Consumer Spending is Running Against the Wind

Michael Normyle – Nasdaq’s US Economist joins IBKR’s Andrew Wilkinson and Jeff Praissman to discuss the headwinds the consumer is currently facing and consumer spending’s effect on the economy.

Contact Information:

Email:  Michael.Normyle@nasdaq.com

Web:   www.nasdaq.com

Summary – IBKR Podcasts Ep. 101

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi everyone, welcome to IBKR Podcasts. I’m your host, Jeff Praissman, along with Michael Normyle, Nasdaq’s U.S. economist. In this podcast, we’re going to discuss the headwinds the consumer is facing and the consumer spending’s effect on the economy. Welcome Michael, thank you for joining us.

Michael Normyle

Thanks, glad to be here.

Jeff Praissman

It’s great to have you back. So, let’s just kind of start with how does the average American’s accumulated excess savings look now compared to peak levels?

Michael Normyle

Sure. So, I’ll start by defining excess savings for everyone, since it’s a relatively new concept that’s basically just the amount of money that people saved since the pandemic started above and beyond the pre-pandemic trend in savings. And so, people were able to save a lot of extra money during the pandemic for a few reasons. First, that everyone was stuck at home so they couldn’t spend money on traveling or going out. And then we had government stimulus checks that padded people’s bank accounts, and also there would be enhanced unemployment benefits. So that meant that a lot of people made more money on unemployment than they did at their previous job. So, for all these reasons, Americans accumulated about $2 trillion in excess savings at the peak in the middle of 2021, according to most estimates.

Now, though, it’s estimated that we’re down to about $200 billion in excess savings as of Q2, so a tenth of the peak level and estimates are that excess savings will be gone by this third quarter.

Jeff Praissman

Are there demographics that are struggling more than others with — obviously excess savings is down a huge amount – are there demographics that are struggling more than others or just savings down all across all financial levels?

Michael Normyle

Yes, savings are definitely down across the board and many expect that, you know, lower income households in particular are worse off where they’ve actually have already exhausted their excess savings at this point. Because the number that we’re looking at is an aggregate number so it could be that the suspicion is that wealthier demographics still have some excess savings, whereas people on the lower end more than likely have already spent their excess savings at this point. And that’s, you know, of course, with higher inflation that we’ve experienced in the last couple of years, people have had to dip into those savings to make ends meet. That’s why the expectation is that people on the lower end of the income spectrum have probably exhausted their excess savings at this point. It’s possible that wealthier households, however, may never need to spend down their excess savings. So the good news, though, is that Bank of America data does show that checking and savings account balances are higher across the income spectrum relative to pre-pandemic levels, and that likely reflects a mix of excess savings and wage gains that we’ve seen over the last few years.

Jeff Praissman

Kind of leads me to this question now, even with the “wealthier households” that most likely have some excess savings left or all their excess savings from pre peak levels. Do you think, given our current economic climate, though, do you think that they’re spending behavior will change and even if they still have this excess savings, they won’t necessarily be spending as much and putting as much money into the economy?

Michael Normyle

Honestly, it’s possible that that has already happened. I think some people believe that the reason that we’ve managed to avoid recession to this point is that with all the talk of an impending recession over the past year, people already adjusted their spending habits a bit, being a bit more cautious. And we’ve actually seen the savings rate has picked up since the middle of last year, although it’s still below pre-pandemic levels. So there are some sign that people have been, you know, enhancing their kind of precautionary savings a little bit but this shift could become more pronounced as people run out of excess savings on a wider scale.

Jeff Praissman

And, of course, you know, the other side of savings is debt. What is the current trend with consumer debt as this excess savings has sort of dwindled down?

Michael Normyle

Right. So, debt has been rising and that’s not really that surprising right? We’ve seen home prices rising over the last few years, so they naturally require bigger mortgages, and the average car price is over $40,000 so that’s going to require larger auto loans. But the headline grabbing figure that we saw the other week was that credit card debt surpassed a trillion dollars in the U.S. and that’s a problem because the Fed’s rate hike cycle has also pushed the average credit card rate to 20%, which is near a record high but there are a few bits of good news. First, we had lenders have learned their lesson from the financial crisis so home and auto loans have gone to more creditworthy individuals on average. And we’ve also had a decade plus of low rates, so a lot of debt was locked in at very low long term fixed rates, and only about 10% of outstanding household debt in aggregate is adjustable rate because so much of it is the fixed rates for mortgages and things like that where it’s a long-term fixed rate. And then lastly, with incomes rising so much in recent years, if you look at credit card debt as a share of income, it’s actually not that stretched by historical standards. So, credit risk is lower and rate risk is relatively low too.

Jeff Praissman

To kind of go along with debt because obviously you can have debt, but you can still — people have debt, but they’re making timely payments. It seems like a lot less of an issue than people that have debt and aren’t even able to make their payments. So, has the frequency that people are late with payments increased at all? Where is that compared to, say, peak levels?

Michael Normyle

Definitely seen delinquency rates rise from their lows in 2021 and at that low period happened to coincide with the peak and excess savings, which makes sense. Fortunately, though, even as they’ve come up, they’re still more or less around the pre-pandemic levels at this point. And those pre-pandemic levels are even about half or less than half of the delinquency rates that we saw during the financial crisis. So, it’s still at a relatively innocuous level at this point.

Jeff Praissman

The United States is obviously a huge geographical country with different you know, — the northeast, you got the Southeast, Midwest, Pacific Northwest, Pacific Southwest. Is the delinquency rate kind of vary between geographical areas or is it sort of kind of evened out between the different regions? No real difference between the different geographic regions or are there sort of certain areas of the country that seem to be struggling more than others?

Michael Normyle

Yeah, there’s definitely a lot of variation across the country, depending on region. So for example, if you look at the country with the highest delinquency — I’m sorry —  the state with the highest delinquency rate right now, that’s Texas, whereas the lowest is California. And that’s a pretty significant gap, it’s about double the rate in Texas as it is in California. So, it can be quite varied across state lines and across regions and seeing relatively significant gaps as well.

Jeff Praissman

And you touched on this a little bit earlier with one of your answers when you discussed the difference between, say, fixed rate debt and variable rate debt. And to obviously kind of to dive a little bit more into it, credit card payments, car payments, mortgage payments, you know … sort of you can kind of get a little bit more detail about how it’s affecting, say, credit card payments and car payments versus mortgage payments? If I have a low mortgage, I’m in really good I’m in really good shape, except for the fact if I want to sell my house and get another house, whether I’m trading up or trading down, then all of a sudden, my 3% mortgage might go to 6.5 – 7% mortgage and maybe, I would assume had some sort of effect on the market as well.

Michael Normyle

I think you’re right in thinking that the biggest challenges for consumers right now are the more variable rate things like credit cards and then as well as car payments. So, we see delinquency rates on credit cards and car loans are actually about triple the rate for mortgages and the good news is that bankruptcy and foreclosure rates remain below pre-pandemic levels. And like you’re saying about the impact on changing mortgage rates, that’s definitely a factor. We see since right before the Fed started hiking rates to now, the monthly mortgage payment for the median priced home has increased from less than 1400 dollars per month to more than 2100 dollars per month. So that’s an increase of more than 50%. And in that time period, home prices are only up just over 10%. So, a lot of that is the higher mortgage rates that are that are driving that increase. And like you said, a lot of people bought homes or refinanced in the last few years so about 60% of people have mortgage rates that’s under 4%. So, with prices up in recent years, rates at 7%, housing affordability is now about as bad as it’s ever been and so that’s kept people with low rates from wanting to sell their homes, creating a lack of supply available, of homes available for sale. But that’s also created a bit of a new trend lately where people have been pushed into the new home market but that’s kind of a separate issue.

Jeff Praissman

And my last question, sort of the elephant in the room, student debt payments have been kind of, I guess, frozen for the last three years and people with student debt haven’t had to make a payment, but that’s about to end. And with every other headwind coming at consumers, college is extremely expensive these days, the student debt is extremely high and this just seems to be like another headwind for millions of Americans, especially probably even more on the younger side that might just be trying to start out, you know, get their foot in the door. Kind of start building up their savings, maybe they would be looking to go from an apartment to a house. So how do you think this, once the student debt payments come into it as another headwind, how will this affect the economy?

Michael Normyle

Right. So, estimates are that it’s about 20 million Americans that are restarting student loan payments in October and that’s after three years of not making those payments. A lot of people certainly got used to having that extra money in their pocket, not having to set that aside and some people even took that as an opportunity to take on more debt during that period. So, it’s definitely going to be a challenge for a lot of people in terms of what it will do for consumer spending. For example, estimates are that it will subtract about $9 billion a month from consumer spending. It’s important to remember that monthly consumer spending is about $1.5 trillion, so it’s not actually that big of a drag as it relates to consumer spending. So, most estimates are that it’s going to take around 0.1% off of spending this year and a bit more next year. So, it’s definitely a headwind to the economy for sure and at a time where we already have all the interest rate hikes and other headwinds facing the economy.

It is mitigated by the fact that a lot of student loan debt is with higher income households and so they have that mix of excess savings leftover that we discussed, along with higher incomes where they can better absorb the cost of a student loan payment coming back into their monthly bills.

Jeff Praissman

It may have an effect on an individual family but the overall economy, it’s going to be just a little bit of a blip basically. And it shouldn’t — You know, while individual households may suffer from having this extra payment, the overall economy … it’s going to just be a slight headwind and not a major bump in the road for it.

Michael Normyle

Right, I think that’s a fair assessment. I think it’s going to be, of course — on a case-by-case basis — it’s always going to be certain people where it will be a big challenge depending on how their circumstances have changed over the last few years. But in aggregate, it might be getting more media attention than necessarily is related to the amount of impact it will have on the economy.

Jeff Praissman

Once again, I’d like to thank our guest, Michael Normyle from Nasdaq for joining us at IBKR Podcasts. For more from Michael and Nasdaq, please go to our website under Education to view previous Nasdaq webinars and podcasts. I also want to remind everyone that you can find our podcast on our website under Education, scroll down to IBKR Podcasts or on YouTube, Spotify, Apple Music, Amazon Music, Podbean, Google Podcasts, and Audible. Thank you for listening, until next time, I’m Jeff Praissman with Interactive Brokers.