(Bloomberg) — A key source of US economic growth this year — consumer spending — is showing signs of losing steam, even before Wednesday’s round of Federal Reserve rate hikes kick in.

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Credit card data show that spending in May was just 10% higher from the same month last year, according to a Barclays report this week. For the rest of 2021, that monthly spending growth has averaged more like 20%.

That slowing growth, combined with weakening home sales and declines in wage growth, would mean that monetary tightening is already hitting the economy hard. The Fed may be able to tighten less aggressively in July, according to Barclays, which is forecasting just a half percentage point rate hike next month. Rates markets indicate a strong chance of a three-quarter percentage point hike.

The stock and corporate bond markets don’t reflect the risk of a weakening consumer, wrote Barclays strategists including Ajay Rajadhyaksha, Ryan Preclaw, and Hale Holden, in a separate Tuesday note. The slowing growth of consumer spending underscores how difficult the Fed’s job is now as it looks to contain inflation that’s running at a four-decade high, while trying to avoid tipping the economy into recession.

The softening only started in the last four to six weeks, but it was visible among both high- and low-income consumers, the strategists said, based on a sampling of Barclays credit card data. And it’s consistent with a report on Wednesday that showed retail purchases fell 0.3% in May from the month before, the first decline this year.

“Like Atlas with the world on his shoulders, the consumer has been supporting the US – and, to a large extent, the world – economy all year,” the strategists wrote. “But that might be about to change.”

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Target, Walmart

Consumer spending accounts for about two-thirds of US economic activity, and in the first quarter, it was the segment that performed relatively well even as government expenditure fell and corporate investment lagged. But there are signs that Americans are growing less willing to spend and are generally weaker.

Inflation is taking a bigger bite out of incomes, forcing Americans to dedicate more of their spending to basics like food and gas and leaving less room for discretionary purchases. That’s leading to higher inventories at Walmart Inc. and Target Corp., and also pushed the savings rate in April down to the lowest since 2008.

Given these declines, full-year earnings estimates for consumer discretionary stocks probably need to fall 2.5% to 5% across Wall Street, the Barclays strategists wrote. Those kinds of declines have usually resulted in these securities performing more than 2 percentage points worse than the broader market.

For high-grade corporate bonds, risk premiums were around 1.4 percentage point on Wednesday, according to Bloomberg index data. They will likely reach as wide as 1.5 percentage point by the end of the year, Barclays strategists said.

Nothing’s Immune

The slowdown in spending growth seems to be happening for both goods and services, Barclays wrote. Earlier this year, many strategists expected consumers to ramp up vacation traveling and go out to restaurants more often. While that was true for most of the year, in the last six weeks, services spending grew only 15% from the same period in 2021, compared with roughly 30% earlier this year.

And more subprime borrowers are falling behind on their car loans, according to S&P Global Ratings’ tracking of bonds backed by the consumer debt. Delinquency rates rose to 3.82% in April, rising back toward 2019 levels, compared with 2.49% a year earlier, the ratings firm said in a report on Tuesday.

These figures tie in with a report last week that showed consumer sentiment plunging in early June to its lowest level on record, based on the University of Michigan’s sentiment index. The report aligns with the argument that US consumers might be starting to pull back, Barclays wrote.

Borrowing costs are rising across the economy now as the Fed tries to tamp down inflation that’s running at around 8.6% a year. The Fed said it would hike short-term rates by 0.75 percentage point on Wednesday — the biggest increase since 1994 — and it expects more increases this year as it tries to get inflation closer to its 2% target.

Job Cuts

While the US job market is still strong, a June 2 report by outplacement firm Challenger, Gray & Christmas said that May saw a surge in job cut announcements in some industries, including construction and tech. The sectors cutting jobs tend to be more sensitive to rates or the struggling stock market.

Coinbase Global Inc., the largest US digital-asset trading platform, said it is cutting about 18% of its workforce on Tuesday, citing the plunge in crypto-currencies and worsening economic conditions. Real estate brokerages Compass Inc. and Redfin Corp. said they are laying off workers as mortgage rates rise and home sales fall.

“An entire army of appraisers, loan originators, title company workers — hundreds of thousands involved in the machinery of refinancing mortgages — are vulnerable,” the Barclays strategists wrote.

Bond investors are getting increasingly concerned about spending and layoffs, and are demanding higher interest payments when buying notes backed by consumer loans. The lowest rated part of a bond from auto lender Exeter Finance, backed by subprime auto loans, sold at a yield of 9.545% this week, according to data compiled by Bloomberg News.

That may be the highest yield for such a security since the financial crisis, said John Kerschner, head of US securitized products at Janus Henderson Investors, in a phone interview. The high level also reflects broader market turmoil this week, investors said.

The Fed has no choice but to tighten further now, which will probably only cut into consumer spending more.

“The Fed is in a very difficult spot with inflation,” said Cristian deRitis, deputy chief economist at Moody’s Analytics Inc, in a phone interview. “Consumers are facing multiple shocks as well from higher food and gas prices. Rising interest rates only add to the stress.”

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