What's driving consumer debt, low consumer sentiment, and weaker retail sales?
Thanks for the important question about what's influencing consumers right now. There are many closely connected trends that reflect a challenging environment for some American households, even as the overall economy continues to grow. Understanding the underlying forces can help put current conditions in perspective for long-term financial planning.
Here are some key factors to consider:
• Consumer debt levels fell slightly in the second quarter to $18.8 trillion, according to the Federal Reserve Bank of New York. Of course, this is still a significant amount, especially as credit card debt approaches $1.3 trillion, auto loans $1.7 trillion, and student loans also $1.7 trillion. Delinquencies also remain high, but this is partly due to how companies and researchers are categorizing loans.
• The latest retail sales report for July showed that spending fell much more than expected. Overall consumer spending declined -0.6% for the month, compared to an expected gain of 0.1%. However, these retail sales figures published by the Census Bureau are not inflation adjusted, so improving gasoline and fuel prices can affect these figures. On the flip side, the personal saving rate has fallen to just 2.7% based on recent data, well below the historical average of 6.2%, suggesting some consumers are feeling stretched.
• The data points to what is often referred to as a "K-shaped" economy. This is one in which some households are doing well and benefiting from a growing economy and financial market gains, while others are struggling. For instance, inflation and wages are moving in the wrong direction for some workers. The latest jobs report showed that average hourly earnings grew only 3.2% in July, below the overall rate of inflation, meaning that paychecks are not keeping up with prices.
• The recent University of Michigan Surveys of Consumer figures also show that consumer sentiment remains near historic lows, falling further in August. This is true for both Current Conditions, or how consumers feel today, and Expectations, or how they feel about the future. This isn't surprising after several years of rising prices.
• At the same time, these monthly economic reports can fluctuate significantly. Overall GDP data show that consumer spending remains healthy, and the overall economy is still growing. So, while some consumers do face important challenges, it's critical to not overreact to one set of data points.
The included chart on consumer debt levels helps illustrate how financial stress builds during periods of high inflation and a weakening labor market, and why these trends are worth watching closely.
While the current environment is challenging, it is worth remembering that long-term investors who stay focused on their financial plans through economic cycles have historically been well-positioned to benefit when conditions eventually stabilize and improve.
