Data and Analytics

How the Economy is Affecting Consumer Segments Differently

How the Economy is Affecting Consumer Segments Differently

September 27, 2022 | Weston Smith

Consumers are being impacted differently in today’s uncertain economy. While some households are struggling, others are thriving, creating an environment of hidden risk and hidden opportunity. During our September 8 Market Pulse webinar, we explored how these diverging economic scenarios are impacting your business and what measures you can take to stay ahead of the curve.

What is happening in the economy?

Robert Wescott, President of Keybridge LLC, opened the webinar with an economic update, recapping a report from the National Bureau of Economics. The bureau’s assessment is we are not in a recession at this time despite a 2nd quarter of negative GDP. Their findings are based on five indicators which remain in a positive direction:

  • Employment
  • Industrial Production
  • Real Personal Income
  • Real Consumer Spending
  • Real Wholesale/Retail Sales

But looking ahead, recession risks are increasing. The U.S. government bond yield curve is nearly inverted, and the index of leading indicators has started to hook down slightly, shown in Figure 1 below. As for inflation, it is at one of the highest rates in 70 years outside of the oil shocks of the 1970s.

Figure 1

And Wescott doesn’t think we’ll see inflation relief in the near term, noting it appears inflation is becoming embedded in the economy. Keybridge’s measure of “underlying inflation” based on the Top 25 CPI Categories to Watch is now running at 7.2% (Figure 2). During the webinar Rob indicated there would be an interest rate hike, and prior to this article’s publish date, the Federal Reserve raised interest rates a third-consecutive, three-quarters of a percentage point to a range of 3%-3.25%. The housing sector, in particular, is already showing signs of slowing in response to the rate increases, and we can expect housing to slow down even more in the next few months. 

Figure 2

Financial stress rising up the income ladder 

We’re seeing an early warning sign in stagnant real retail spending (Figure 3). Consumers in many classes are starting to feel the pinch from these staggering figures with the consumer sentiment index reaching 60-year lows. The stark reality is that — in many households — wage growth isn’t keeping pace with inflation. 40% now report it “difficult” to pay expenses — the highest we have seen in years. 

Figure 3

In Figure 4 below you can see households within the below $50,000 income bracket expect a sharp increase in spending on their housing, food, and transportation.

Figure 4

And consumers of all income levels are reporting elevated financial stress. Figure 5 reveals an all-around uptick in difficulty paying household expenses as well as declining expectations about financial situations over the next year. Higher-income households are anticipating the biggest drop. Employment expectations are weakening, especially for higher-income workers. Even postings for in-demand roles like software developers are declining.

Figure 5
Lastly Rob predicted we may see cutbacks soon in spending on travel and dining, as even middle-income households plan on cutting back if high prices persist (Figure 6). 

Figure 6

What are the impacts specifically to consumer credit? 

Tom Aliff, Equifax Risk Consulting Practice Leader, shared May 2022 YTD trends. He started with mortgage originations coming down from the 2021 boom as well as auto originations slowing slightly with subprime share dropping from 2018-2020 levels. Bankcard limit originations are now above pre-pandemic levels; subprime share has been growing steadily, and the number of new cards originated is above all prior year levels. Unsecured personal loan originations balances are at all time high levels; subprime share has been declining steadily, and the number of new loans originated is also a new high. Home Equity Revolving limit and unit originations are higher than they have been in the last 11 years.

Tom also shared that revolving debt in July 2022 is seasonally at 2019 levels, and non-revolving debt is continuing to rise. Mortgage debt is at $11.7 trillion while non-mortgage debt has returned to keeping pace with an increasing trend aligned to pre-recession. Personal loan debt grew significantly since 2019, more than any other loan type, and now accounts for 3.4% of total non-mortgage debt (6% in Subprime). Credit limits and utilization have started to slowly increase for both bankcard and private label card; home equity line utilization continues to decrease. While mortgage delinquency remains low, auto and personal loan delinquency has returned to pre-COVID levels in recent months with card delinquency on the rise. Subprime auto delinquency is now higher than pre COVID. 

To close out, Tom suggested action (Figure 7):

  • Look beyond credit scores to spot consumers with increased DTI:
    • Consumers with lower income saw their credit scores increase 8-29 points on average. 
    • But, consumers with income less than $60K had a higher increase in DTI
  • Analyze geographic differences to focus risk efforts, as inflation’s impact varies by region

Figure 7

For more, watch our full webinar recording here.

* The opinions, estimates and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.

Weston Smith

Weston Smith

Portfolio Marketing Specialist

Weston Smith has worked in customer-facing and internal marketing plus training for nine years. She currently serves as a Portfolio Marketing Specialist at Equifax, a trusted data and analytics partner, and has a track record of leading and developing compelling programs and initiatives. As part of working in the cred[...]