Investor worries grow as student loans and credit card debt weigh on consumers

Investors are grow­ing increas­ing­ly con­cerned about the finan­cial sta­bil­i­ty of Amer­i­can con­sumers as ris­ing stu­dent loans and cred­it card debts take their toll. Despite a strong labor mar­ket with his­tor­i­cal­ly low unem­ploy­ment rates, there are signs that con­sumer stress is on the rise.

Con­sumer con­fi­dence took a hit in August, falling more than expect­ed, while delin­quen­cy rates among cred­it cards issued by small­er banks reached record highs. Depart­ment store Nord­strom report­ed that delin­quen­cies on its store cards now exceed pre-pan­dem­ic lev­els, and Macy’s expects late pay­ments to reduce cred­it-card rev­enues by 41% from the pre­vi­ous quarter.

One major con­cern is the impend­ing resump­tion of pay­ments on approx­i­mate­ly $1.1 tril­lion of fed­er­al stu­dent loans in Octo­ber. A study by Tran­sUnion warns that con­sumers could face a “pay­ment shock” of $500 or more each month. This loom­ing finan­cial bur­den has left many investors wary of the con­sumer sector.

“The U.S. con­sumer is on thin ice com­ing into the final stretch of 2023,” cau­tions Emi­ly Roland, co-chief invest­ment strate­gist at John Han­cock Invest­ment Man­age­ment is quot­ed by Reuters as say­ing. She is more opti­mistic about bonds and defen­sive sec­tors like health­care as the fourth-quar­ter hol­i­day shop­ping sea­son approaches.

Despite the addi­tion of 187,000 non-farm jobs in August, the unem­ploy­ment rate rose to 3.8%, lead­ing to con­cerns that fur­ther labor mar­ket declines could have a dou­ble-edged impact on investors. While it may relieve some infla­tion pres­sures, it could also weigh on con­sumer spending.

Con­sumer spend­ing did exceed expec­ta­tions in August, but the sav­ings rate fell to its low­est lev­el since Novem­ber 2022. As Jake Jol­ly, senior invest­ment strate­gist at BNY Mel­lon, notes, con­sumers will soon exhaust their pan­dem­ic-built sav­ings, rais­ing doubts about how long con­sumer spend­ing can con­tin­ue to sur­prise on the upside.

Gre­go­ry Daco, chief econ­o­mist at Ernst & Young, pre­dicts that high­er inter­est charges, dwin­dling sav­ings, and stu­dent loan pay­ments will lead to a decline in con­sumer spend­ing growth from 2.3% in 2023 to 0.9% in 2024. He antic­i­pates below-trend growth for sev­er­al quarters.

Investors are anx­ious­ly await­ing an updat­ed view of con­sumer cred­it usage and a read­ing of the ISM ser­vices sec­tor, which accounts for two-thirds of the econ­o­my. Despite con­cerns, the U.S. econ­o­my is still expect­ed to grow at an annu­al­ized rate of 5.9% in the third quarter.

Inter­est rates are like­ly to fall in the fourth quar­ter and into 2024 as infla­tion fears sub­side, pro­vid­ing some relief for con­sumers. Jason Dra­ho, head of asset allo­ca­tion Amer­i­c­as at UBS Glob­al Wealth Man­age­ment, expects investors to buy into any dips in con­sumer stocks, believ­ing that the U.S. con­sumer and the econ­o­my will remain fair­ly resilient into 2024.

“The US con­sumer, and there­fore the econ­o­my, should remain fair­ly resilient well into 2024,” the agency quot­ed Dra­ho as saying.

How­ev­er, accord­ing to Sandy Villere, a port­fo­lio man­ag­er at Villere & Co., even if con­sumer spend­ing does fall sig­nif­i­cant­ly, the strong ral­ly in the sec­tor will like­ly wane as the tech-dri­ven broad­er mar­ket slows over the fourth quarter.

“We think it’s pre­ma­ture to move away from the con­sumer now, but we can see a reces­sion hit­ting in the first quar­ter as the Fed’s rate hikes start to kick in,” Villere is quot­ed as saying.