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Opinion Credit
It seems consumers are willing to pay up to treat themselves
by Duncan Sankey
Duncan Sankey
Portfolio director and head of credit research
Cheyne Capital
US spending remains resilient despite financial worries
Consumption accounts for just under 70% of the GDP of the world’s largest economy, so the mindset and spending habits of the US consumer are fundamental to the fundamentals of the corporate environment. The good news is that (repeated) reports of the death of the US consumer seem greatly exaggerated.
Most of the pall over consumption has been cast by US consumers themselves. Surveys by Civiqs show that 48% believe their family finances have deteriorated over the past year (the number compares to post-pandemic highs and lows of 54% and 18%, respectively), while 51% think the nation’s economy is getting worse, despite the US boasting the best growth rate of the G7 economies over the past year, increasing real average hourly earnings and falling headline and core inflation. Only 16% judge that their family finances have improved (admittedly up from 11% at the beginning of the year) and only 29% see the economy on the mend. However, stripping out the directionality is revealing. A poll of Wisconsin residents by Quinnipiac University showed that 65% think their financial situation is nonetheless excellent or good.
More interesting still is the disparity between what consumers say and what they actually do. Real personal consumption continues to grow, albeit with evidence of a divergence between wealthier and older cohorts (who account for a disproportionate share of consumption) and the rest. The less well-heeled are prioritising essentials and trading down, although the extent to which this is a reaction to “sellers’ inflation” rather than insecurity about finances is debatable. Nonetheless, dismal results from retailers such as Dollar General, whose customers are mainly households making under $35k per annum, attest, in part, to strain within poorer sections of the community.
Retail and travel see steady demand
The middle and wealthier cohorts? Not so much. Consumers may not be profligate, but they are buying. Consumption bellwether Walmart saw gains in market share from upper-income households, but also more transactions and higher tickets, with particular strength in its ‘digital shelf’. Best Buy’s results showed ongoing weakness in big-ticket household appliances, but this is as much common sense as caution. Lacklustre renewal and remodelling demand is consistent with expectations of falling interest rates; shoppers still forked out for PCs and tablets. Some hotels and OTAs (Marriott, Airbnb, Expedia) signalled modest softening in forward-booking trends, but this follows an extended period of ‘revenge travel’ as people got the pandemic out of their system.
At all points on the income/wealth spectrum, it seems consumers are willing to pay up to treat themselves, be it the premium economy seat on the flight to a European holiday or additional beauty products. They also continue to pursue aspirational purchases and still want to eat out. This may warrant belt-tightening in other areas. However, consumers are not being cautious as much as — to use a coinage from several retailers last quarter — “choiceful”.
Rising debt levels spark concern
Resilient consumption trends might still give cause for concern if debt financed. The growth in buy-now-pay-later services — about 17% of US consumers have a credit record using such apps — does raise misgivings, but may also reflect a generational shift in payment habits (digital natives preferring apps over plastic and cash). Nonetheless, outstanding balances on US cards rose almost 9% in the year to June and the proportion of individuals paying off the full balance every month fell about five points over the past year to 47%.
This likely reflects some prioritisation of payments: average monthly payments on the all-important auto loan are up $160 compared to 2021. However, low mortgage rates provide an offset for homeowners, while others should soon see some relief from falling interest rates. Importantly, credit card delinquency rates appear to be peaking at levels slightly above those prevailing in 2016-20 (a period of unprecedented low rates and easy liquidity) and well below the levels of 1998-2006. Again, with the exception of subprime auto lending, there is little evidence of distress to upset consumption.
Whatever consumers may say about their finances and economic outlook, consumption in the US remains built on two foundations. For the less wealthy and younger consumers it rests on the strength of the labour market, which, while clearly cooling, remains healthy by historical comparisons and continues to generate real wage growth. The wealthier (and older) still luxuriate in the accidental inflation of property and financial asset prices created by a decade-plus of low rates and easy liquidity. An autumn chill in the markets might induce a shiver in this cohort, but they’re unlikely to stop shopping.
