Macro Strategy Insights

How Full is the Consumer Consumption Glass?

We discussed/highlighted/emphasized (take your pick) the possibility that the economy was poised for a bounce, or “trampoline” effect in last weekend’s Escalation and Expansion. My base case has been for a slowdown in the economy and a slowing job market with different regions and industries being impacted in their own way. The combination of the jobs report on Friday and the strength of the Citi Economic Surprise Index are two factors driving this reassessment.

We fought through some technical difficulties yesterday morning and discussed this theme, as well as banks, commercial real estate, and commodities on Bloomberg TV (28:35 mark).

Now let’s explore whether the glass is half empty, half full, or filled to the brim! In today’s piece, we will take a quick look at the consumer.

Consumer Credit

The data has pointed to a resilient consumer. I’ve been skeptical of how strong the consumer will be going forward. My impression, albeit subjective, was that discounts were very prevalent during this holiday season (pulling future demand forward) and that inflation continues to skew spending higher (as we still have to spend more to get the same amount of stuff). While that might have been a sufficient argument a few weeks ago, we need to dig deeper.

There was a period of time when we were able to ignore the rapid rise in consumer credit post-COVID. The argument, which we were happy to make, was that consumer credit was well below trend. The trend line was quite stable, going back years. Now we face two issues:

  • We are back above the trend line, which should at least raise some eyebrows, if not cause outright concern.
  • The accelerated trend of consumer credit has not levelled off. I would have expected that as we approached “normal” levels of credit card debt, we would have seen the rate of increase slow. That hasn’t really happened and I wonder how much of this is tied to the fact that it costs more to buy the same stuff.

Okay, so debt is rising, but maybe everyone has such a great job that they can support these new levels of debt? Or maybe everyone locked in such low rates on their mortgages that revolving credit debt isn’t a big deal?

This brings us to rising delinquencies. I picked two data series from the New York Fed (which seems to rely on Equifax data). There are a myriad of “delinquency” data series on the Bloomberg Terminal. They are not all quite as stark as this chart, but they all show the same thing – delinquencies are rising and are approaching or surpassing historical averages.

So, let’s take a gander at the “excess savings” that were such a big part of many investment theses.

There is still a lot of money sitting in bank accounts. That is impressive given the surge into money market funds that we witnessed as the differential in rates between deposits and money market funds ballooned as the Fed started hiking rates.

There are a few concerns that I have with the “money on the sideline” arguments:

  • How much was “tucked” away to pay for things like student loans that people knew would eventually have to be paid (or at least the moratorium would end for many).
  • Maybe the “rich get richer”? I assume (and I think there is data confirming this) that the average savings deviates dramatically from the median. Some number of large deposits makes the averages skew higher than the median, which may also exaggerate the “savings on the sideline” view. The people who already have more than they can spend have more savings, while the “average” person may be back to normal. Or, given that revolving credit is rising, which charges a higher interest rate than any bank (or money market fund) can offer, there might be a lot less money floating around the system waiting to enter something other than bank deposits.

While not as concerning as the previous two charts, it certainly gives me pause for thought.

Bottom Line

The consumer is still spending, but should they be? Is it sustainable? Is it just a necessity of life in a world where inflation continues to add to the daily cost of living? Let’s be honest, for many things, the “real world” cost of things seems much higher than what the official data suggests.

Ultimately, if the job market is really strong, that could offset these negatives. Higher wages, more hours, better jobs, etc. will all help consumer spending. I doubted this (until Friday’s report, which I still have questions about), but these are now necessary conditions for consumers to keep spending. This is because many of the tailwinds that we had in the past (low rates, excess savings, underutilized revolving credit) are no longer tailwinds (and may even be headwinds).

Looking at the “consumer spending glass” I see a glass half empty, now increasingly dependent on a strong job market.

So, the jury is still out (in my view) on the consumer, but I’m not convinced that the positive surprises will continue, so I will have to attack the jobs data to convince myself one way or the other!