US household debt surpassed $16 trillion for the first time during the second quarter, the New York Federal Reserve said Tuesday. Even as borrowing costs surge, the NY Fed said credit card balances increased by $46 billion last quarter. Are Americans using credit cards to live beyond their means?
It costs more money to borrow money, and the rise as the rise in credit debt is troubling. Here are people using credit cards, and how will they pay down high balances? And that money will come out of consumer spending, which drives the economy, is particularly troubling heading into the holiday season.
Why are consumers going deeper in debt? This needs analysis. It could be that the excellent job resignation led to higher salaries and, therefore, more spending, or it could be that they need credit cards to keep up with inflation. It’s a warning sign that marketers should keep an eye on.
Another warning from the auto market
The average price for a new car is over $40,000, and many buyers are taking out auto loans. Most vehicle purchases are financed via an auto loan, and understandably so. But unlike mortgage lenders, who tend to impose strict borrowing requirements, auto loan lenders aren’t stringent. And so, it’s pretty easy for the typical consumer to get approved to borrow a car, even if they can’t afford the payments they’re taking on.
Estimates are that 25% to 50% of auto loans are given to consumers who may not be able to repay them. And no, 5% of auto loan borrowers are behind on their payments, and almost 50% are underwater on their car loans — meaning, the amount they owe on their vehicles exceeds the value of those vehicles themselves. All of this is very reminiscent of the housing market crash of 2008, only here, we’re talking cars, not homes.
Many car dealers earn higher profits by selling vehicles on credit instead of cash. Some buyers hear that they have to pay up to $1500 more for a car if they pay cash, and too many dealers are still charging buyers “marker price” instead of MSRP. It can lead to a lot of excess inventory and the return of discounts to entice buyers.
What about the real estate market?
Some real estate experts have warned about a potential housing market crash. But that s unlikely to happen for a big reason.
There’s a minimal supply of homes on the market, and buyer demand is still strong. Even if buyer demand wanes due to factors like rising mortgage rates, the reality is that property owners are sitting on record levels of equity. So we’re unlikely to experience a scenario like in 2008 when foreclosure rates soared, and homes started flooding the market at a rate that outpaces demand.
While a housing market crash may not be imminent higher prices and the possibility that those who bought at the market’s peak may never see equity drag down this economic sector.
Now CEOs are also tightening the screws
According to the WSJ”
Corporate chiefs who spent much of the pandemic patiently answering questions in town halls, sending reassuring notes to staff members, and projecting a softer image are shifting their tone as signs emerge that the economy is worsening.
The CEO of Google’s parent company told staff last month to work with “greater urgency, sharper focus, and more hunger than we’ve shown on sunnier days.” Meta Platforms Inc. CEO Mark Zuckerberg said in late July that the Facebook owner must operate with greater intensity, “and I expect us to get more done with fewer resources”; an engineering leader at the company also recently told managers to identify and push out low performers.
The shift in messaging reflects increasing anxiety in the C-suite about where the economy is headed. A survey released in June by the Conference Board, a business research firm, found that most CEOs think a recession is coming or already here. When leaders fear a downturn, their talk and actions change: executives, board members, and corporate advisers.Wall Street Journal
What does it all mean?
There are a lot of economic indicators but can marketers trust them? Where consumers will be willing to spend their money and how much they’re willing to pay will be contingent on many factors that may be unique to each brand’s category.
While private label sales have increased in some categories, like supplements, they are declining. Is it bec se of inventory issues or trust that store brands can’t be as good as branded products?
Most new car purchases are financed, and the average monthly new car payment now hovers around $700, a record high, according to recent industry reports. That’s a lot of money and more than rents in some cities. Those payments could derail new consumer spending so it’s essential that marketers listen to their customers and what consumers are saying online.
Brands that are quick to respond to anticipated changes to consumer behavior will be winners, while brands that feel this information means nothing will have a bumpy ride.