What a difference a year makes.
Launch of consulting giant McKinsey & Co. the results of a consumer survey last fall that carried this bubbly headline: “Shoppers Feeling Worn Out and Outgoing.” McKinsey said that half of those who reported annual earnings of at least $100,000 were “excited or anxious about the holidays.” It turned out to be a good decision. Despite the pandemic and its many complications, the final count from the US Census Bureau showed that annual retail sales grew 18 percent in 2021 over 2020.
This year’s headline? How about, “Shoppers are exhausted, exhausted and gloomy?” I’m also not sure that statement is accurate.
The main villain is inflation, but the problem is much deeper than the price of gasoline or groceries. Interest rates are skyrocketing. That means the cost of credit card debt is rising, and as the Federal Reserve recently promised, it is expected to continue rising as the central bank acts to prevent inflation from getting worse.
A year ago, consumers had a good reason to feel “expensive.” Among other factors, many had used part of the flood of government stimulus funds released during the year to reduce debt. At the same time, real estate prices were beginning to spiral out of control. The median sales price of homes sold in the US increased by more than a third in just 12 months. Consumers had cash, credit, and home equity available.
A year later, credit card debt skyrocketed, posting the biggest year-over-year percentage increase in more than two decades. Revolving credit increased in July only at an annual rate of 11.6 percent.
So consumers have been spending money they don’t have and now it’s costing them much more. A year ago, the average adjustable-rate credit card charged about 15%. Today, the average adjustable rate for all new card offers has topped 21%, with some bank cards hovering at 25%. Those rates are guaranteed to keep rising as the Federal Reserve raises the prime rate that credit card rates are based on.
Meanwhile, rising mortgage rates are stifling the housing boom. Home prices are falling, home values are shrinking, and those who have moved, invested in real estate, or bought a second home are discovering what it means to be land poor.
Perhaps the most revealing statistic on the state of the consumer is from the Fed. Personal Savings Rate tracker that calculates personal savings as a percentage of personal disposable income. That measure peaked in May 2020 when federal stimulus payments flooded the economy with cash.
A year ago, the savings rate was 10.5%, the highest in three decades. A year later, in the most recent report in July, it had plummeted to 5%, the lowest rate since the Great Meltdown/mortgage crisis of 2008.
What does all this data mean for the state of the consumer and future spending?
First, cars and houses are becoming unaffordable for many, and therefore that segment of the economy will continue to slow as the Fed’s interest rate adjustments intend. If the Fed can control inflation, specifically food and gas prices, then there could be a light at the end of the tunnel. If not, and consumers have less cash to spend, they are likely to cut back or borrow.
Which brings us to the final consumer debt factor that needs to be considered. If employment numbers remain strong and people can continue to pay off their credit cards AND maintain a reasonable percentage of debt, we may all have a decent landing.
The concern is that there are too many “ifs” in those statements.
It is better for both businesses and consumers to keep a close eye on all the metrics of what is currently happening and what has happened in the economy, but it is just as important to try to anticipate what may happen next.