The indomitable spirit of the US consumer often emerges as a beacon of hope amid economic uncertainty. Frequently celebrated with the adage "the US consumer remains resilient," this tenacity is viewed as a bulwark against the onset of economic downturns.
However, in the face of mounting economic challenges, one can't help but ponder the longevity of this resilience. How long can the US consumer continue to weather the storm and stave off the inevitable pressures of a faltering economy?
This week, our reflections gravitate towards a series of disconcerting indicators. We distilled these extensive articles into succinct summaries:
Summary of The Economist article:
During the pandemic, government support and reduced spending due to lockdowns boosted American personal savings from 9% of income in 2019 to peaks of 30% in 2020 and 20% during subsequent pandemic waves. This resulted in an accumulation of around $2.1trn in excess savings. However, by June 2022, the Bureau of Economic Analysis reported a drastic drop in the personal-savings rate to 2.7%, with a slight rise to 4.3% thereafter, indicating increased financial strain as evidenced by the rise in credit card debt and late payments.
While there's debate on when these pandemic savings will be exhausted, with varying forecasts from different experts, it's clear that Americans have rapidly depleted their reserves, and this trend is consistent across income groups. Yet, recent real income growth due to wages outpacing inflation offers a glimmer of hope, potentially allowing Americans to finance spending through earnings rather than savings. The sustainability of this consumer-led recovery, however, remains uncertain.
Summary of WSJ article: In recent years, particularly amid pandemic-induced labor shortages, wages have surged, especially for individuals who transitioned to new jobs, as companies vied to secure workers. However, this trend has shifted notably. With the job market now cooling and businesses becoming increasingly prudent in their hiring decisions, many are offering reduced salaries to new hires compared to just a few months prior. This shift is evident in the fact that wage growth reached its zenith last summer. "There are more people looking for work now; the competition isn't as fierce," one expert notes. This changing landscape is underscored by sentiments like, "The market is completely different now; companies know they can pay less." Indeed, these declining wages represent a stark departure from the trends observed in 2022, marking a sharp reversal in the job market's trajectory.
WSJ - Car Prices Might Be Unsustainable for Buyers.
Surging loan delinquencies signal that many consumers can’t afford their auto loans.
For the average American, paying off a new car at current prices demands 42 weeks of income, according to data from Cox Automotive, up from around 33 before the pandemic.
Seasonalized rates of severe delinquency for auto loans are the highest since at least 2006, but the jobs market is strong.
“Usually you get the default spikes when unemployment spikes—it’s the biggest correlation in consumer credit,” said Clayton Triick, a fund manager at fixed-income investor Angel Oak Capital Advisors. “To see them go up that much while unemployment is still low is not typical.”
Total Household Debt Reaches $17.06 Trillion in Q2 2023.
Credit Card Debt Exceeds $1 Trillion.
Second quarter of 2023: Credit card balances increased by $45 billion to a record $1.03 trillion (marking a 4.6% quarterly increase) with 69% of Americans having a credit card account.
Delinquency rates largely remained flat, but credit cards and auto loans showed slight increases in transitioning into delinquency
New York Fed highlighted the brisk growth in credit card balances and noted that while delinquency rates have risen, they align with pre-pandemic norms.
As we sift through these indicators, it becomes clear that the resilience of the US consumer is being tested on multiple fronts. The culmination of these factors may well determine the trajectory of the economy in the coming months.
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