Taking the Consumer’s Temperature

Consumer behavior is currently under a magnifying glass as capital market tumult with inflation rising along with interest rates fuel yet another wave of uncertainty. From my perspective, the consumer’s financial balance sheet is strong and well-positioned to weather any potential storm. Overall, fundamentals remain stable and within historical norms despite higher grocery and gas prices in addition to government stimulus having waned.

Positive trend among affluent consumers

Economic growth is driven by the more affluent consumer. This segment tends to spend more and be a larger driver of top-line economic numbers. According to Visa Business and Economic Insights, as of 2019, the affluent segment was 27% of the consumer base but accounted for 47% of total consumer spending.[i] This segment is in strong financial health with credit scores migrating upward. Affluent households posted strong gains in net worth and wages since 2022—a possible indicator of future spending.

The divided consumer segment persists

A significant development during the pandemic was the bifurcation in the consumer base. High income consumers who were able to work from home built up savings, paid down debt and were able to improve or stabilize their situations. In contrast, lower income consumers really struggled. They had the benefit of government support to help them through the pandemic, but that has ended. Now it's definitely more of a struggle for them.

Most existing debt is fixed rate

While higher interest rates may add pressure to a consumer’s financial situation, we believe it should have a minimal impact on existing debt as most is fixed rate. For example according to Equifax, as of April 2022 mortgage debt[ii] was primarily fixed rate and totaled $11.44 Trillion (72.7% of total consumer debt). Adjustable rate mortgages were just 1% of outstanding mortgages down from a high of 12% during the global financial crisis at the end of March.[iii]