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One of the few bright spots in the economy over the past several months is that consumer discretionary spending continued to remain robust, despite the fact that high inflation has largely meant that people cannot really afford their spending. This is evidenced by the fact that credit card balances are at nearly $1 trillion and personal savings balances have dropped substantially over the past two years. Basically, the only conclusion that can be drawn from this is that American consumers will keep spending beyond their means until the minimum required payments on their credit cards force them to cut back. That may be good for consumer discretionary stocks and those companies that profit from consumer discretionary spending, but it is hardly good for the long-term health and vitality of the economy.

However, there may be a near-term event that will substantially reduce the level of consumer spending. This is the resumption of student loan payments.

Background

As with many things affecting our economy today, the pending discretionary spending impact from student loans has its roots in the COVID-19 pandemic and the government's unprecedented reaction to it. Back in March 2020, then-U.S. President Donald Trump ordered that student loan payments be paused in order to help people manage the adverse impacts that the lockdowns had on the budgets of many households. This increased the spending power of many people since they no longer had to make student loan payments that averaged $393 per month. In effect, this had the same effect as if the government gave $393 each month to every person in the nation with a student loan or nearly $800 per college-educated couple with student loans. This money could be spent on other things, which many people opted to do rather than save it.

While this was originally intended as a temporary measure to help people weather the lockdowns and the spike in unemployment that accompanied them, it wound up being a permanent fixture of the nation. This is because both the Trump and the Biden Administrations kept extending this pause, despite the fact that the pandemic "emergency" officially ended a few months ago (and most states ended their own emergency declarations back in 2021). Likely due to the fact that this payment pause has been going on, American households have generally reacted as though the increase in discretionary income due to not having to make student loan payments was permanent. As we just saw, this increase in discretionary income is easily enough to finance a relatively cheap three-day vacation or a new Apple (AAPL) iPhone every few months.

The Blow To Consumer Spending

As part of the debt ceiling deal that was passed a few weeks ago, Congress explicitly forbade the Biden Administration from extending the student loan payment pause. As such, student loans will begin accruing interest on September 1, 2023. However, most borrowers will not need to actually make payments until October.

Naturally, once these required payments resume, it will have exactly the opposite impact as the pause had on consumer discretionary spending. A person with an outstanding student loan will see their discretionary income decline once payments are required to be made in October. After all, a borrower will no longer be able to spend the approximately $393 per month that they were previously able to as this money will now have to go to making student loan payments. When we consider that most of these people almost certainly cannot afford to maintain their current spending levels and still make those payments, it seems likely that the businesses at which consumers spent this money will see a revenue decline.

Now, the real question is how big of an impact this will have on the economy as a whole. After all, in a nation of 330 million-odd people, a few people reducing their spending by ~$400/mo. does not have a noticeable impact. However, in this case, it will, due to the sheer number of people that have outstanding student loans.

On Friday, Barclays predicted that the restart of student loan payments will reduce consumer discretionary spending by $15.8 billion per month or approximately $190 billion per year. That is about 8% of total consumer discretionary spending nationwide. Clearly, then, this is a problem that investors do not want to ignore.

The big question then is which companies will be most affected by this? Obviously, the utilities and telecommunications sectors are unlikely to be affected. The products and services provided by those sectors are considered to be necessities by most people, and it is unlikely that anyone will allow their electricity to be cut off in order to pay their student loans. They will cut back spending on luxuries far before they cut back on electricity and the Internet. Likewise, fossil fuel companies are unlikely to be much affected. While it is possible that people will cut back on driving due to the reduction in discretionary income, this is not going to be a large enough impact to affect the energy industry.

The big losers here will be any company that is heavily reliant on consumer discretionary spending. This includes apparel companies, hospitality companies, restaurants, and similar companies. We will probably also see companies like Apple have a headwind to revenue, but I doubt that it will be as affected as the other companies listed due to the necessary status that many people place on their smartphones. It is certainly possible that people will be less included to purchase iWatches and similar products though as they are little more than niche gadgets. We might also see a decline in the number of people upgrading their phones every two years.

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