Macro Take: Is the Consumer Really "Strong"?
What the consumer really looks like as we head into a recession
“The Consumer is Strong” seems to have become the mantra for a while in the media, social or otherwise.
We have the Fed saying it, we have so-called experts saying and of course we have an unlimited number of opinion pieces saying it.
Brian Moynihan (Bank of America’s CEO) suggests that “the consumer is in a very strong position” because they have plenty of room to borrow. Mr. Moynihan is a solid CEO but it makes me wonder if his statement actually benefits the bank or the consumer. We probably already know the answer to that.
But, the tide is gradually changing and there are cracks under the surface that are beginning to show.
Jamie Dimon recently made a great argument of this, saying that the US economy did not experience a normal recovery. And, he’s obviously right. What we had was an artificial forced recovery that was fueled by cheap credit and stimulus checks - essentially monetary and fiscal policy.
The consumer seems to be strong because of these artificial levels of stimulus in the economy. People are still spending and this gives us the false impression that the consumer is strong. But, let’s have a look at whether this is really the case.
Where are the Cracks?
Wages seem to be on the rise and this is not unnatural. Cost of living adjustments are being made, as the level of inflation remains high. But, wages adjusted for inflation, i.e., real wages are still negative. This is clearly a case of inflation increasing faster than wage increases.
While we’ve seen some improvement as of April’s data, people’s purchasing power is still being eroded. According to the last PCE data in May, real disposable personal income was down 6.2% year-over-year, marking the fifth straight decline. Coupled with other factors in the economy, this can keep the consumer weak for much longer.
Household Deposits and Savings
Household deposits still remain at a significantly high level. While this is good news, this is not the only news. When taken into context with personal consumption, debt and savings levels, the picture starts to look less rosy.
The last published data shows the personal savings rate dip to 4.4% in April 2022. The last time this happened was in 2008-2009, during the Great Financial Crisis.
We’re seeing people dip into savings, to counter price increases coming from inflation. People still want to spend. Personal Spending data was up in April by 0.9% partly because people still want to spend on services to experience the re-opening.
So people are using savings to spend. But, that’s not all they’re using.
Household debt balances have progressively increased. We were of the notion that the consumer is spending from stimulus checks, investments, cash and even savings. But look what we have here… the debt balance has gone up. ⬇
Credit Cards: Credit cards are scary. They are the first to be used and they are the first to become delinquent. People will default on Credit Card debt more easily than other kinds of debt. Credit Cards also carry exorbitantly high levels of interest rates. With the Fed raising rates, I can only see this as imminent disaster.
The flows into serious delinquency still remain at acceptable levels but, data from Credit Card companies suggest there is an increase and their data is more current.
Mortgage Payments: Mortgage balances rose by $250 billion in the first quarter of 2022 and stood at $11.18 trillion at the end of March. But, the chart below alarmed me. I looked at these stats for my recent appearance on the Futures Radio show with Anthony Crudele, and what I found actually surprised me. Last quarter, this chart looked pretty much okay.
Now, we see the level of “current” mortgage payments coming down (green line) while late payments on mortgages (red line) going up. This is a cause for concern because people usually want to pay their mortgages so they don’t lose their house.
This could however, also be a result of the second mortgages that people have taken out for vacation / second homes. Regardless, it doesn’t bode well for the housing market.
What the Changing Tide Brings
Margins coming down
We talk about companies having pricing power and being able to pass on the cost of inflation and supply chain price increases. But, let’s consider this: With no more stimulus checks in the economy, and the consumer clearly weakening, how much can companies even raise prices.
Cost of living adjustments can only go so far
As we said, cost of living adjustments are being made. While this also leads to a potential situation of a wage spiral, effectively exacerbating inflation, it can also have the opposite effect of companies cutting workers. This is exactly what we’re seeing play out at the moment and the unemployment level will start to rise.
Things are not as great as they seem and this can only lead to a more difficult situation when a recession does hit. It’s not a matter of if, but rather a matter of when.
We need to look at companies through this lens. If companies like Target are lowering their margin projections, we really need to think twice about what will happen with other companies who are not so resilient and have even less pricing power.
We’re in for some trying times and we’re probably yet to see the market bottom.
Ayesha Tariq, CFA
There’s always a story behind the numbers
None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned.