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By Robert Dishner
Consumers are acting as if their savings buffer is depleted.
Recent data has given us concern that comparing savings to pre-pandemic levels may not be the right analysis when it comes to consumption. Consumers are acting as if the buffer they want is higher. They are spending nearly all their disposable income and using consumer credit in lieu of savings. If that is the case, for consumption to continue to rise, we believe incomes and the availability of credit will likely be crucial. Importantly, 2022 spending levels may be “artificially” high, driven by a potential…
Our issue is with assets held by U.S. commercial banks: Credit card debt, which initially dropped by over $120 billion from pre-pandemic levels through April 2021, is basically back on trend and is $200 billion higher than the lows. Home equity lines, while still well below pre-pandemic levels, have increased by $4.3 billion since early August, and auto loans continue to grow.
Initial stress in the beginning to show as auto loans are starting to deteriorate, with newly delinquent auto loans increasing to 6.2%, above last year’s 5% but still below the 6.9% seen in 4Q19. Also, Vanguard reported a pick-up in the share of workers taking cash from plans through new loans and non-hardship withdrawals on 401k(s). Particularly troubling was a rise in hardship withdrawals to all-time (since 2004) highs.
That consumers have been willing to spend nearly all their disposable income (savings rates are at near all-time lows) as well as take out credit suggests to us that they are less willing to spend down “excess” savings. If the consumer will not spend those amounts, or if the distributional accounts later in the month show concentrated savings at upper incomes, then consumption could be reduced into 2023 if earnings are lower or credit is unavailable.
Availability of credit is of particular concern: According to the latest Senior Loan Officer Opinion Survey, domestic banks’ net percentage willingness to make consumer installment loans has fallen to -6.8%—the lowest level outside of the pandemic since the global financial crisis.
While the Federal Reserve and many banks have noted the savings increase, that assumes that those prior levels were optimal. We, therefore, are getting more concerned about consumption, particularly on goods that require credit. That said, incomes should continue to support services spending, blunting a deeper slowdown.
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