By Jevan Capital Founder Jason Buxbaum
Key Takeaways
- Rising Credit Card Delinquencies: As reported by Moody’s, credit card delinquencies have reached their highest level since 2011, indicating that many consumers struggle to keep up with their payments.
- Record High Credit Card Balances and Debt: The New York Federal Reserve notes that credit card balances are at an all-time high. Furthermore, credit card debt is cited as a significant source of financial stress, according to the Financial Times and a Michigan Ross survey. This suggests a deepening financial strain among U.S. consumers.
- Increased Profits for Banks from Credit Cards: Big banks are seeing record profits from credit cards, with JP Morgan being the leading example. This is likely exacerbated by the high interest rates on these cards, which Bloomberg reports have reached a record high of 22.8%. I would speculate that credit cards are being used more for essentials like food than before making it difficult for the cardholder to lower their spending.
- Stagnation in Retail Sales: U.S. retail sales have plateaued after a significant rise that began in 2020. This plateau could indicate a saturation point or a pullback in consumer spending.
- Declines in Major Goods Producers: Notable companies like Heinz, Pepsi, McDonald’s, and Target have reported sales declines in staples, suggesting a potential shift in consumer purchasing patterns.
- Changing Consumer Demographics in Discount Retail: An intriguing trend is the growth in higher-income customers (earning over $100,000) shopping at discount retailers like Dollar Tree and Walmart. This could imply a strategic shift in consumption habits among wealthier consumers seeking value amid broader economic pressures.
- Potential Impact on Inflation: The shift towards value-oriented shopping among wealthier consumers might lead to demand destruction for more expensive goods and services, potentially exerting downward pressure on prices and inflation.
Finally, there is some “good” bad news, and lots of it. Inspired by various articles and surveys announced, I’ve noticed a distinct shift from near-heroic stories about the bulletproof US consumer holding up every aspect of the economy, from retail to real estate. Ironically, on the cusp of the Fed meeting, where they announced four rate cuts starting July, the stories tell a tale of a battered, debt-laden American consumer. Here are some relevant bullet points.
- According to Moody’s, credit card delinquencies hit the highest level since 2011
- Credit Card Balances are at a record high (NY Fed)
- Credit Card Debt is one of the most significant sources of financial stress (Financial Times, Michigan Ross)
- Big Bank profits on credit cards hit record highs (JP Morgan is the biggest)
- Interest rates on cards hit a record high of 22.8% (Bloomberg)
- US Retail Sales plateaued following a steep rise which started in 2020
- Several major US goods producers and sellers reported sales declines of Staples, Heinz, Pepsi, McDonalds, and Target.
The article by Alexandra White featured in the Financial Times 3-20-24 sheds light on another crucial breadcrumb, which I think is more bad news, which may be good. The author cites that the CEO of Dollar Tree said their growth comes from customers earning more than $125,000 annually. A similar data point came from Walmart’s Chief Executive, who noted that its growth in Q4 was due to consumers earning more than $100,000 per year.
This shift in consumer behavior could lead to significant demand destruction, forcing sellers of goods and services to lower prices or risk declining revenues. Consider this: every consumer earning $125,000 who starts shopping at Dollar Tree is one less customer for stores like Target or Costco. This change could be the crucial factor in the inflation equation that, once removed, could halt inflation in its tracks, at least for the time being.
