Investment Strategy Brief:
Will Consumers Feast This Holiday Season?

Below is a transcript of this week’s video.

Hello, this is Ilona Vovk with Investment Strategy at Glenmede.

The U.S. is officially heading into the premiere shopping season of the year with Black Friday just around the corner. Keeping a finger on the pulse of the consumer is always an important exercise, given that household spending is typically the engine for overall economic growth in the U.S., consistently representing about two-thirds of gross domestic product. As goes the consumer, so too does the broader economy.

As far as household spending goes, once late November hits, its primetime for spending. U.S. retail sales experience spikes that seem to pop up about once per year. That’s the holiday season, where households typically spend much more cash than they do in other months by far, including gifts, decorations and extra personal treats too. With heightened concern over the overall economy, these holiday spending trends this year might get an extra dose of scrutiny from economists and investors alike.

There are some signs that the U.S. consumer may not be on its best foot heading into the holiday shopping season. For example, retail sales registered the first month-over-month decline in at least six months in October on a seasonally-adjusted basis. What’s more, is the University of Michigan’s Consumer Sentiment Index has picked up on signs of waning confidence in U.S. households. This could be attributed to growing concerns over the effects of high inflation and rates on personal finances. 

To that end, U.S. households built up an arsenal of excess savings during the pandemic above and beyond what they ordinarily might have saved given more normal conditions. However, the average consumer has already worked through most of those savings, which may not be able to support spending as much as they have in the past.

Now the other component to this is government transfer payments which are no longer providing as much support. In addition, interest costs are placing new demands on disposable income, particularly after the resumption of student loan repayments. 

So, there are some nascent signs of consumer stress showing up in credit delinquencies which we can observe through the share of outstanding debt balances that have transitioned to 30 or more days past due for auto loans, credit cards and mortgages. After sitting at multi-decade lows following the pandemic recession, those numbers have continued to tick higher. This may be an important factor to monitor for more signs of stress from consumers. 

To summarize, consumer spending is a major driver of the U.S. economy, with the holiday shopping season a key barometer for the health of households. Retail sales and sentiment have been flagging incremental weakness in consumer strength heading into the year’s premiere spending season. This time, households face multiple headwinds as government support diminishes and personal debt burdens increase relative to disposable income. The other concern being that consumers, in aggregate, have less excess pandemic-era savings left to support holiday season spending. And one of the things to watch is rising delinquencies on mortgages, credit cards and auto loans which have risen notably and are nearing more concerning levels. Consumers, this time, may look to moderate or may not be able to sustain the same level of robust spending as in past holiday seasons.

And with that, thank you for listening! And please don’t hesitate to reach out with any questions.