LIVE MARKETS-Consumer corner: UMich, outstanding consumer credit

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CONSUMER CORNER: UMICH, OUTSTANDING CONSUMER CREDIT

Investors neared the end of a turbulent week with cheerful news from the American consumer, who's responsible for 70% of the economy.

First, the mood of the consumer has grown unexpectedly brighter this month.

The University of Michigan (UMich) took its preliminary stab at November consumer sentiment USUMSP=ECI and delivered a print of 73.0, a 2.5 point improvement over October's final number and 2 points cheerier than the predicted 71.0.

Looking under the hood, survey respondent's assessment of their current state of affairs deteriorated a bit, by 0.8%. Near-term expectations, however, grew 5.9% jollier (UMich notes the survey period ended before the U.S. Presidential election).

It should be noted that the "current conditions" metric is still gloomier than in April 2020, the nadir of the pandemic shutdown panic.

"Consumers have moved away from the extreme pessimism of two years ago, as the lingering effects of the pandemic were dissipating, but households were dealing with the one-two punch of high and rising inflation and fears of a coming recession," says Jim Baird, chief investment officer at Plante Moran Financial Advisors.

"Further, they may not feel exuberant, but they're spending in a way that would suggest a greater degree of confidence than the sentiment index would suggest," Baird adds.

As for inflation, participants expect year-over-year price growth at 2.6% one year from now, cooler than October's 2.7% reading and 70 basis points cooler than the most recent (September) core CPI reading of 3.3%.

Interestingly, the UMich one-year inflation expectation in September 2023 was at 3.2%, so the year-ago survey was fairly prescient.

However, that appears to have been a fluke.

The graphic below, which shifts one-year inflation expectations one year forward and compares that trendline to CPI over the last two decades, shows that UMich inflation expectations metric is not a terribly accurate crystal ball:

How consumers respond to surveys is one thing, but how are they actually behaving?

While the ambidextrous Fed was busy cutting interest rates on Thursday it was also releasing its September report on outstanding consumer debt USCRED=ECI.

The data showed American consumers collectively increased their credit balance by $6.0 billion in the last month of the third quarter, a 21.5% monthly deceleration.

The increase fell vastly short of the $14.50 billion consensus.

Breaking it down, non-revolving credit - which covers big ticket items such as tuition and cars - grew by nearly $5 billion, a 49.3% smaller number than August's $9.8 billion increase.

Revolving credit - which includes credit card balances - increased by just over $1 billion, partly making up for the prior month's $2.1 billion paydown.

Outpointing that much of the non-revolving increase was attributable to student loans following a court's decision to block President Biden's SAVE plan, Grace Zwemmer, associate U.S. economist at Oxford Economics had this to say:

"(Revolving credit) declined on a year-over-year basis, which we expect will continue as a growing share of low-income borrowers have exhausted their credit limits," Zwemmer writes, adding "however, any pullback in borrowing by low-income households will have a relatively small impact on overall consumer spending."

Here we have UMich expectations against the PCE saving rate, along with the year-over-year change in revolving credit outstanding, which is clearly decelerating.

Consumers, despite their high hopes for the future, are more worried about the present; saving less and keeping their plastic in their wallets.

(Stephen Culp)

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