QUOTE OF THE WEEK
“As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.” -John Fitzgerald Kennedy
TECH CORNER
I want to talk about the financial health of the consumer. Consumer spending makes up approximately 75% of the economy.
It is starting to look like the consumer is running out of money. This fact can be illustrated by the direction of consumer spending. Retail consumer spending dropped by -0,09% in the month of January, which compared to the prior month, easily dropped far more than expected. Also, consumer spending for the month of December was revised downward after showing a strong Holiday spending season. I just saw a statistic, that during the Holidays, credit card debt went up over 55 billion and Buy Now Pay Later (BNPL) went up 18 billion. Over 80% of the increase in Holiday spending was put on credit cards and BNPL.
The average credit card interest rate has now risen to over 22% and the BNPL rate if you miss a payment is over 25%.
Credit card default rates are now over 5% for Capital One and Discover credit cards which means t people are just walking away from paying their credit card bills. The overall default rate on all credit cards is now higher than during the Great Recession of 2007-2008.
Another huge loan default is the auto loan industry. People who financed their auto and truck purchases over a five or seven year time frame are finding themselves both unable to make the payments and finding that the loan on the vehicles is more than it is worth so they are just handing in the keys.
Another indicator that the consumer is in trouble is the current savings rate. Historically the savings rate in the U.S. has been around 9%. During the pandemic the rate was 6.8% primarily due to the the government handing out checks to people and businesses. Now the savings rate is at 3.9% and falling.
Why is this happening? I have two theories. The first is that incomes have not kept up with the high inflation we have experienced over the last number of years and second is that Americans are addicted to spending no matter what their economic circumstances are.
What this points to is that the consumer can’t continue to spend at the same rate to prop up the economy.
