Yu: Welcome to Asset TV. I'm Michelle Yu. Thanks for joining us as we have a great panel discussion here in our New York studios with our friends at Thrivent Asset Management. Joining me today from Thrivent are Steve Lowe, chief investment strategist, Eric Johnson, equity consumer research analyst, and Tracy Pamperl, director of investment grade research.
Inflation and how the U.S. Federal Reserve is managing interest rates has been one of the top economic headlines for over a year now. Question here is, how have Fed rates affected consumers, Steve?
Lowe: It's had a huge impact overall over the past few years. And to begin with, the Fed cut rates down to the zero and that enabled consumers to borrow at very, very low rates, historically low rates. So that enabled spending on houses and housing prices shot up. Cars became more affordable if you could find one. But the party has stopped now because the Fed has been raising rates very aggressively to combat inflation. And that makes everything that you need financing for more expensive. So, it's hard housing's affordability is not great right now.
It makes it harder to buy a car, it makes it harder to carry large balances on credit card debt. And so, the net impact is that it kind of dampens consumption. And that's exactly what the Fed wanted to do. It wanted to cool the economy, and you do that by having consumer demand taper off and that helped bring down the inflation rate, which was the goal of that. And supply chains were very snarled during the pandemic and there were shortages, but that's largely ease, but you still see pockets of weaknesses. But overall, I think we see the consumer in good financial shape.
They're willing to spend, there's some caution, but they have this tailwind now that didn't exist before which is lower rates, and I think that will help going forward in particular as it makes large ticket items more affordable and should help the housing market. The downside of lower rates is that asset prices tend to go up. So lower rates also enable housing prices to go up, but overall, it's positive for the economy and for consumers.
Yu: Eric, your thoughts?
Johnson: Yeah, as Steve mentioned, a lot of the mechanical drivers with inflation and Fed's actions, there's also a psychological aspect that the team at Thrivent really looks at to analyze how consumers spend. And so, as inflation expectations were accelerating, consumers were expecting sustained double-digit inflation for a period of time there. What you tended to see was some stockpiling and pulling forward of demand.
So, this is most evident grocery store hoarding of toilet paper where consumers worried about prices increasing in the future would actually go pull forward multiple months of demand into their basket at one point in time, worried prices would be higher or they couldn't get it next time they showed up at the store, right? And so that's a psychological difference beyond what the mechanical drivers would indicate. And now we're in a period of disinflation which is a reduction in the annual rate of inflation growth.
Or even if we can move into a sustained deflationary environment, the interesting dynamic would be consumers looking at car prices declining month over month, year over year. Why would I buy the car now and if it's going to be $5,000 cheaper next year, right? And so instead of pulling forward purchases, consumers could defer them expecting cheaper prices in the future. So those are a little bit of back and forth there I'd call out.
Lowe: Yeah, yeah, because the hoarding is a hallmark of economies is high inflation you got to buy now right, because prices are going up and now you're probably seeing the reverse here.
Johnson: Yes, absolutely. And the other unique dynamic to this cycle really in the last 15 years is any consumer with significant savings is actually generating a meaningful yield or interest income on that money. So, they look at their bank statement monthly. In the mid-two 2000s or mid 2010s you weren't seeing much of a return, so this isn't doing much for me I might as well spend it here. And now maybe I defer that car purchase and that interest in the next year would pay for family vacation flights to Europe. And so, these are unique wrinkles to the last few years different from the prior decade plus we assessed. So ultimately a moderating rate cycle is probably a positive for consumers provided unemployment data remains strong, and home prices remain stable.
Yu: Tracy, I did not forget about you.
Pamperl: Yeah, I was just going to take that step back and remind everyone, the high interest rates right now do have an impact on the consumer, and where we're really seeing it is on big purchases that you typically have to take out a loan for. So, think of a large remodel, so a kitchen remodel, large purchases like on appliances, on furniture at this point. So, we are seeing a dial back in that kind of spend. Interestingly though, new auto sales have actually remained quite stable at this point.
I think that's been an interesting dynamic because autos, even if everyone wanted to buy an auto in 2021, '22, there wasn't autos on the lots at the time. So, I think what's happening is now we have the supply to meet the demand so that has remained more stable. What's interesting though is the average selling price is starting to come down, and that's being driven by a couple of factors. First, it's a mix shift. So, we're starting to see more spend, more sales in lower priced cars, smaller SUVs as opposed to those large SUVs and pickup trucks.
So that brings that selling price down. We're also starting to see an increase on dealer incentives. So, when you go in and the dealer's offering 2, 3, $4,000 to come in, so again, that's impacting the price. Credit card debt though at this point is starting to accelerate. And at the beginning of that it's a positive because it means the consumer spending. What we're starting to monitor though is if it's getting to a concerning level, because if you're having to put a purchase on a credit card right now the interest rates still really high.
Does it get to a point where the consumer can't afford to make that payment? So, monitoring what's happening with delinquencies. And delinquencies not being able to make your payment after 30, 60, 90 days is how they measure it. And delinquencies are increasing right now, but they're back to about a pre-COVID level. Does it keep increasing and does it get to a concerning level that we really get concerned about the consumers, what we're monitoring?
Lowe: Yeah, it's really hard to carry credit card debt because right now you're paying about 22% interest on the average and that adds up very, very quickly.
Pamperl: Yeah.
Johnson: And that's up from 15% generally over much of the last decade prior. So that's a significant hundreds of dollars on your average balance increase year over year the consumer has to manage.
Pamperl: Yeah, and that's a great point. So, if we can come down from that 22% to maybe that more normalized level, we actually could have a positive in consumer spend. One, if you have to take out that loan for a necessary purchase just naturally it'll be a little bit easier to pay it back if interest rates come down. Also, if anyone's been sitting on the sidelines and not wanting to take out that loan for, like I said, that kitchen remodel, it may bring people back into the market and interest rates are down. Yeah, let's go ahead and do that remodel. So overall, it actually could spur some consumer spending once rates start coming down which would be a positive read-through for the economy.
Johnson: One of the areas we're most focused on the equity side watching this is in automobiles. As Tracy mentioned, it was the one area that was probably most impacted by supply chain shortages, and also consumers weren't driving. Many people were working from home, mileage went down significantly. A lot of people got kickbacks from their insurance companies for staying at home and not driving.
So, your premium you paid you actually got a refund on that across many insurance companies. And so that was the area we didn't over consume in this good spending binge. And so, to the extent you get a little bit of interest rate relief here, it could really catalyze volume of auto sales because it's one area where we didn't pull forward that demand. And so, it will be a pretty clean look to see if lower interest rates will be a nice accelerant for the consumer spending from here.