Consumer staying power may come down to credit

Summary

With excess savings depleted and a shaky jobs market raising doubts about future income growth, the role of credit is becoming a critical factor in the staying power of the consumer. We break down where credit is growing, where it is shrinking and the extent to which banks are willing to lend.

The broad weakness in the July jobs report raised questions about whether the policy environment has remained too restrictive for too long, yet recent consumer spending numbers continue to come in stronger than expected. Real PCE surprised to the upside in Q2, rising at a 2.3% annualized rate amid a jump in durable goods purchases and steady services spending. Early indications for a promising July put spending on track for a solid third quarter as well. But the lackluster pace of hiring in July, combined with other labor market indicators continuing to weaken, implies weaker income growth which will eventually weigh on consumer spending.

Had the labor market cooled earlier in this cycle, households would have been in a far better position to absorb job losses or diminished income growth. But now that pandemic-era savings are either diminished or completely depleted, the role of credit has become a more important and isolated driver of sustained spending growth.

It is often the case that credit is generally more expensive and less widely available to low income households. That is particularly the case now amid the current higher for longer rate environment and even more true for renters. We examine this key credit difference.

Download the Full Report!