The Precarious State of the US Consumer: Worse is yet to come

Despite robust job figures in the US, underlying indicators reveal a worrisome narrative for American consumers. Consumer confidence, as gauged by the Conference Board's Consumer Confidence Index, dropped to 103 in September, marking the second consecutive monthly decline. Consumers are growing increasingly apprehensive about surging prices, especially for essential items like groceries and gasoline. Moreover, the "Expectations Index" has fallen below the critical threshold of 80, signaling reduced confidence in future business conditions, job prospects, and incomes. Here are key indicators that warrant investor attention:

1. Shrinking Pandemic Cash Reserves: The US consumer weathered the storm partially due to the excess cash distributed by the government. However, a Federal Reserve study reveals that Americans outside the wealthiest 20% now hold less cash than when the pandemic began. Adjusted for inflation, bank deposits and liquid assets for the bottom 80% of income earners were lower in June than in March 2020.
2. Escalating Consumer Debt and Delinquencies: Credit card default rates have soared to a five-year high at 2.7%, doubling from 1.4% just two years ago. This spike indicates that many consumers are struggling to meet financial obligations, reflected in rising delinquencies in consumer debt, surpassing USD 1 trillion. The same trend is witnessed in overall consumer debt
3. Concerning Use of Buy Now, Pay Later (BNPL): Research from the Federal Reserve Bank of New York reveals that 32.7% of BNPL users faced financial difficulties in the past year, including low credit scores, rejected credit applications, or loan delinquencies. This suggests disproportionate use by financially challenged individuals, potentially leading to more significant financial troubles in future
4. Declining New Home Sales: The tight housing market, impacted by COVID-19 supply disruptions, has kept home prices elevated. Homeowners who enjoyed lower mortgage rates are hesitant to sell and purchase new homes at significantly higher rates, now exceeding 7%, the highest in decades. New housing sales serve as leading indicators for consumer demand related to setting up new homes.
5. Retails sales volumes are faltering: While nominal sales seem strong, adjusting for inflation reveals a decline in the real volume of sales over last few quarters. High inflation, rising housing costs, falling consumer confidence, risky BNPL usage, increasing credit card defaults, and dwindling household savings all contribute to sluggish sales.These statistics present a sobering outlook for the US consumer. Most tech stocks, which have significantly contributed to the AI-driven rally in US indices, are directly or indirectly related to consumer trends. It is unlikely that they will remain unaffected as consumer activity slows down. The US consumer may face tougher financial conditions going ahead, not even counting potential repercussions of a looming partial government shutdown.

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