TS Eliot wrote that the world will not end explosively, but quietly.
The unstoppable wave of consumer spending may end with a sudden hit to retailers rather than a complete slamming on the brakes.
Consumers may become more open-minded as they realize their savings alone are not enough to keep up with spending and debt puts added pressure on them.
And it’s lower-income consumers who may offer the clearest indication of retailers’ future, especially in discretionary spending categories like beauty and apparel.
As PYMNTS Intelligence has found and highlighted in a recent column by Karen Webster, 10% of U.S. consumers earning less than $50,000 a year are already struggling to make their monthly payments because they run out of money before payday. The challenges faced by this demographic reflect the difficulty of sustaining the 8% of overall consumer spending.
As for obligations, “while they won’t ultimately go away, each month becomes a game of bill-payment roulette as consumers decide which bills they can wait a little longer for. Interestingly, of all household expenses, utilities, insurance, cell phone, and credit cards make up the largest monthly cuts — bills that carry the greatest downside risk if not paid,” Webster writes. But funds spent on these necessities (which are stretched to the limit) mean less money available for other things.
Low-income consumers are being left behind
There are some signs from earnings season so far, especially from banks. While most of the payment networks have not yet reported, JPMorgan Chase, Wells Fargo, Citi and others have noted year-over-year increases in delinquency rates on card and auto loans, with slight improvements quarter-over-quarter. It’s important to note that delinquency rates are indicative of some of the tightrope walking mentioned earlier: debt is not yet being written off.
In terms of delinquency rates, JPMorgan’s supplemental earnings showed that its 30-day delinquency rate in the second quarter was just under 2.1%, higher than 1.7% in the same period last year but improved from 2.2% in the first quarter. Card spending was generally strong, but management noted weakness among lower-income customers.
During Citigroup’s earnings call, management pointed to the fact that individuals with higher credit scores continue to use their cards while consumers with lower FICO scores are being left behind.
Chief Executive Jane Fraser said Citi was “seeing increasing differentiation in the credit sector with lower-income customers feeling the pressure,” while CFO Mark Mason said, “Customers with lower FICO scores are being hit more severely by high inflation and interest rates, experiencing sharper declines in repayment rates and increased borrowing.”
The 90-day delinquent rate was 1.1% for the most recent period, up from 0.8% last year and down from 1.2% in the first quarter. Card loans that are 30 days or more delinquent rose to 2.7% from 2.3%, according to Wells’ filing.
Delinquency rates have been rising slightly in other loan categories, with the most recent quarterly delinquency rate at 1.12%, up from just over 1% in the first quarter and 0.9% last year, according to JPMorgan filings.
We noted that “most” of the payment networks have yet to report. Visa and Mastercard are still waiting to report. But Discover reported earnings last week, reporting a 3% drop in card sales, with CFO John Green saying, “The company is still in the red.”[s] “Consumers are becoming more cautious and cardmembers are spending less, with lower-income households being hit the hardest,” the CFO said.
The data showed that the 30-day delinquency rate for the card portfolio was 3.7% in the June quarter, up from 2.9% in the same period a year ago. The net principal charge-off rate was 5.6%, up from 3.7% last year. Green said losses will “peak and plateau” in the second half of the year. Net charge-off rates should be in the range of 4.9% to 5.2% overall, according to supplemental materials. The company’s most recent annual report details that 80% of its card business is associated with consumers with FICO scores of 660 or higher, with the rest falling below that level.
PYMNTS Intelligence reported that a significant percentage of young millennial and Gen Z consumers who are unmarried, married but not living with their children, or single with children, are in the “under $50,000” income bracket.
These are the same segments struggling to survive before payday, and our data shows that only 22% purchased clothing and about a third purchased health and beauty products, indicating that in densely populated households with children, these items are the most important and likely to wear out and need replacing. As lower-income consumers cut back on spending and families downgrade/trade off, these retailers may feel the pressure.
The chart above, compiled by PYMNTS, shows that roughly half of consumers having trouble making payments fall into the subprime category, the lower FICO band that was noted as coming under pressure during the earnings call.
Savings trends suggest that savings might not be helping much: JPMorgan reported that consumer bank deposits fell 3% from the first quarter and 9% from a year ago.
According to data from PYMNTS Intelligence, while ready-to-use savings are evident across all income levels, but especially among lower-income consumers, they do little to cushion against shocks or sustain card payments and spending. For consumers struggling to make ends meet and pay their bills each month, that total comes to about $1,700.
These consumers have, on average, outstanding balances of more than $5,000, and even for relatively affluent households, the balances are even higher, exceeding $10,000.It’s a tightrope walk.
Read more about: Apparel, Citi, consumer spending, credit, credit cards, earnings, economy, health and beauty, JPMorgan Chase, news, PYMNTS News, retail, Wells Fargo
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