With the holidays approaching and Black Friday just behind us, spending may be top of mind for many. The holiday shopping season does appear to be off to a strong start despite high inflation and recession fears. Black Friday and Cyber Monday sales were solid, proving consumers have been surprisingly resilient.
We’re experiencing the highest inflation rate since the early 1980s and in order to keep up with rising expenses, consumers are dipping into savings and maxing out credit cards. As more consumers are now relying on credit cards to get by, total credit card debt reached $1.17 billion in the fourth quarter, an all-time record.1
According to the Federal Reserve (Fed) Bank of New York, credit card debt has increased 15% since last year, the largest one-year increase in over 20 years.2 Not only are consumers building up credit card debt, but they are also depleting their savings. During the height of the pandemic, with the help of fiscal stimulus, many people built up their savings. They’ve now spent that money and then some.
As this week’s Chart of the Week shows, personal savings are now below their level at the onset of the pandemic. This combination of higher debt and lower savings is not sustainable, and will likely cause consumers to cut spending in the coming months — a problematic scenario since consumer spending is a key driver of the economy.
Corporations are already experiencing some pain. Excluding the energy sector, there has been a decline in earnings growth the past two quarters for companies in the S&P 500 Index.3 Much of this has been margin compression but if consumer spending deteriorates, decreases in revenue may be next. Last month, Walmart CEO Doug McMillon stated that their customers’ “pocketbooks are stretched.” This is one of many such comments from management teams regarding the concerning state of the consumer.4
Just this past week, when speaking at a conference, Nordstrom CEO Erik Nordstrom said his company is seeing “signs of strain on the customer across all customer cohorts” and that it is “most pronounced at the lower income level.” The problem could become especially worrisome after the holidays, when it’s time to start paying off high credit card bills.5 In extreme situations, the growing debt could even result in downstream impact on credit scores, affecting consumer ability to qualify for cars or homes. To add to the pain, variable-rate interest on money owed will likely be more expensive now that the Fed has raised rates.
Key Takeaway
We’ve seen consumers be resilient, but their “pocketbooks” can only be stretched so far. The question is, “How long will it be before they run out of cash while racking up debt?” We are going to see consumers make important choices that will likely hurt companies, especially consumer-discretionary ones. It doesn’t feel like a question of if there will be a hit stemming from inflation, but rather when and how hard.
This is a troubling trend and certainly not good for the broader economy. However, there is also the potential for inflation to decline, which would certainly be a welcome change and perhaps help reverse some of the pressure on the consumer. For now, we will see how this interesting dynamic further plays out into 2023.
Sources:
1Source: The Federal Reserve- Consumer Credit; 12/7/22
2Source: Federal Reserve Bank of New York- Total Household Debt Reaches $16.51 trillion in Q3 2022; Mortgage and Auto Loan Originations Decline; 11/15/22
3Source: Factset- Ex-Energy, S&P 500 Reporting a Decline in Earnings for the 2nd Straight Quarter; 11/1/22
4Source: CNBC- Walmart Raises Outlook as Groceries Boost Sales, Inventory Glut Recedes; 11/15/22
5Source: Seeking Alpha- Nordstrom Stock Sinks as CEO Calls out Consumer Strain; 12/6/22
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