called the development a “milestone” for the lender. The 2016 fake accounts scandal — in which the bank admitted to putting customers into more than 3 million unauthorized accounts — unleashed a wave of scrutiny that revealed problems related to the servicing of mortgages, auto loans and other consumer accounts.
The attention tarnished the bank’s reputation and forced the retirement of both ex-CEO John Stumpf in 2016 and successor Tim Sloan in 2019.”The OCC’s action is confirmation that we have effectively put in place new systems, processes, and controls to serve our customers differently today than we did a decade ago,” Scharf said. “It is our responsibility to ensure we continue to operate with these disciplines.”
The termination of the OCC order “paves the way” for the Fed asset cap to ultimately be removed, RBC analyst Gerard Cassidy said Thursday in a research note.

— CNBC’s Leslie Picker contributed to this report.
Don’t miss these stories from CNBC PRO: More

Imposter scams were the most prevalent type of consumer fraud in 2023, according to the Federal Trade Commission.
There are many forms, but they share a basic premise: Criminals pretend to be someone you trust, such as a romantic interest, government agent, relative or well-known business, to persuade you to send them money.
The best way for consumers to counter imposter scams is by pausing and verifying that a communication is accurate, according to fraud experts.

Vasily Pindyurin | fStop | Getty Images

Consumers lost a record $10 billion to fraud in 2023, and imposter scams were the most prevalent swindle, according to the Federal Trade Commission.
Nearly 854,000 people filed complaints to the FTC about imposter scams in 2023. This represents 33% of the total consumer fraud reports filed to the agency.

Consumers lost $2.7 billion to such scams in 2023, according to FTC data. The average loss was $800.

Imposter scams come in many forms, but share a basic premise: Criminals pretend to be someone you trust to persuade you to send them money, or to get information that can later be leveraged for money, experts said.
People may falsely claim to be a romantic interest, the government, a relative in distress, a well-known business or a technical support expert, the FTC said in a recent report.
Fraudsters, often part of sophisticated organized crime networks, may contact potential victims via channels such as e-mail, phone call, text, mobile apps, social media or traditional snail mail.

The internet has ‘really supercharged’ imposter scams

Government impersonators, for example, might suggest they work for the Social Security Administration, IRS, Medicare or even the FTC. Others may say they’re from a company such as Amazon or Apple and claim there’s something wrong with your account, or from your utility company threatening to turn off service. Others may say they’re a close friend or family member and need money for an emergency.

More from Personal Finance:FBI: ‘Financial sextortion’ of teens is ‘rapidly escalating threat’How this 77-year-old widow lost $661,000 in a common tech scamWhy this popular service is like ‘payday lending on steroids’
Nascent and improving technology, such as artificial intelligence and voice cloning, has made these frauds more convincing, experts said.
“These scams have been around forever, really, but the internet has really supercharged them,” said John Breyault, vice president of public policy, telecommunications and fraud at the National Consumers League. “The scammers seem to be getting better at what they’re doing.”

Additionally, imposter scams have a low barrier to entry for criminals, another likely reason they’ve proliferated, said Hardeep Rai, product director at Feedzai, a fraud detection service used by financial institutions.
“You get [hold of] a bunch of phone numbers and call,” Rai said. “It’s an infinitely scalable fraud in that sense.”

Older adults tend to lose more money

Older victims were less likely than younger ones to report losing money to all types of fraud, but their typical loss was higher. For example, victims age 80 and older had a median loss of $1,450; by comparison, the typical loss didn’t exceed $500 for those younger than 70.
The FBI reported last year that a subset of imposter scam — a type of tech-support fraud known as a “phantom hacker” scam — was on the rise nationally, “significantly impacting” older Americans.
Such cybercrimes are multilayered: Initially, fraudsters generally pose as computer technicians from well-known companies and persuade victims they have a serious computer issue such as a virus, and that their financial accounts may also be at risk from foreign hackers.

Accomplices then pose as officials from financial institutions or the U.S. government and persuade victims to move their money from accounts that are supposedly at risk to new “safe” accounts, under the guise of protecting their assets.
These tech-support scams often wipe out seniors’ entire bank, savings, retirement or investment accounts, the FBI said.
“This is money people have worked for a lifetime to build up,” Breyault said. “For many victims, they don’t have time to recover: They’re older people or people of limited means.”
In addition to financial loss, “we know fraud causes significant emotional and psychological harm,” he added.

Cryptocurrency accounted for the largest fraud losses relative to other payment methods, while bank transfers and payments were No. 2, according to FTC data. Fraud victims lost $1.9 billion and $1.4 billion via these payment channels, respectively, in 2023.
Consumers often have limited legal recourse to get their money back in these cases: Victims who are duped into authorizing a transaction (i.e., voluntarily sending money to criminals) generally have weaker financial protections than those ripped off by unauthorized transactions, Breyault said.

How to protect yourself from imposter scams

The most effective steps consumers can take to protect themselves from imposter scams are to “pause and verify,” Rai said.
Fraudsters prey on fear and urgency, hoping to trigger a knee-jerk emotional reaction from victims.
“They’re playing a nasty psychological game,” Rai said.
Consumers who receive an unsolicited message from someone — even if it appears to be someone they know — asking them to move money or make a transaction should pause, think about the request and avoid being pressured into it, he said. This may make a fraudster go off-script and remind consumers to engage their rational decision-making, he added.
“It pays to be skeptical,” Breyault said.

They’re playing a nasty psychological game.

Hardeep Rai
product director at Feedzai

Additionally, consumers should verify who they’re communicating with, experts said.
Don’t respond to an unsolicited message, Breyault said. Instead, call the official number on your bill or the back of your bank card and ask the representative to verify the veracity of the initial communication.
Likewise, don’t click a link or call a number in an unsolicited message or pop-up window; independently seek out the respective official website or other communication channel.
In that case, “you are the one controlling that communication,” Breyault said.
“It’s easy to think this wouldn’t happen to you,” Rai said. “But everyone is susceptible to fraud. Fraudsters are very, very advanced.”
Don’t miss these stories from CNBC PRO: More

Europe had weathered one winter since Russia’s invasion of Ukraine in 2022. But although gas prices had returned to Earth, they were sure to rise in the colder months to come. Thus if commodity merchants bought at rock-bottom rates in the summer, they could offer future delivery at much higher prices on the forward market. To make the deal work, all they needed was somewhere to store the product. The EU’s underground capacity was almost full; parking the gas in tankers offshore would have been expensive. Their solution was unorthodox: pumping 3bn cubic metres (bcm) of natural gas eastward to Ukraine.Stashing hydrocarbons in a war zone might seem ill-advised. Indeed, last spring analysts assumed that companies would require publicly guaranteed war insurance in order to risk such a trade. But by June the spread between summer and winter prices had widened enough that the gamble seemed worthwhile. Ukraine’s generous customs regime for short-term storage, combined with promises that gas would not be requisitioned under martial law, provided traders with extra incentive. The resulting trade helped keep the EU’s reserves stocked throughout this winter, suppressing gas prices across the continent. It also provided healthy profits for the firms involved. Akos Losz of Columbia University estimates that merchants made up to €300m ($320m) from the play.Now the trade is looking like a test run for Europe’s future energy strategy. Ukraine is home to the continent’s second-largest gas-storage capacity, after Russia, totalling nearly 33bcm. It has more storage space than big economies like Germany, which boasts around 24bcm, and dwarfs that of next-door Poland by a factor of ten. Having mostly been developed as part of the Soviet Union’s energy infrastructure, the facilities massively exceed Ukraine’s domestic needs. Both the EU and the Ukrainian government are keen to put them to work. Denys Shmyhal, Ukraine’s prime minister, has said that he wants to turn his country into Europe’s “gas safe”. Naftogaz, a state-owned energy company, has offered up to half its storage space to European energy firms. Traders are now poised to repeat last year’s trade at bigger volumes this spring, starting from an earlier date.The firms involved in the trade have kept quiet, partly for security reasons. Trafigura, a commodities giant, is the only one whose involvement has been confirmed, but Naftogaz reports that more than 100 European companies have made use of its storage sites. According to Natasha Fielding of Argus Media, an energy-information firm, these include “large energy companies with trading desks and smaller, local utility firms in eastern Europe”. The latter, she says, could have the most to gain from the arrangement. Countries including Moldova and Slovakia not only lack significant storage capacity of their own, but also remain heavily dependent on Russian gas, which is still delivered through Ukraine under a long-term transit agreement due to expire in December.Although Europe’s energy problems have become less acute, storage provides a hedge against future disruption. Ukraine is eyeing the future, too. The country still receives up to $1.5bn a year from Russian companies, which use its pipelines to deliver gas under the existing transit deal. Once that agreement lapses, the government intends to make up some of the shortfall using storage fees paid by Western firms. There is also another consideration for Ukraine’s leaders. The more they can integrate their country’s energy industry with European markets, the more invested the EU will be in their defence. At a time when support from their allies appears shaky, that is worth quite a lot. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Although buying inflation-protected bonds to protect against inflation does not seem unreasonable, it would have been a spectacularly unprofitable move during the latest bout of inflation. One hundred dollars put into inflation-protected Treasuries in December 2021, when investors first saw American core inflation reach 5%, would have been worth just $88 a year later. Even cash under the mattress would have done better.Safe to say, inflation-linked bonds are in trouble. Investors pulled $17bn from exchange-traded funds tied to them last year. Canada announced plans to cease issuing them in 2022; Germany did the same in November. Sweden is considering its options. Yet these countries are making a mistake. So long as their purpose is not misconstrued, inflation-linked bonds serve a vital function for markets and the governments that issue them.Why, then, do the bonds not always offer protection against inflation? Start by breaking down the sources of return for a bondholder. First comes coupons, payments received before a bond matures. The difference between inflation-linked bonds and their conventional counterparts is that these are not fixed in dollars, euros or pounds; instead, they rise with inflation, as does the bond’s principal. Their real value is preserved if inflation is unexpectedly high. So far, so inflation-protective.Yet for many investors a second mechanism will matter: changes in a bond’s price. Such changes reflect shifts in the market value of the future payments to which a bondholder is entitled. Here, a snag emerges. Real interest rates determine the present value of that future money: when rates rise, bond prices fall. And as was made painfully clear during 2022 and 2023, few forces raise long-term real rates as sharply as a central bank ferociously tightening monetary policy. Most of the time, this second mechanism matters more for inflation-linked-bond returns than the first. Indeed, it is what caused the $12 loss an investor would have made between December 2021 and December 2022.Although they do not always protect against inflation, the bonds do serve a wider purpose. For markets, their main value is isolating (and pricing) beliefs about economic concepts. Conventional bond yields package together two distinct forces: inflation expectations and real interest rates. Inflation-linked bonds disentangle them: their yield more cleanly expresses the market’s pricing of real interest rates. Likewise, the gap in yields between a nominal bond and an inflation-linked one gives the market’s pricing of expected inflation, known as “breakeven inflation”.Separating these concepts matters. For speculators, doing so means a more straightforward way to trade on macroeconomic pressures. For market observers, making real interest rates visible and tradable helps explain the pricing of almost any other financial asset. One way to view stocks, bonds and property is as a way to buy future payouts (dividends, coupons and rent, respectively). Each has real interest rates embedded in its price. And for central bankers, breakeven inflation offers a constantly traded measure of whether markets find their inflation targets credible.In fact, with appropriate caveats, inflation-linked bonds do even offer some inflation protection. They can outperform if inflation rises and central banks fail to raise rates in response, as in 2021 when most central bankers valiantly insisted that inflation was transitory. Shorter-duration inflation-linked bonds can provide payouts with lower exposure to rising interest rates, a bet that can be magnified with leverage if a speculator wishes. And long-term investors, such as pension funds, that hold the bonds to maturity are not much affected by fluctuations in a bond’s market price. Locking in inflation-linked cashflows helps them offset liabilities that are often also indexed to inflation.For bond issuers, this poses a trade-off. Pension funds and other risk-averse investors’ appetite for inflation-linked bonds means they may pay a premium for them. But other buyers may demand a discount because, with pension funds uninterested in selling, inflation-linked-bond markets are relatively illiquid. The empirical evidence on which effect dominates is spotty at best. Policymakers have reached varying conclusions. In 2012 analysis by New Zealand’s Debt Management Office prompted a ten-fold increase in the country’s inflation-linked bond issuance as a share of total issuance over the next decade. A study in 2017 for the Dutch government concluded the opposite: that limited liquidity made inflation-linked bonds more troublesome than helpful.Certainly there have been instances where governments have saved a great deal of money by issuing inflation-linked bonds. Britain’s first such bond issue in 1981 coincided with an 800-year high in British inflation. Whereas its price reflected expected annual inflation of 11.5%, it eventually paid out a realised inflation rate of just 5.9%. Recently, however, luck has run in the opposite direction for Britain and most other rich-world bond issuers. Spiking inflation has pushed up the coupon payments governments owe and prompted concern about rising debt bills.Sometimes, therefore, the bond issuer will win and sometimes it will lose. But in the long run the odds are in its favour. That is because inflation-linked bonds shift inflation exposure from bondholders to issuers, and markets offer compensation for those willing to take on risk. Moreover, it is risk that governments are well-placed to assume: high inflation tends to mean a higher nominal tax take, and more money to pay down debt.Forget bitcoin and goldOne question remains. If not inflation-linked bonds, what should an investor who was worried about rising prices have held in late 2021? Stocks performed worse, even if they bounced back, as did bitcoin. Gold and oil, however, held their value. A better trade still might have been to bet on the price of bonds falling—including those that are inflation-linked. ■Read more from Free exchange, our column on economics:Universities are failing to boost economic growth (Feb 5th)Biden’s chances of re-election are better than they appear (Feb 1st)The false promise of friendshoring (Jan 25th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

Only a few years ago, analysts and investors were aflutter with talk of a new “supercycle” in commodities. Some believed the world was about to repeat a surge in raw-material prices that began in the early 2000s, and lasted until the global financial crisis of 2007-09. This time the prompt was meant to be a mixture of a fast economic recovery, as the West emerged from covid-19 lockdowns, combined with a shift to green energy.Today the thesis looks far less certain. Prices of lithium and nickel, which are vital for electric-vehicle (EV) batteries, exploded in 2021 and 2022, but have since collapsed. Nickel is almost 50% cheaper than at the start of 2023. Lithium’s fall has been even steeper: its price is down by more than 80% over the same period. The Bloomberg Commodity Index, made up of a basket of foodstuffs, fuels and metals, has declined by 29% since its peak in mid-2022.Forecasts for oil demand now vary wildly, too, depending on assumptions about governments’ plans to wean consumers off the stuff. The International Energy Agency expects demand for oil to increase to 106m barrels per day (bpd) by 2028, up from 102bpd last year, and global demand to peak not far above that level. The Organisation of the Petroleum Exporting Countries, a cartel of oil producers, expects demand to rise more than twice as fast in the next five years, to 110m bpd, and then to keep rising for at least the next two decades.Commodity trading has never been simple: prices depend on unpredictable economic cycles, as well as the production capacity of drillers, growers and miners. But it is now nightmarish. On top of such concerns, investors have to contend with a barrage of political and technological uncertainties, which range from developments in battery tech to government appetite for subsidies. And it is these questions that will govern the pace of the green transition.Start with the EV market. It is clearly still growing: 14m EVs were sold worldwide in 2023, a 35% increase on the previous year. But how fast will it continue to grow? Both new and used EVs are sitting in American dealerships for longer than their petrol-powered rivals. Volkswagen, a German automaker, reports that EVs made up 8-10% of sales in 2023, down from 11% the year before. Ford and GM are among the carmakers to have delayed EV- and battery-plant construction over the past year. Wariness about the sector is dragging on the share price of Tesla, the market leader, which is down by 26% this year. And will evs still need the same battery materials? New sodium-ion batteries require neither nickel nor lithium. If they begin to supersede existing types, demand for the metals will plummet.Political considerations are also increasingly difficult to track, since the direction of travel is no longer one-way. Politicians across the rich world have started to worry about the costs involved in the energy transition. In September Britain delayed a ban on internal-combustion engines. Ahead of elections to the European Parliament in June, the draft manifesto of the centre-right European People’s Party now opposes an outright ban on such engines. Are these just cosmetic changes or the start of a deeper shift in green policies? Commodity investors need an answer.Nor is it only Western policies and demand that matter. During the last commodity supercycle, China’s construction of millions of flats, hundreds of thousands of miles of roads and all manner of other physical infrastructure kept demand for hard commodities growing fast. Now demand from the world’s second-largest economy is much less certain. Chinese economic growth has slowed considerably, and investment in property has slumped as the government attempts to steadily deflate a bubble of its own creation. At the same time, copper prices have proved to be astoundingly resilient, dipping just 9% during the past 12 months. This reflects China’s push for self-sufficiency in energy, including in solar and hydro power.Pity anyone whose job it is to forecast how these factors will play out over the next 12 months: if getting an accurate sense of the trade-offs in Western politics is tough, divining the approach of an increasingly cloistered Chinese government is close to impossible. It is clear that old methods of reading commodity markets are no longer sufficient. Without an understanding of the demand for new vehicles, the technology inside them and the politics of net-zero, any bets on the future of commodity markets will be little more than guesswork. ■Read more from Buttonwood, our columnist on financial markets: The dividend is back. Are investors right to be pleased? (Feb 8th)Bitcoin ETFs are off to a bad start. Will things improve? (Feb 1st)Investors may be getting the Federal Reserve wrong, again (Jan 24th)Also: How the Buttonwood column got its name More

The Office for National Statistics said U.K. gross domestic product shrank by 0.3% in the final three months of the year, notching the second consecutive quarterly decline.
All three main sectors of the economy contracted in the fourth quarter, with declines of 0.2% in services, 1% in production and 1.3% in construction output, the ONS said.

Skyline view of the City of London financial district.
Mike Kemp | In Pictures | Getty Images

LONDON — The U.K. economy slipped into a technical recession in the final quarter of last year, initial figures showed Thursday.
The Office for National Statistics said U.K. gross domestic product shrank by 0.3% in the final three months of the year, notching the second consecutive quarterly decline.

Though there is no official definition of a recession, two straight quarters of negative growth is widely considered a technical recession.
Economists polled by Reuters had produced a consensus forecast of -0.1% for the October to December period.
All three main sectors of the economy contracted in the fourth quarter, with the ONS noting declines of 0.2% in services, 1% in production and 1.3% in construction output.
Across the whole of 2023, the British GDP is estimated to have increased by just 0.1%, compared to 2022. For the month of December, output shrank by 0.1%.
U.K. Finance Minister Jeremy Hunt said that high inflation remains “the single biggest barrier to growth,” since it is forcing the Bank of England to keep interest rates firm and stymie economic growth.

“But there are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low,” he added.

Inflation has come down markedly in the U.K., but remains well above that of the country’s economic peers and the Bank of England’s 2% target, squeezing household finances. The headline consumer price index reading came in at 4% year-on-year in January.
Notably, GDP per capita — which adjusts for population growth — contracted by 0.6% in the fourth quarter, after a 0.4% decline in the previous three months, and fell further through each quarter of last year. Over the whole of 2023, seasonally-adjusted GDP per head shrank by 0.7%.
‘Shallow and short-lived’ recession
Marcus Brookes, chief investment officer at Quilter Investors, said that the figures most likely indicate that the recession will be a “potentially shallow and short-lived one that may not reflect the true state of the economy,” which is set to experience a “muted recovery” throughout 2024.
“U.K. GDP contracting in both December and the fourth quarter of 2023 is mainly due to persistently high inflation, structural weaknesses in the labour market and low productivity growth, but also adverse weather conditions,” Brookes said via email.
“These factors affected the performance of the services and construction sectors, which are the main drivers of the U.K. economy.”
He noted that some of these hindrances are temporary and have already started to ease, with the inflation print of January undershooting forecasts for a reacceleration.
“Over the coming months, we expect inflation to fall, potentially easing the pressure on U.K. households, and supporting the recovery of the consumer-driven economy,” Brookes added.
“The key indicator to watch is inflation in the services sector, which accounts for the bulk of the UK’s economic activity and employment and reflects the strength of wage growth and consumer demand, which are crucial for the U.K.’s recovery.”
Neil Birrell, chief investment officer at Premier Miton Investors, said Thursday’s figure and the softer-than-expected inflation data “may give rise to some concern over economic strength in the coming year.”
“Most sectors of the economy were weak, but the optimists will point to the fact that there is plenty of scope to cut interest rates should the current trend in inflation and growth accelerate.” More

In midtown manhattan reminders of commercial property’s difficulties are everywhere. On the west side, near Carnegie Hall, stands 1740 Broadway, a 26-storey building that Blackstone, an investment firm, bought for $605m in 2014—only to default on its mortgage in 2022. Soaring above Grand Central station is the iconic Helmsley building. Its mortgage was recently sent to “special servicing” (it may be restructured or its owner may simply default). As the sun sets, the underlying problem becomes clear: working from home means fewer tenants. Floors bright with lights, where workers potter about, sit sandwiched between swathes of black.This is not a new development. Many buildings have stood empty for four years, since covid-19 struck. At first, owners hoped to wait out the pandemic. But workers were slow to return, meaning employers ended up downsizing. Vacancy rates, especially in shabbier buildings, rocketed. Then interest rates rose. Most commercial buildings are financed via five- or ten-year loans. And many of these loans will shortly be refinanced, while rates remain uncomfortably high. Some $1trn in American commercial-property loans will roll over within the next two years, an amount that represents a fifth of the total debt owed on commercial buildings.Recently a number of office buildings in big cities have traded at less than half their pre-pandemic prices. These sorts of losses will wipe out many owners’ equity, leaving banks to swallow hefty losses of their own. Indeed, three institutions have already been hit hard. In recent weeks New York Community Bank (NYCB), a midsized lender; Aozora Bank, a Japanese institution that hoovered up American commercial-property loans; and Deutsche Pfandbrief, a German outfit with exposure to offices, all reported bad news about their loan books and saw their shares plummet.Meanwhile, China’s property crisis is becoming more acute. With domestic portfolios struggling, some Chinese investors, who have bought property assets all over the globe, may need to raise cash—and could start dumping overseas assets, depressing property values. If consumers start to seriously struggle with rising interest rates on auto loans or credit cards, it is possible that more institutions will end up in a similar situation to that of nycb. Little surprise, then, that people are starting to fret that the move to working from home could end up causing a financial disaster.It is worth putting these problems into context, however. For a start, the problems at NYCB really do seem unique to the institution. Although the bank has exposure to New York offices, it in fact wrote down the value of its portfolio of loans on rent-stabilised “multi-family” apartment blocks in the city. These plunged in value after legislation in 2019 restricted the ability of owners to raise rents if an apartment was vacated, or if the landlord made capital improvements. The other lender that specialised in these sorts of loans was Signature Bank, which failed last year.Moreover, there is a limit to how big a problem offices can pose, even if the damage to them is severe. The total value of American property (not including farmland) was $66trn at the end of 2022, according to data from Savills, an estate agency. Most of that is residential. Only a quarter is commercial. And commercial property is much more than just offices. It includes retail spaces, which are struggling, but also warehouses, which are in demand as data-centres and distribution points, and multi-family buildings. Offices are therefore worth perhaps $4trn, or about 6% of the total value of property in America.Between 2007 and 2009 residential real estate in America lost a third of its value. A similar shock today would wipe $16trn from total property values. Even if every office building in America somehow lost its entire value, the losses would still be just a quarter of that size. On top of this, lenders are better protected against losses in commercial property than they were against those in the residential sort. Whereas loans for the latter were often close to 100% of a building’s value, even the most ambitious commercial-property loans tend to cover just 75% of a building’s value.BloodshedThe wound inflicted by commercial property is best likened to that caused by a slip of a kitchen knife—it is nasty, obvious and painful. Stitches might be required. But it is unlikely to grievously injure the victim.Nor will the wound fester unnoticed. Because property problems are so visible, regulators are all over them. About half of commercial-property debt is loans from banks (and mainly from smaller ones, since rules discourage large institutions from such lending). The rest is securities or loans from insurers. The Office of the Comptroller of the Currency, a regulator, reportedly advised NYCB to write down the value of some of its loans more aggressively, making them obvious when it reported earnings on January 31st. Across the pond, the European Central Bank has asked banks to set aside extra reserves to cover loan losses in commercial property.America’s economy, which is still growing smartly, offers extra protection. Look up at New York’s empty skyscrapers and it is easy to feel alarmed. But cast your gaze back down to street level and you can calm yourself. The streets are bustling. Shops are packed. Restaurants are full. America is healthy and on the move, even if it could do with a bandage for that nasty cut. ■ More