Following the onset of pandemic, outside of the three large fiscal transfer payments sent to U.S. households, there were several temporary programs to help support the consumer, including student loan forgiveness. However, most of the pandemic-related programs have rolled off and student loan payments resume on October 1st. From a macro perspective, we are viewing the student loan pause in the context of what it meant for consumer spending during the period it was in place and what the reversal of that likely looks like. Simply put, there were programs in place that artificially supplemented the consumers’ ability to spend and now those benefits are going away, which likely has a negative impact on consumer spending from here.
One of the reasons we believe this is worth tracking is because of the already weak consumer income setup. Although real average hourly earnings have been positive on a y/y basis since May of this year, they had been negative for twenty-five consecutive months beginning in April 2021. In nominal terms, earnings have been trending lower on a y/y basis since March 2022 and in the latest release moved to their slowest pace since June 2021. With nominal earnings growth moving sideways to down in 2023, the recent reacceleration of the Consumer Price Index has once again started to put downward pressure on real earnings growth. The cumulative impact of negative real earnings growth will likely continue to play out through 2023.
As real earnings were slowing, consumers increased their use of credit card debt. The y/y growth rate of revolving consumer credit has been above 10% since February 2022. Over that same timeframe, nominal retail sales have slowed from 17.8% y/y to 2.5% in August. When adjusted for inflation, retail sales have not moved above 2% y/y growth since March 2022 and have been negative in nine of the last ten months. In terms of the consumer debt setup, the interest on those credit card balances on average are at their highest levels on record.
The acceleration in credit card usage and slowdown in spending has taken place in a period where student loan payments were on pause. The reversal of that program likely puts the consumer in an even tougher spot in terms of debt and ability to spend. One of the ways we can track whether student loans are being paid back is through deposits from the Department of Education into the Treasury General Account. Over the last few weeks, we have seen these deposits increase, which is likely a response by some consumers to catch up on delayed payments ahead of October 1st. It will be important to watch this data and consumer delinquency reports over the next few quarters because there are still ways for certain consumers to push payments out beyond the coming due date by applying for relief plans like Income-Driven Repayment Forgiveness, Public Service Loan Forgiveness, or the On-Ramp program.
The slowdown in real earnings growth, acceleration of expensive credit card debt, and resumption of student loan payments likely point to a consumer that is becoming increasingly unable to spend. We will continue to monitor the consumer setup closely as a further slowdown in consumer spending will likely have negative implications for the broader economy.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC