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.