Consumers Hang Tough and Confidence Off Bottom

Episode Summary

Executive Summary: The episode centers on the American consumer as the key buffer against recession amid slowing growth and high inflation. The hosts and Wayne Best conclude the consumer is still spending, but momentum is weakening, especially for lower- and middle-income households. They also discuss Powell’s hawkish Jackson Hole speech, consumer credit trends, and the limited macro impact of student-loan forgiveness.

Main Topics: Fed policy and Jackson Hole (Priority: 5/5): Powell’s Jackson Hole remarks were interpreted as a strong signal that the Fed will keep raising rates and hold them high until inflation is meaningfully tamed, causing equity markets to sell off. Consumer spending remains the economic firewall (Priority: 5/5): Despite slowing growth, consumers are still spending enough to keep the economy out of recession for now, supported by low unemployment and strong travel demand. Visa spending momentum data shows broad slowdown (Priority: 5/5): Wayne Best explains Visa’s Spending Momentum Index, which is below 100 and declining across regions and spending categories, indicating fewer consumers are participating in spending growth. Consumer credit looks healthy in aggregate but stressed at the bottom (Priority: 4/5): Aggregate delinquencies and credit scores remain strong, but Chris highlights rising balances among lower-score borrowers, suggesting stress concentrated in lower-income households. Gas prices and inflation relief (Priority: 4/5): Falling gasoline prices are improving consumer sentiment and real purchasing power, partially offsetting other inflation pressures. Student-loan forgiveness and repayment reform (Priority: 4/5): The group discusses Biden’s student-loan relief plan, its limited near-term macro effect, and the need for broader structural reform to avoid moral hazard. Recession risk remains elevated but not certain (Priority: 5/5): The panel assigns roughly even odds to recession over the next 18 months, with Wayne slightly more optimistic and Mark/Chris still constrained by the inverted yield curve.

Key Arguments: Powell’s message was not new, but it reinforced that rates will likely stay elevated for an extended period, which hurt equity markets. The two negative GDP quarters do not by themselves prove recession; recession requires broad, deep, and durable weakness across the economy. Consumer spending remained strong through summer travel, making it hard to call the economy recessionary while the consumer is still active. Visa’s spending data shows declining participation, especially among lower- and middle-income households, while affluent consumers are still carrying spending. Consumer credit growth is mostly normalization after pandemic-era paydowns and accommodations, not necessarily a sign of immediate systemic distress. Credit score averages are unusually high partly because pandemic accommodations and payment behavior boosted observed credit quality. Chris is worried about a concentrated buildup of debt stress in lower-score borrowers, which may not yet show up in aggregate delinquencies. Student-loan forgiveness has limited immediate inflation or GDP impact because relief is partly offset by resumed payments after the moratorium ends. Structural reform, not just forgiveness, is needed to fix student lending; otherwise moral hazard and tuition inflation may worsen. Recession probabilities remain meaningful because the yield curve is still inverted and the Fed is tightening into slowing growth.

Data Points: Fed rate hike expectation: 58% chance of a 75 bps hike - Market-implied probability after Powell’s Jackson Hole speech, as discussed by Chris. Neutral policy rate: 2.0% to 2.5% - Powell characterized this as the approximate neutral range in the discussion. GDP revision: Still negative in Q2, but less negative than the first print - Chris said the second-quarter GDP revision was consistent with slowing but not yet recession. GDI: Positive in Q2 - Gross domestic income was stronger than GDP, suggesting possible upward revisions ahead. Personal saving rate: 5.0% - Below the roughly 7% pre-pandemic level; indicates consumers are drawing down some excess savings. Visa Spending Momentum Index: 95.0 - July reading, below 100 and down month over month, indicating spending momentum weakened. SMI trend: Down in 5 of the last 7 months - Visa’s July reading showed a broad slowdown in consumer spending momentum. Regional spending momentum: Declined across all four U.S. regions - Midwest and South moved back into contraction territory; Northeast remained most volatile. Metro areas losing momentum: ~835 of 877 - Most tracked metro areas saw weaker momentum in July versus prior months. Discretionary spending momentum: 94.5 - Visa’s discretionary spending category was below 100, showing contraction. Non-discretionary spending momentum: 95.9 - Visa’s non-discretionary spending category was also below 100. Consumer spending forecast: 2.3% in 2022; 2.1% in 2023 - Wayne’s real consumer spending forecast, implying no recession in the baseline. Average consumer credit score: 725 - Wayne said scores are near the highest levels ever observed. Bank card outstandings growth: 14.2% YoY - Second-quarter growth in bank card balances, viewed as normalization from pandemic paydowns. Retail card outstandings growth: 5.2% YoY - Chris cited Equifax data showing retail card balances growing more modestly. Personal loan growth: 22.4% YoY - Equifax data showed strong growth in consumer finance-company loans. Bank card outstandings delinquent: $18 billion - Mark contrasted current bank-card delinquency with $27 billion in Feb. 2020. Bank card outstandings total: about $800 billion - Used to contextualize the delinquent share of bank-card balances. Total household liabilities outstanding: $15.6 trillion - Mark cited total household debt across mortgages, auto, cards, and student loans. Total household debt delinquent: $197 billion - Very low relative to history, indicating broad household balance-sheet health. Student-loan relief: $10,000 / $20,000 - Biden’s plan forgives up to $10k for qualifying borrowers, up to $20k for Pell Grant recipients. Income thresholds for student-loan relief: $125,000 individual / $250,000 couple - Eligibility cap described in the policy discussion. Student-loan payment cap proposal: 5% of income - Chris said the plan would lower income-based repayment from 10% to 5%. Student-loan repayment term proposal: 10 years - Chris noted a shorter repayment horizon versus the prior 20-year term. Inflation impact from student-loan forgiveness: +8 bps in 2023 - Moody’s estimate of the near-term inflation effect. Recession probability: ~60% over 18 months - Chris’s estimate through end-2023. Recession probability: ~50% - Wayne’s model-based estimate, with caveats about false signals. Recession probability: close to even / ~45% near term - Mark’s overall estimate, with lower near-term risk than the full horizon. Gasoline price: $3.90/gallon - Wayne’s statistic for Monday; used to illustrate substantial relief from June peaks. Natural gas price: $9.38 per MMBtu - Chris’s statistic of the week, highlighting extreme energy pressure.

Pivotal Quotes: "this is going to create pain for households and businesses" — Wayne Best: Wayne summarizing Powell’s Jackson Hole warning about the cost of bringing inflation down. "when the consumer is so darn strong" — Wayne Best: Used to explain why he does not view the economy as being in recession yet. "I guess I'm worried that there's a shoe to drop here" — Chris Dorides: Chris describing concerns that lower-score, lower-income borrowers may be accumulating hidden stress.

Implications: Consumers are still preventing recession, but the cushion is narrowing. Watch low-income debt stress, Fed tightening, energy prices, and yield-curve signals; these will shape whether the slowdown stays mild or tips into recession.