“Zombie Consumers” Are Clinging to Life (and Prepping for the Worst…)

May 19, 2023

Have consumers finally gone full walking dead?

Last December I wrote about the rise of “zombie consumers” in today’s economy. How shrinking personal savings — thanks to depleted stimulus windfalls, falling real wages and “still-not-transitory” inflation — was impacting both consumers and threatening the economy as a whole.

Given certain recent reports, I thought it’d be a good time to revisit that topic and see how the driving force behind our GDP (the US consumer) is doing.

Retail Sales Are… Good?

So the Census Bureau released its Retail Sales report this past week. The numbers were, like so many recent economic reports, mixed at best.

On a year-over-year basis Retail Sales rose 1.6%… Hooray!  

Which was down from 2.4% in the previous report…

And a continued decline for eight of the last 9 months. Still, a positive number’s a positive number. 

Drilling down, the month-over-month print was up 0.4% (vs. a forecast of +0.8%) while ex-autos was up 0.4% and ex-gas and autos was up 0.6% — which pretty much highlighted the 0.8% drop in spending at gas stations. This is a potentially important shift which I’ll come back to in a minute. 

Of course these numbers look backward. What are retailers — those whose job it is to predict future consumer behavior — saying?

Maybe Not So Much…

Earnings reports from two of the US’ bigger retailers suggested that the forward trend in consumer spending is actually softening. ZeroHedge reported: 

Analysts and traders have been questioning whether the robust consumer spending trend observed early in the season would sustain, or if a slowdown in spending was imminent. Their answer arrived over the past few days as Home Depot cut its forecast due to sliding sales as the home improvement boom appears to be waning. Additionally, Target, one of the biggest retailers, voiced concerns about “softening sales trends.”

Home Depot cratered this week when it reported its net sales were down 4.2% year-over-year and missed their expected target by over $1 billion. EPS were down 6.7% as well. Looking forward they saw sales falling between 2% and 5% and earnings dropping between 7 and 13%

Richard McPhail, executive vice president, and chief financial officer, warned about the “continued uncertainty regarding consumer demand.”

Target’s net earnings fell 5.8% to $950 million in the quarter while earnings beat estimates at $2.06 per share. 

“We continue to contend with a significant headwind caused by inventory shrink, building on a worsening trend that emerged last year,” said Target Chief Executive Brian Cornell. Target predicts that shrink could reduce profitability by more than $500 million this year, he said.

These retailers’ forward projections are more troubling than any economic report.

Some Good News on the Horizon

Remember, the Retail Sales report only considers the sale of goods (i.e. “stuff”). It doesn’t include services like healthcare, education, travel, housing, entertainment and so on.

The Bureau of Economic Analysis, on the other hand, dips its toes in the consumer spending waters by reporting on Personal Consumption Expenditures which includes goods and services.

Their April number doesn’t come out until next week (the 26th) but their March report showed month-over-month spending overall was basically flat: Spending on goods was down 0.6% while services was up 0.4%. 
You can see from their data that there’s been a fairly healthy increase in demand for services for the past 12-18 months (post pandemic).

Source: The Bureau of Economic Analysis

So in a nutshell, excluding gas for the moment, it looks like consumers may still be clinging to life.

But How Much Life is Left?

This past week, the NY Fed just reported that total household debt in the first quarter of 2023 rose $148 billion to reach a record level at $17 trillion. Have a look at the chart below…

Source: The Federal Reserve Bank of New York

Not good (but not surprising either in a Fake Economy…) 

Now some analysts have argued that this rise is really no big deal because that pile of debt is only about 86.5% of disposable household income. Of course that’s only true if you compare it to nominal disposable household income which, as of March, was $19.78 trillion according to the BEA.

Adjust for inflation to get a gauge on people’s REAL disposable income and you’ll find 1) that folks are making about $4.1 trillion less (based on 2010 dollars) and 2) that means $17 trillion of household debt is really 109% of real disposable income. Have a look…

Source: The Federal Reserve Bank of St. Louis

Now, if we take a look at what people are leveraging in the non-housing category…

Source: The Federal Reserve Bank of New York

Breaking down the sector: car loans were up $10 billion, student loans rose $9 billion, and other loans (personal loans, payday loans etc) were up $5 billion. 

What was notable, and not in a good way, was that credit card debt was basically flat at $985 billion. I say “not in a good way” because that bucks a decades-long (since 2001) trend of credit card balances declining in the first quarter. 

So credit card debt is currently a tick off all time highs of nearly a trillion dollars. People are still charging to keep up with inflation. But how much of all that gets paid off every month and how much is actually weighing on cardholders?

A November 2022 LendingTree survey found that just 35% of cardholders say they always pay their credit card balance in full every month, while 65% say they carry a balance at least some of the time. Nearly half (46%) of those cardholders who have card debt say it would take them at least a year to pay it off.

American Bankers Association data showed that more than half (56%) of all active accounts carried a balance in the third quarter of 2022, the most recent quarter for which we have data. That’s up 3 percentage points from the second quarter of 2022.

So it’s probably fair to say about half a trillion dollars is still outstanding on consumers’ books. And it’s likely that they’re starting to feel it because they’ve started to use them less. Take a look at the next chart. 

You can see that the blue line — the dollar amount of debt —has continued its steady climb. The red line — the Y-o-Y percentage change — however, has begun to decline as of October 2022. Given that prices haven’t retreated, this suggests that consumers are starting to use their cards a little more sparingly.

Source: The Federal Reserve Bank of St. Louis

There’s another factor that also suggests that consumers might be feeling the pinch of inflationary pressures. 


Another chart the NY Fed put out was for 90+ days delinquent debt…

Source: The Federal Reserve Bank of New York

Mortgages and HELOCs (home equity lines of credit) are pretty much sacred cows. People will pay them before anything and everything. (Student loan delinquencies have also remained exceptionally low since the pandemic. But that could change dramatically once President Biden’s loan forgiveness program gets sorted out.)

But looking at the other three categories, delinquencies in auto and “other” loans and credit card debt have all started to tick up as far back as Q3 of 2022. (Right about when the pace of charging started to slow down.) At 90+ days, these loans aren’t far from default.

Add up the whole of the consumer debt situation and the picture it paints isn’t pretty — consumers have really started to feel the pressures of inflation. 

Expectations are Supporting That (and More)

I’ve written over and over and over that it is absolutely critical that the Fed does everything it can to control the public’s expectations of inflation. People make plans (in theory at least) based on what they expect things to cost down the road. And higher expectations tend to push the cost of everything higher (especially wages). 

So the Fed believes it is critical for people to believe they can manage inflation. (All their credibility hangs in the balance on that.)

So let’s go back to the NY Fed’s Survey of Consumer Expectations and see what data they’ve collected regarding the market’s expectations of inflation.

The median 1-year projection is for inflation to be at 4.4%.

Source: The Federal Reserve Bank of New York

Extend that survey out to three years and expectations aren’t much better at nearly 3%…

Source: The Federal Reserve Bank of New York

This flies way in the face of the Fed’s own predictions in their Summary of Economic Projections. Their most recent SEP projections show inflation coming in at 3.3% at the end of 2023, 2.5% by 2024 and 2.1% in 2025.

And while the Fed is losing control of the inflation expectation battle, they may also be losing on the recession front. I’ve shown you this chart before as well — Personal Savings.

Source: The Federal Reserve Bank of St. Louis

You can see the stimulus spikes that occurred during the pandemic. Those were levels of saving that have never been seen before. (Back at the end of 2012 savings hit just over $1.5 trillion.) And you can see how quickly those savings were depleted. Back in June of 2022, savings hit a low of $506 billion — a level it hasn’t reached since 2009 during the GFC. 

Well that trend has started to reverse itself too. Folks have managed to sock away cash raising the savings number to almost $1 trillion. And struggling to beef up savings is a sign of consumer uncertainty about the future.

That suggests recession.

The Good News/Bad News Conclusion

So let’s go back to that Retail Sales number for a second. 

I’ve said this over and over too… Retail Sales isn’t adjusted for inflation. A higher number doesn’t necessarily mean more buying. I could just mean higher prices. And when you adjust for inflation you see what you get…

Source: The Federal Reserve Bank of St. Louis

So… Consumer strength isn’t close to keeping up with what they’re reporting. We’ve got a drop in gas purchases, a downtick in credit card spending and uptick in savings.

There’s no doubt that consumers are struggling (the upturn in debt delinquencies is a troubling sign). And they’re starting to turn more defensive. 

And at the same time, they don’t believe higher inflation is going away anytime soon.

It’s kind of a good news/bad news report.

The good news is there may still be some life left in the zombie consumers. The bad news is they’re bracing for the worst.

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential