Consumer Spending Down, Credit Card Debt Down, Household Debt Reaches Record
Retail sales, the indicator most closely associated with consumer spending, rose less in October than forecast, reflecting a slowing recovery. Increasing positivity rates are probably driving two changes in consumer behavior: reticence to spend in general; and inability to spend, as bars, restaurants and travel offer less capacity than usual. Supply chains are still disrupted, too, making many things consumers would like to buy either scarce or available only on a lag. Extrapolating to November, we can probably expect lower consumer spending once again since family gatherings, travel, and holiday gift buying will likewise be subdued this year. Winter is coming for retail, it would seem.
In good news for middle- and lower-class America, average credit card balances are down as households put their dis-spending to work in paying down accumulated short term debt. Travel and consumer purchases tend to be placed on credit cards because of the consumer protections most offer, and as these are down, the payment processors who provide them are consequently seeing lower revenues. Friends of goodstead know that we are inveterate enemies of short-term borrowing, as the rates charged to consumers are usurious, unethical and generally should be curbed by law. As we recommend in our financial planning protocols, if you are carrying any short-term debt, be sure to pay that balance down since carrying a credit card balance is like holding onto an investment that loses 20% of its value every year.
It is important to differentiate, however, between the types of consumer debt. While short term debt tends to carry extreme interest charges--even when not considering late fees and other charges--long term debt incurred in connection with an asset purchase or human capital investment can have interest rates that are reasonable. Borrowing to buy an asset like a house or car can make sense. These carry lower interest rates because they are secured by the value of the asset that collateralizes them. Credit card debt is unsecured, which is why its interest rates are so much higher. The risk to the lender is greater because its ability to recover its principal in the event of default is quite limited. Borrowing to pay for a degree can also make sense, for example, depending upon the earning power the degree affords you after graduation. And so, debt can be good or bad depending upon the price you pay for it--the interest rate--and the degree of pressure it puts on your current cash flow.
While credit card or revolving debt has fallen, US household debt hit a record high. This measure includes all forms of debt, both good and bad. As interest rates have held at historic lows, the most creditworthy borrowers have been able to refinance these assets to save on incremental interest payments. This is often a good idea, depending on what interest rate you own on your mortgage and what your holding period is likely to be. However, current strength in the housing market means higher prices, which means larger mortgages, which means more household debt. As Americans have saved money on restaurants, bars and travel, they have been accumulating cash in bank accounts. It is easy to see how these savings are converted into down payments on large asset purchases by those who don't worry about job security.
Still, we expect modest economic expansion through the coming quarter as the economy continues to recover from its earlier vertiginous fall. The release of truly impressive efficacy numbers for Moderna's vaccine, as well as its better shelf-stability and less onerous cold chain, have done much to reflate risk assets. The outlook for 2021 continues to improve, and so as we prepare for the change in season--and a holiday season without customary gatherings of friends and family--we can nonetheless say with Kierkegaard that recent developments prove that, "In the depth of winter, I learned that within me there lay an invincible summer."