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$16.5 Trillion Consumer Debt Is Bad News for Holiday

Retailers gearing up for Black Friday sales this holiday could find that consumer spending might be as good as it’s going to get.

Signs point to consumer debt heading in the wrong direction next year. The Conference Board Leading Economic Index [LEI] for the U.S. fell by 0.8 percent in October 2022 to 114.9 after falling 0.5 percent in September. The LEI is now down 3.2 percent over the six-month period through October, reversing its 0.5 percent growth over the previous six months.

“The U.S. LEI fell for an eighth consecutive month, suggesting the economy is possibly in a recession,” Ataman Ozyildirim, The Conference Board’s senior director, economics, said on Friday. “The downturn in the LEI reflects consumers’ worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing.”

Ozyildirim, who expects 1.8 percent year-over-year real GDP growth this year, believes a “recession is likely to start around yearend and last through mid-2023.”

The University of Michigan Consumer Sentiment for the U.S. fell to 54.7 in November from 59.9 in October, representing the lowest reading since July when the reading was at 51.5. The Conference Board’s Consumer Confidence Index reading won’t be out until Nov. 29. The Index in October fell after back-to-back monthly gains. More importantly, the Expectations Index component—which measures consumer outlook six months out—was at 78.1, which at less than 80 typically signals rising recession risks.

Retail executives reporting quarterly earnings in the past few weeks aired concerned about the level of promotions this holiday season, especially since consumers are all too aware the sector is awash inventory it desperately needs to offload.

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Walmart saw an influx of more affluent shoppers who drove three-quarters of its third-quarter grocery growth, CEO Doug McMillon and chief financial officer (CFO) John David Rainey told Wall Street analysts last week.

At Target, consumers are showing “increasing signs of stress,” while cutting back on nonessentials and “dipping into their savings” in order to make ends meet, CEO Brian Cornell told investors last week. Some people are “starting to run out” of options, he warned.

Macy’s Inc. CEO Jeff Gennette, who believes shoppers “are waiting until closer to holiday to make purchases,” expects traffic to surge around Thanksgiving weekend and Cyber week with a second bump two weeks before Christmas.

Initial signs that consumers have begun to borrow more from credit lines surfaced this past August when the Federal Reserve Bank of New York issued a report that U.S. household debt passed $16 trillion in the second quarter of 2022, a 2 percent bump from Q1. Credit card balances, responsible for $890 billion of that total, jumped by $46 billion from the first quarter, a 13 percent year-over-year increase for the largest spike in over 20 years.

Last week’s New York Federal Reserve report said third-quarter household debt rose by $351 billion to $16.5 trillion. That’s an 8.3 percent increase from a year earlier, and the biggest annual increase since a 9.1 percent jump in the first quarter of 2008 at the start of the Great Recession.

“Near-term consumer resilience will come at a further deterioration in household finances as households draw down savings and accumulate debt to spend. That may eventually spell economic trouble,” Wells Fargo economists Tim Quinlan and Shannon Seery wrote in a report.

Retailers that run a credit card operation might not squeeze much revenue out of that business for the next several months.