Overview
What do the numbers tell us Alex?
Real consumer spending in the US is basically bang on its trendline, growing about 2 per cent year over year. Nominal spending has been stronger than that given inflation, growing at about a 6 per cent annualised rate looking back to 2019. That's been supported by very strong gains in income on a nominal basis, again up 6 per cent over the last four years, annualised. On a real basis, it’s about 1.5 per cent.
That is reassuring, but I would say there are some yellow flags. In particular, delinquencies in parts of consumer loans like autos and credit cards are reaching or surpassing pre-pandemic levels.
Does that worry you?
It is hard to tell. Delinquencies were at a historical low during the pandemic, helped by things like forbearance and lower spending and fiscal stimulus. And now we've seen them normalise. But the rate of increase is ongoing. So the question is where do those delinquencies go from here.
The level of them is not bad, but the trend might be?
Correct. The level is a bit above pre-pandemic levels, but the trend, especially on the credit card side, does suggest continued deterioration. Now there are questions about whether this can continue to deteriorate if the labour market holds up. What we're seeing so far is probably just a reflection of normalisation, but also of higher interest rates putting stress on some US consumers, particularly younger, lower income cohorts with higher debt balances.
But the Thanksgiving numbers were very encouraging.
They were. Spending numbers online were up in the high single digits in store, up maybe 1 per cent for an overall spending growth number of 2 to 3 per cent year over year. That exceeded the low expectations and was generally in line with what you might have seen pre-pandemic, but below some of the stronger years of late.
What’s holding consumption up?
Both strong wages and job gains. The labour market has been the key to supporting the consumer.
And those stats will tell us what’s going to happen in the months ahead?
If you look at things like wage growth or job openings, labour demand has been cooling. But overall employment and employment gains have continued. If that changes or weakens in the year ahead, where you start seeing job losses and higher unemployment, that's certainly a risk factor for the consumer.
How is sentiment among the companies you cover?
Management sentiment I would say is mixed depending on what categories they're in. If you look at some of the service sector companies like travel and leisure demand is quite healthy. Their management teams are generally optimistic. Some of the weaker categories that did well in 2020 or 2021, like home improvement, furniture, consumer electronics, and some of the big ticket consumer durables like boats or RVs, where demand has been weaker, sentiment there is more downbeat.
Is there a lot more differentiation between those categories of companies than before the pandemic?
Yes, the nuances of the pandemic and lockdowns drove some big changes in what consumers were spending their money on.
Or how people divide up their spending.
Yes. Goods were very strong in 2020 and 2021 whereas services suffered. Now that has really flipped. Travel, leisure, entertainment, or categories like gyms or casinos or theme parks have been strong at the expense of categories like home furniture, home improvement, consumer electronics. A lot of these are durable goods that last many years. And because people spent on these things during the pandemic there's just less need for purchases right now. Plus there’s some pent up demand for things like vacations.
What's the one thing that people might be missing when they look at your sector?
I see a lot of headlines about excess savings and the rundown of those savings being worrying for future consumer spending once they’re exhausted. But it’s not something I worry about as much. There are a lot of assumptions in these calculations. One part is that it uses disposable income, which includes things like capital gains taxes and asset income. And those have been fluctuating a lot but don't really impact spending. If you look at just aggregate wages and salaries, which is what tends to drive spending, that has basically grown alongside spending over the past four years. So it suggests that excess savings are a bit of a red herring.
