This week we want to briefly review how the consumer is holding up in a weakening economy with high inflation. The best way to get a sense for the consumer’s health is by looking at retail revenue growth and credit card spending.
Credit card balances have exploded higher this year. During Q3, total credit card debts outstanding in the US grew by 15% year-over-year. This was in stark contrast to the Covid period of debt repayment and decreased spending. The last data point from the Federal Reserve shows Revolving Credit (Credit Cards) balances at the highest level ever. Since the reopening of the economy in 2021, credit card debts have risen by nearly $200 billion to $940 billion.
At the same time, interest rates on those debts have also risen quickly. Credit card interest rates are now approaching 16%, by far the highest rate in the past decade.
Now, just looking at credit card spending doesn’t give us the full story on consumer health. We need to understand why people are using their credit cards instead of paying for their purchases upfront. This could be driven by very optimistic households that are buying in anticipation of strong earnings growth or it could be a sign that consumers are running out of money and are turning to debt to maintain their lifestyles in the face of rapidly rising inflation.
To find a clue as to which of these scenarios is playing out, we can look at the earnings reports for the major retailers. This week many of the largest retailers reported weak earnings and compounded the misery by providing reduced guidance for the holiday quarter.
The largest retailer in the world, Walmart, reported this week and had a lot of insight into what is happening in American households. Walmart CEO, Doug McMillon, said, “Regardless of income levels, families are more price-conscious now.” He went on to explain that Walmart has been picking up a lot of business from households who traditionally haven’t shopped at its stores. Walmart expanded its market share in Q3 with ¾ of those gains coming from shoppers with incomes above $100,000. Same store sales were barely able to outpace inflation in the quarter with real sales increasing by 0.5% y-o-y. Management noted that they have been working through excess inventory caused by much weaker sales than expected over the past six months. The company is forecasting an earnings decline of over 5% in the final quarter of the year (its most important quarter). John Rainey, Walmart CFO, said, “The consumer is stressed.” He expects continues slowing in shopping.
Target also reported earnings this week. The company missed earnings expectations with earnings down 49% in the quarter vs. last year. Real sales fell by 4.3% as pricing and volume couldn’t overcome inflation. The company is expecting a decline in absolute sales during the holiday quarter. Based on their view of continued consumer weakness, they are reviewing the company’s operations for potential cuts.
Other retailers have reported similar dismal results based on consumers reducing spending.
So, it appears that the recent surge in credit card spending is due to consumer distress and not optimism. We’ll have a better sense for how bad things are after the holiday shopping reports but for now it doesn’t look like the consumer is in a positive mood. In fact, consumer sentiment hasn’t been this low since early 2009.
So, what do we do with this information. Well, this makes us more inclined to stick with our allocations to the necessities of life, instead of investing in the luxuries. We continue to like rental housing, consumer staples (food, clothing, fuel), energy and healthcare.
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