NerdWallet CEO: US consumer health 'feels like a tale of two cities'
Many U.S. consumers have remained resilient amid inflation, but there are some signs of weakness starting to emerge.
According to NerdWallet CEO Tim Chen, consumers with lower credit score levels are showing softness relative to those with higher credit scores.
“The state of the consumer feels like a tale of two cities,” Chen told Yahoo Finance Live (video above). “We're seeing continued strength relative to historical norms in the prime and super-prime segments and definitely some credit deterioration in the near-prime and subprime space.”
Although the largest consumer banks maintain that household balance sheets are healthy, the Federal Reserve Bank of New York found that credit card debt reached a record high by of the end of 2022 as overall household debt rose to $16.90 trillion.
"Credit card balances increased by $61 billion to reach $986 billion, surpassing the pre-pandemic high of $927 billion; mortgage balances rose to $11.92 trillion, auto loan balances to $1.55 trillion, and student loan balances to $1.60 trillion," The New York Federal Reserve Bank stated in its quarterly report on household debt and credit. "The share of current debt transitioning into delinquency increased for nearly all debt types."
Not all debt is created equal. Mortgages, for instance, are backed by an asset that can appreciate over time. Often the interest rate is fixed and the timeline to repay is set. Credit cards, on the other hand, come with much higher, changeable interest rates that can end up snowballing you into greater debt.
That could exacerbate the divergence between stronger consumer groups and weaker ones. As borrowers struggle to pay their bills on time and delinquency rates for credit cards and other forms of debt increase, credit scores may start to take a hit.
During the Great Recession in 2008 and 2009, 50 million people saw their FICO 8 scores decline by more than 20 points during the depths of the economic turmoil. And nearly 21 million had their scores decline by over 50 points.
This slide in credit is something borrowers are hoping to avoid, especially as the economy is believed to be headed toward what Yardeni Research President Ed Yardeni has called "the most widely anticipated downturn on record."
One bright spot, however, is that increased consumer spending has been propped up by a strong labor market and higher wages.
“If you look at the last jobs report, over 500,000 jobs created," Mastercard Economics Institute Chief US Economist Michelle Meyer told Yahoo Finance on Monday. "Wage growth is continuing and aggregate wages are clearly still picking up, and that's supporting overall spend. So a lot of that is the consumer purchasing power that reflects the health of the labor market.”
Not all transactions come from a place of strength, however.
Inflation tends to be stickier for some categories more than others, meaning that core and frequent purchases on necessities may carry higher costs for a sustained period of time. And as more cash is being deployed towards "needs," spending on more discretionary items tends to get put on plastic or financed.
Although the increase in swiping and tapping to pay has been welcome news for credit card companies such as American Express (AXP), Visa (V), and MasterCard (MA), it's not clear how long consumers will be able to offset elevated prices through debt before they begin pulling back on spending.
According to a ScoreSense report, 53% of participants said holiday spending in 2022 "somewhat" or "extremely" compounded their current debt, while 37% of respondents expressed concern about the ability to clear the debt they incurred during the holidays.
And to the NerdWallet CEO's point, consumer sentiment survey data from the University of Michigan has shown hints of unease.
“Overall, high prices continue to weigh on consumers despite the recent moderation in inflation, and sentiment remains more than 22% below its historical average since 1978," Joanna Hsu, Survey of Consumers Director, said, contextualizing the preliminary consumer sentiment reading for February. "Combined with concerns over rising unemployment on the horizon, consumers are poised to exercise greater caution with their spending in the months ahead.”
Brad Smith is an anchor at Yahoo Finance. Follow him on Twitter @thebradsmith.
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