During times like these, I tend to watch the statistics in order to assess the health of the economy, stock market, bond market, and the all-important consumer. Oftentimes, we put the emphasis on the economy and the markets. The most important player is the consumer because the consumer drives the economy. Consumer spending makes up 2/3rds of economic growth. Consumer actions dictate everything.
Let's take a look at recent statistics that might give us a clue concerning consumer health.
Reuters reported that U.S. household wealth declined by a record 6.2 trillion dollars during the second quarter. It fell 30 billion more than the second quarter during the pandemic when everything was shut down. Note, percentage-wise, the decline in 2020 was still a little larger. However, this is a big number in today's climate.
With inflation putting pressure on people's budgets and raising concerns about a prolonged recession, U.S. consumers are once again adding new credit card debt by the billion, racking up $67.1 billion during Q2 2022, according to WalletHub's latest Credit Card Debt Study. That is an all-time record for credit card debt added during the second quarter of a year, and WalletHub now projects that consumers will add a total of $110 billion in debt during 2022. – wallethub.com
Now, what are consumers buying with this newly created debt?
You could argue that the consumer is shopping as usual. The retail sales numbers came out this morning and showed them in alignment with what was predicted. So there are no clues there. Personally, I think that if you were able to pull back the numbers, you would see the consumer is using credit cards to make ends meet. They are putting necessities on credit cards.
All you have to look at is the average interest rate of credit debt. The Consumer Financial Protection Bureau said at the beginning of 2022 that the average interest rate was 19.2%. Since then, I would speculate that the average rate is closer to 21%, seeing that since the beginning of the year, the Fed has increased interest rates several times.
Thus the question is – Why would the average consumer choose to take on debt at an average of 21% for something at Best Buy?
The interest rates are getting out of hand. Here is a different question – What about creating debt when you are just trying to survive? A consumer is not thinking about or cares about interest rates when purchasing necessities and trying to make ends meet. As long as the minimum payment can be made, consumers care more for their family's needs than the cost. "You gotta do what you gotta do."
Unfortunately, I think we are at the beginning of a tough cycle, considering that inflation shows no signs of letting up.
Don't worry – President Biden and the politicians in Washington have passed the 670 billion Inflation Reduction Act to combat these problems. It is too bad that there really is nothing in that bill that actually does combat inflation. In fact, with more deficit spending on the table because of the bill, theoretically, inflation should continue to go up….and we wonder why we have problems.
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