You don’t need to dig deep to spy signs of consumer strength. From July retail sales to earnings from big box retailers, we’ve seen beats across the board.
Home Depot (HD) topped analyst expectations and authorized a major $15 billion share buyback. Walmart (WMT) beat on both revenue and earnings per share. And while Target (TGT) missed on sales, it reported a significant profit jump.
At the same time, homebuilders are continuing their winning streak. And credit metrics, according to Capital One, are holding steady in the face of higher interest rates.
But what these numbers don’t tell you is that while consumers may still be spending… consumer budgets are stretched to their limits. And in a matter of days, there’s a $1.8-trillion charge poised to stretch American budgets to their breaking point…
The Payment Pause is Ending
According to Target, rising food and gasoline prices are causing shoppers to curb discretionary purchases. And they’re kicking the can down the road with credit card debt just topping $1 trillion for the first time.
But lurking in the shadows is the resumption of $1.77 trillion in student loan payments for more than 40 million borrowers.
Repayments of federal student loans were paused during the depths of the pandemic. But that holiday is ending in September.
In turn, budgets are going to get a lot tighter.
The latest study by TransUnion shows 50% of consumers will owe more than $200 per month on their student loans. And 20% will have payments over $500. This averages out to an extra $500 payment per month for millions of Americans.
That’s equal to roughly $12 billion per month or $144 billion per year being shifted away from discretionary spending.
For perspective, Ford (F) banked $158 billion in revenue in 2022 after selling 4.2 million vehicles. And JP Morgan (JPM), the largest U.S. bank, raked in $128.7 billion last year. So, we’re not talking about an insignificant sum…
Savings Exhaustion
The student debt restart is a serious headwind for U.S. consumers.
Keep in mind, their spending has been resilient and helped keep the economy expanding even after more than a year of Federal Reserve interest-rate hikes.
Compounding the strain, many of the student loan borrowers have taken on other kinds of debt since payments were paused. And they’ve exhausted their saving from the pandemic. That situation is leaving households below the historical trend…
And the results won’t be pretty.
According to a recent Credit Karma survey:
Major U.S. corporations are already weaving these obstacles into the conversation on their earnings calls.
Walmart stated resuming student loans and the drawdown in excess savings as undercutting household spending. Target views it as an “additional pressure on the already strained budget.”
And even restaurants believe they’ll feel the impacts. Both Wendy’s (WEN) and Cava (CAVA) are warning about the draining of personal disposable income.
But all of this does provide us with a game plan…
The Sector to Avoid
The resumption of student loan payments may not spark a recession or derail the economy. But there are plenty of sectors that are going to feel outsized impacts.
For now, I’m keeping a close eye on the Consumer Discretionary Select Sector SPDR ETF (XLY).
Even though it’s been a leading sector for much of 2023, it’s been in a downward trend since mid-July.
And having already crossed below its 50-day moving average, shares could be on their way toward their 200-day. That’s roughly another 10% decline as retailers post cautious outlooks.
