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.
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.
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
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.