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59% of Americans feel like the economy is already in a recession. About the same percentage don’t have enough savings to keep food on the table for three months if they lose their job. An increasing portion (36%) of U.S. adults have more credit card debt than emergency savings. This is according to Bankrate data published earlier this year.

We’ve all heard these terrifying statistics about the U.S. consumer. So, did the one-two punch of the pandemic and inflation finally break the legendary American consumer? Knowing the answer is key because no investment is truly separated from consumer spending.

To find out, we won’t rely on the “news” where many get their “information” from. We’ll be looking at cold, hard data from SEC filings and careful analysis by top consulting firms.

Credit Card Data Galore

All the major credit card companies, like American Express (AXP), Mastercard (MA), Discover Financial (DFS), and Visa (V) are publicly traded. They report a mountain of data on the health of the American consumer every quarter. But my favorite credit company to “data mine” is Capital One Financial (COF). That’s because Capital One leans toward consumers with lower credit ratings.

If Capital One’s customers are holding up, odds are everyone else is doing just fine. Delinquency rates are the most important metric. This measures the percentage of borrowers that are late on their credit card bills. In Q2 2024, the latest reporting period, delinquency rates improved from 4.48% to 4.14%. I’ve tracked Capital One’s delinquency rate for the last 10 years. The best it has been was around 2.5% in 2020 and 2021 when stimulus checks flooded the average American with cash. Over the last decade, the average has been roughly 3.25%.

Today’s rate is higher, but 2023’s was 3.99%, and the metric throughout 2018 and 2019 was 3.74% to 3.84%. The Federal Reserve tracks the credit card delinquency rate on all commercial banks.

This puts today’s levels into context. Sure, the consumer is under pressure compared to the free money period of 2020-2022. But when it comes to credit cards, the numbers look better than almost all years going back to 1990…

Bank of America, one of the largest in the country, just reported their stats for August. Total credit and debit card spending rose 0.9% year-over-year, rebounding from a small decline in July. Their research showed that housing cost inflation was easing, which benefits homeowners and renters. That’s on top of a 5.9% year-over-year increase in wages. Average checking and savings account deposits at the bank were 33% higher than in 2019 for all income levels.

When you focus on higher-income earners, account balances are up 50% compared to 2019.

Interest Rates Going in the Right Direction

The Federal Reserve is telegraphing significant interest rate cuts. These cuts automatically lower the pressure on borrowers. Even if the debt is fixed-rate like a car loan, consumers can generally refinance to the lower rate with minimal cost or hassle. Personal loans, lines of credit, and credit card loans are mostly floating rate, so consumers with that debt are already feeling some relief with more on the way.

Depending on the term, home loans have dropped from nearly 7.5% in May down to 5.41% (15-year) to 6.36% (30-year fixed jumbo loan) today. On a 30-year fixed loan for $400,000, that means savings of over $300/month. If the Federal Reserve stays on its current course, a 5.5% rate will be available in the next couple of quarters, and that is a $500/month savings.

Confidence Matters

In a market economy, perception is reality, at least in the medium term. That’s because inventory and staff levels are dependent on what companies believe will happen. If consumers keep their wallets open, their employers keep making money. Sure, you aren’t going to spend all your money at the Toyota dealership you work at. But you might spend extra on better landscaping or to remodel that second bathroom. And that might make the business owner just confident enough to visit your dealership and pick up a new Tundra.

This recent analysis by McKinsey, a leading consulting firm, shows that the number of “Optimistic” consumers is at a multi-year high. Not only that, but outside of a couple of blips, those that are “Pessimistic” are near multi-year lows. 

A similar study by Bloomberg reported a sharp drop in consumer sentiment for September. Buried in the numbers, however, was that almost all the negativity was in the $50,000 and under household income bracket. This makes sense because lower income households are still being hit hard by inflation. Their wages didn’t rise as quickly as higher income groups, and they aren’t as likely to own their own home or have a large stock portfolio. Whether we all realize it or not, both have increased dramatically in value since inflation took hold.

Employment opportunities for all income levels remain strong. The unemployment rate of about 4% remains well below historical averages.

Final Thoughts

Americans are not nearly as concerned about their finances as the media would have you believe. Sure, inflation is a huge pain. No one likes spending $200 on groceries, and that means we all complain about it (guilty as charged). But when you step back and look at the numbers, it tells a different story.

Credit card delinquency rates are not only way below historical averages, but improving from earlier this year. The cost of major purchases (homes) and expenses (rents) has eased compared to a few months ago thanks to an aggressive Federal Reserve. In many key areas, the part of the population that drives most of the economy, and almost all of the investment activity, are doing better today than in 2019.

No one knows when the next major recession will be. That’s why at Wide Moat Research, we focus exclusively on high-quality companies (most of which pay reliable dividends) trading at discounts to fair value. This is a proven way to ride out even the worst of recessions.

And if you really study the data, the surprising takeaway is this: it looks like a downturn happened earlier this year, and we are already coming out of it.

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