Hello Traderade family,
I hope you're all having a good weekend. As we head into the end of the year, we thought this might be a good time to check in on the health of the consumer.
We just saw multiple reports over the past week that said consumers spent a record amount for holiday shopping. CNBC quoted $9B for Black Friday and I put out this chart on Twitter that showed record amount from the Adobe Survey for all three shopping days.
But, remember not everything is as it seems. These numbers are not adjusted for inflation and with that adjustment, spending actually comes down to around -5% from 2021 levels.
And this is no surprise.
We continually keep hearing that the US consumer is strong. But, the data keeps telling us otherwise. With the Personal Savings numbers hot off the press, this is a good time to look at what the data is actually telling us.
Personal Savings data just came out this Thursday and the news continues to be grim.
According to the BEA, that publishes this number on a monthly basis with the PCE data, the US Personal Savings Rate as a Percentage of Disposable Income dropped to 2.3% from 2.4%. This may mean nothing on the face of it but, when you look at the data going back to the 1960s, this is the second lowest point since then! The lowest was 2.1% in July 2005, and I won’t be surprised if we get there.
Here’s another scary chart. According to JP Morgan, excess savings accumulated during the pandemic will likely be gone by mid-2023.
Real Wages are the most negative that they have been in a long time. Unfortunately, earnings are not where we want them to be. Real disposable personal income was up 0.4% month-over-month and down 3.0% year-over-year (versus down 3.4% in September).
Despite some of the wage rate increases and the tighter labor market, the YoY change in wages has been obliterated by inflation. The recent jobs report showed us that hourly earnings are inching upwards, increasing 0.6% MoM.
But earnings increasing is a double-edged sword. On the one hand, we have a situation where savings are drying up and without the additional boost from earnings, demand will slow enormously. On the other hand, the higher wages will lead to further increases in the costs for companies and when they pass those costs on, inflation will continue. What the Fed is most scared about is a wage spiral which will continue to push inflation higher.
The Employment Cost Index that comes out on a quarterly basis doesn’t show us a pretty picture either and the Fed Chair even discussed this twice now, saying that the level is 1.5%-2% above where it ideally should be.
Borrowing Levels
Unfortunately, as purchasing power starts to drop due to the decline in savings and real wages, we see borrowing start to inch up. As of Q3, 2022, the total debt balance increased from $16.15T to $16.51T. When looked at in a historical context, things don’t look great.
The next chart shows us the total levels of delinquencies on the left, and the transition to serious delinquencies on the right. The total level of delinquencies is still quite low, albeit with a slight increase. But, the data on transitions tells us that loan repayments are definitely being delayed. This isn’t great news. The cycle for credit card debt is such that we start to see real delinquency data and defaults between December and March. So, looking at the Q4 data will probably be more telling.
Finally, we’re starting to see some increases in bankruptcies and foreclosures. We are nowhere close to historical levels and this is still a good sign. Again, next quarter’s data may reveal more and there may still be some buffer in the system due to the level of excess savings.
Closing Thoughts
“How did you go bankrupt?"
“Two ways. Gradually, then suddenly.”
- Ernest Hemingway, The Sun Also Rises
This is how the market unravels. Things build up gradually over time and then, we start to see sudden sharp movements. Despite most banks saying the consumer remains strong, we see gradual changes that suggest otherwise.
The consumer is at the heart of the economy. Without consumer spending, we have nothing. We need consumer spending to decline, in order for inflation to moderate. But in the process, we have to understand that this will also companies to post negative growth in revenues and earnings.
We have an earnings recession coming and with that, we will probably see further downside pressure in the markets over the next 3 quarters.
Disclaimer: The content presented in the article is for information purposes only and should not be construed as investment advice. The data presented is accurate to the best of our knowledge at the time of publishing.