Despite numerous economic challenges, consumer spending has remained remarkably resilient. The U.S. Census Bureau’s release of September retail sales showed strong results, solidifying consumers’ willingness to spend. But with the holiday season approaching, it remains to be seen whether consumers will continue their strong spending or begin to pull back in light of financial pressures.
Consumer sentiment is fading
The University of Michigan’s consumer sentiment index dropped to a six-month low of 60.4 in November, down from 63.8 a month earlier. Consumer sentiment around current and future economic conditions also continues to fall with both figures maintaining downward trends in October. There are several factors contributing to the consumer mindset, including gasoline prices that spiked in September, rising interest rates, growing inflation concerns and the return of student loan payments. These factors are not affecting consumers equally, with lower income groups feeling more pressure than higher income brackets who are better equipped to manage economic headwinds.
The Federal Reserve’s battle with inflation through policy rate hikes resulted in the current range of 5.25% to 5.5%. While the Fed held rates steady in the most recent November meeting, the ripple effects of previous hikes are being felt throughout the economy in a number of ways, including higher credit card and mortgage interest rates that are challenging consumers.
Lower-income consumers under pressure
According to the Federal Reserve Bank of New York, credit card balances rose significantly to $1.08 trillion in the third quarter, which is no surprise given recent healthy consumer spending readings and gross domestic product growth. As consumers in the lower-income brackets struggle with higher prices and deplete their excess savings, many are likely turning to credit cards more frequently for basic living expenses. The most recently released third quarter Household Debt and Credit Report, published by the Federal Reserve Bank of New York’s Center for Microeconomic Data, noted that credit card delinquencies have surpassed pre-pandemic levels with the third-quarter credit card delinquency rate rising to 5.8% from 5.1% a quarter earlier. Further, 2% of credit card users moved from current to delinquent by 30 days or more on at least one account in the quarter, higher than the third-quarter average of 1.7% from 2015 to 2019.
Credit card delinquencies are rising across income brackets, but the lowest earners are experiencing the highest rates. In an analysis compiled by the Federal Reserve Bank of New York Consumer Credit Panel/Equifax and American Community Survey, credit card users were compiled into four equally sized income quartiles based on ZIP code median income. When the delinquency rates of each quartile were analyzed, all four quartiles had delinquency rates above pre-pandemic figures, but the lowest quartile had the highest rate.
Lower-income consumers are continuing to feel economic strain from mounting credit card debt and shrinking savings, as well as gasoline and shelter costs that, while improving, remain elevated.
These factors are accompanied by the return of student loan payments, which are also weighing on consumers. We are anticipating that the payments will have only a modest economic impact; however, it’s yet another cash outflow that consumers will have to account for as they carry out their holiday shopping.
