Rising consumer debt points to rebound but perils are lurking
SOME ANALYSTS BELIEVE DEBT STILL HEALTHY, ALLOWING FOR NON-TOXIC SPENDING GROWTH
Consumer debt is rising. How Americans handle that load and how much cash they spend will determine the fortunes of the retail sector and its stocks.
On the positive side, unemployment rates continue to decline, wages have grown modestly among lower-income earners, and plummeting energy prices have given consumers more spending firepower.
Consumer debt, however, has been inching back up after contracting for years. At the end of the third quarter it totalled $12 trillion (Dh44 trillion), according to the Federal Reserve Bank of New York. It peaked at $12.68 trillion in 2008, but dropped during a wave of foreclosures. Since late 2013, however, consumer borrowing again has been rising.
Recent data also show that defaults on various types of consumer loans have been ticking up. Default rates on bank cards, first mortgages and auto loans rose in November, according to the S&P/Experian Consumer Credit Default Indices.
Cutting both ways
Consumer debt cuts both ways, of course. In moderation, it can help encourage economic activity. Carried too far, it can create bubbles that threaten the economy. Some analysts say debt is still in the helpful stages and consumer spending therefore has room for non-toxic growth.
“We still see the consumer leading economic growth,” said Sam Stovall, US equity strategist with S&P Capital IQ. He predicted consumer spending would grow 3.1 per cent in 2016, spurred by gains in jobs and wages.
Jay Nogueira, head of the global consumer sector for T. Rowe Price, was cautiously bullish about the consumer discretionary sector. Credit card debt per household is $6,900, he said, placing it only at 2004 levels, well below the 2007 peak of $8,600.
One argument for a continuing housing rebound comes from Brad Sorensen, head of market and sector analysis for the Schwab Centre for Financial Research. Home ownership peaked before the financial crisis at 69 per cent, he said, and has fallen to about 63 per cent. There is room for growth, he said.
But even bulls on consumer spending see areas of concern. For example, auto lending has emerged as a highly profitable area for banks, and just about anyone can get a car loan these days, said Ernesto Ramos, head of equities for BMO Global Asset Management.
Disappointing performances
Also of concern for the consumer sector, some large retailers have had disappointing performances recently. Among the worst hit was Macy’s. Its stock has fallen to roughly $35 a share from a mid-July peak above $70.
Barbara Miller, a portfolio manager with the Federated Kaufmann fund, sees “more competition from internet sites” as a major factor. To keep up with internet rivals, she added, department stores must also increase spending on technology, further deflating results.
The level of prevailing interest rates will affect consumer spending, but the impact of the Federal Reserve’s recent increase in short-term rates is far from clear.
Stovall said that even if the Fed continued to raise rates, they were likely to remain very low for some time.