By Robert L. Cain, Copyright 2022 Cain Publications, Inc.
Retail sales beat inflation for the fourth straight month the Commerce Department reported in April. The gleeful report is wishing thinking at best, misleads at worse and misinforms at worst. Sure retail sales are higher than last year, but why they are makes for a worrisome picture. For example, Walmart reported that customers favor lower-cost store brands of lunch meat over the higher-priced national brands and buy half-gallons of milk rather than full gallons. Kohl’s department store reported its customers buy less on each shopping trip.
Other factors eat into company profits; a big one is that they have too much stuff going unsold. With supply chain issues apparently over and companies receiving goods “from overseas earlier than expected,” companies such as Costco, have 26 percent more inventory than a year ago, Gap 34 percent more, Walmart 32 percent more. Target 43 percent, Best Buy 9 percent more, and Macy’s 34 percent more. “Holding excess merchandise proves expensive as warehousing costs rise,” reported a May 27 Reuters article. And as they dump the merchandise, it cuts into profits on everything they sell.
The result: several retailers, including America’s largest retailer Walmart, lowered their full-year earnings forecasts blaming high inflation, ignoring the cost of excess merchandise sitting in warehouses. Reuters reported May 26 that “some economists believe the erosion of profits and falling share prices could force companies to pause hiring or start laying off workers.” The wheels haven’t fallen off yet, but their wobble makes for troubling news.
While companies’ wheels wobble, problems exacerbate the way consumers buy. People pay for this higher-than-last-year sales with credit cards because they don’t have the cash. Forty-nine percent of consumers depend on credit cards for essential living expenses. Getting worse, the Federal Reserve Bank of New York reported that credit card balances are $71 billion higher than the first quarter of 2021. Household debt, they also reported, increased $266 billion or 1.7 percent above the first quarter of 2021. Non-housing balances increased by $1.7 billion.
The pain doesn’t fall equally across all economic groups. Sub-prime borrowers suffer most. Many households “are forced to choose between paying for necessities and paying a monthly loan,” the Wall Street Journal reported. In fact, almost half, 49 percent, depend on credit cards to cover essential living expenses with 57 percent having missed at least one credit card payment; almost one in three, 32 percent, used the unpaid credit card debt for food and groceries.
Experian posits that sub-prime borrowers, defined as those with a FICO score of 669 or lower, amount to 34.8 percent, about 90 million adults.
But Wells Fargo CEO Charlie Schaff said “We are still in the best credit environment we have ever seen in our lives.” The best credit environment, huh? Equifax reports that about 11 percent, more than one in 10, credit cards owned by sub-prime consumers were at least 60 day behind in their payments in March compared to 9.8 percent in 2021. Plus, car loan and lease delinquencies set a new record in February with 8.8 percent at least 60 days delinquent.
Fair Isaac reports that “Americans have significantly increased the amount of credit they have taken this year.” Capital One said that in the first quarter credit card delinquency rates were more than 30 days higher than in 2021. And the gloom goes on, except with the credit issuers, who call it “the best credit environment” they have seen.
That will work until the chickens come home to roost. With inflation rising faster than it has in 40-odd years, it’s only a matter of time before over one-third of the population, 90 million-odd adults, can’t pay their bills anymore.
A University of Michigan study reported by ABC News May 22, 2022 found that consumer sentiment dropped nearly 30 percent in the past year. Their spending outruns inflation. Economists at the University of Michigan say there has been a “historic disconnect’ between sentiment and actual consumer behavior. That connection may be re-established shortly when credit cards begin getting declined and inflation surpasses income even more.
It’s already started. Target’s CEO Brian Cornell said the chain “did not expect to see the dramatic shift” in spending away from TVs, appliances, and patio furniture. Instead people are spending money on restaurant gift cards and items reflecting people’s desire to get out and spend.
Some of it has to do with pandemic fatigue. For two years, people have been locked down and masked up afraid to venture out into the world and engage in normal activities. Now they’re maxing out their credit cards to get even. It will go on until it can’t anymore.
A false security prevails with wages rising some 6 percent in April. That looks impressive but lags behind inflation. The national saving rate has dropped about 6 percent to below pre-pandemic levels and household debt rising 8.2 percent in the first three months of 2022 compared to the previous year because of increased use of credit cards, the biggest increase since early 2008 in the midst of the recession. Even so, economists looking through rose-colored glasses say debt hasn’t reached “problematic levels.” We still have some $2 trillion dollars to suck out of savings before everything collapses.
It falls hardest on some demographics with 61 percent of Gen Zers and 53 percent of Millennials having to use credit cards for living expenses, while only 26 percent of their parents’ generation have to.
Employers can’t keep raising wages to keep up with inflation without pricing themselves out of the market while having to dump costly excess inventory. Lacking significant increases in their incomes, which employers can’t realistically provide, employees can’t keep charging everything and skipping credit card payments and still be expected to be able to pay the rent, make the car payments, and buy food. In spite of the rosy reports from banks and economists, danger lies patiently in wait, ready to knock the wheels off the economy.
Written for Zip Reports where they do employment and rental screening.
Contact Robert L. Cain at firstname.lastname@example.org