The consumer is the backbone of the U.S. economy. Despite a slowdown in many areas over the past year, consumer activity continues to hold up remarkably well. Can it hold up well enough to help the U.S. avoid a recession in the next year and beyond? Evangelos Momios is the consumer finance analyst at Bloomberg and covers credit issuers & other financial services providers. He joins the ETF Think Tank to offer his insights on the current state of the consumer and where he sees potential trouble.
In general, Momios thinks that retail and consumer spending levels are still in pretty good shape. The caveat is that at some point Fed policy is going to impact this behavior, but we haven’t seen that yet. He notes that credit card balances were up in January, more so in the lower income tier, which has been the trend for a while. Eventually, credit quality is what will potentially break first, but we don’t appear to be at that point yet.
Throughout the pandemic, we saw consumers focus their spending on goods since many services were shut down. Lately, we’ve seen spending on activity shift back towards the services side and that’s a trend that Momios sees continuing. He says that the current trend is people still spending well beyond their basic needs and uses the rebound in travel as an example. There’s a saying that you shouldn’t bet against the consumer. Momios believes that this is probably still the case for now.
Momios says that he has a generally rosier picture of the consumer than many. He believes that we will eventually see a slowdown, but it’s likely that people will continue spending as long as the economy is growing. For now, GDP remains an upward sloping line. One thing that is a unique factor in today’s environment is the gig economy. It’s something that isn’t being reflected in models of what “should” be happening based on history.
One of the bigger risks facing consumer credit issuers is that at some point they may not be able to pass rising interest rates on to consumers. At some point, you hit resistance. High inflation is another obstacle these companies face because it’s been 40+ years since we’ve faced an environment like this, and it may be difficult for these companies to accurately work this into their models. The issuers that target revolvers, who regularly carry outstanding balances, will be more impacted by these factors than those whose customers pay off their balances.
Other key takeaways:
- How is the Chinese consumer doing with the great reopening. Momios says that right now it’s still more of a narrative than a trend. It’s likely to keep developing throughout 2023, but it’s still in the very early stages.
- Momios hasn’t heard about a slowdown in credit applications. At some point though, the market will probably be saturated. He doesn’t think “buy now, pay later” will present a major risk, but it could result in a decline in mortgage applications.
- Many people assume that consumer spending will slow as conditions tighten. There’s a possibility that people will spend up to the point where they simply can’t, or they run out of cash and consumer spending falls off of a cliff.
- Banking and mortgage businesses will continue to evolve in the ways they use technology. Most companies have already developed their technology quite a bit, including names, such as Ally and Discover, which are already entirely digital. Companies used to look at just FICO scores for credit approvals. Now, they look at dozens of factors. Expect AI to become more involved.
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