Macro Signposts | 2 October 2024
This week, I asked economist Allison Boxer to coauthor Macro Signposts and help analyze the outlook for the U.S. consumer following revisions to GDP data.
Unless explicitly stated, views expressed do not constitute official PIMCO views.
Does the U.S. Consumer Have Room to Run?
By Tiffany Wilding and Allison Boxer
Concerns about the financial health of the U.S. consumer may have been premature.
Last week the Bureau of Economic Analysis (BEA) released annual benchmark revisions to GDP-related accounts – an annual process of updating the U.S. national income and product accounts (NIPA) to reflect new information from comprehensive source data. This year's revisions pointed to an even more resilient and less interest-rate-sensitive U.S. economy than we previously thought. GDI and GDP were both revised higher for 2022 and 2023, and the gap between GDI and GDP was resolved by upward revisions. The technical recession in 2022 – where GDP previously appeared to have contracted for two straight quarters – was also revised away.
Revised household data suggest greater consumer strength
However, we think the most important new information was upward revisions to the U.S. household saving rate, which rose to 5.2% in 2Q 2024 from 3.3% before the revisions. This takes the saving rate from what we previously thought was an extremely low level back toward the range that was typical pre-pandemic (around 5.5% to 8.5%).
The revision implies that U.S. consumers may not be as overextended as previously thought. A higher saving rate implies consumers have more room to reduce their saving to smooth consumption if needed, and conversely, it's less likely that a rise in the saving rate back toward pre-pandemic levels causes consumption to drop meaningfully. While the saving rate revision may seem like a relatively small increase, it is an important driver of consumption. For example, in a counterfactual where the U.S. saving rate wasn't revised higher by 2 percentage points (ppt) but instead rose by that much, the corresponding drop in household consumption likely would have been enough to drag the economy into recession in 2024, all else equal.
Prior to the NIPA revisions, there was increasing worry that the U.S. consumer, who until recently stood out as the most resilient source of overall growth not just in the U.S. but across developed markets, was starting to lose steam. Delinquencies on various consumer credit products have risen above pre-pandemic levels despite rising employment, positive real income growth, and real household wealth that has generally normalized down to still healthy levels after surging due to government supports during the pandemic. And with banks and lenders tightening credit availability and the saving rate (previously thought to be) at very low levels, concerns were rising that an overextended U.S. consumer might need to pull back, risking a weaker economy.
After incorporating NIPA revisions and doing a deeper analysis of consumer credit data, we believe we now have a clearer lens into the U.S. consumer. While there are pockets of consumer weakness at the lower end of the income distribution, middle- and higher-income prime household borrowers appear to be doing just fine. The recent acceleration in consumer debt delinquencies appears to be mainly a by-product of pandemic policies that temporarily inflated consumer credit scores. The aggregate consumer debt-to-GDP ratio reflects healthy consumer balance sheets, and a higher saving rate suggests more of a buffer before consumers must start pulling back.
Three main observations from the credit data underpin our view that the U.S. consumer is generally still in good shape:
- "FICO inflation" – not an overall deterioration in household ability to pay – appears to be a key reason why delinquencies are above pre-pandemic levels. FICO inflation refers to the increase in FICO scores that occurred during the pandemic era, when many consumers benefited from student loan forbearance and household fiscal stimulus. PIMCO's consumer credit universe – a dataset that represents about 10% of the U.S. population – suggests that overall average credit scores in the U.S. rose by about 10–15 points during the pandemic period. Importantly, this FICO inflation was most pronounced for borrowers with lower scores, suggesting that FICO inflation allowed riskier borrowers to access credit they otherwise may not have received. Indeed, using our consumer credit dataset, when we exclude debt underwritten during 2021–2022, delinquencies appear to have risen roughly back to 2019 levels, not significantly above (see Figure 1).
 |
- In that 2021–2022 underwriting period that showed the effects of FICO inflation, there appears to have been a shift in who got access to additional consumer credit, but not a significant increase in overall credit creation. Non-mortgage consumer credit has actually declined by 2 ppts of GDP relative to 2019 levels. This is important because it suggests that the post-pandemic period of strong consumption growth was not driven by consumer credit growth, and therefore the normalization since this period of FICO inflation doesn't necessarily mean a slowdown in consumption. Taking a step back, it's also an important buffer should the economy slip into recession. PIMCO analysis of 78 developed market recessions since 1960 shows that recessions that follow periods where households have more savings tend to be shorter and shallower.
- Traditional lenders have already tightened borrowing standards and pulled back on lending. Macro indicators such as the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) have underscored banks' desire to tighten lending standards since the Fed began hiking interest rates and the failure of Silicon Valley Bank put additional pressure on banks to shore up their balance sheets. Micro data from our consumer credit dataset suggest that the pullback in lending is leading to early signs of a lower pace of delinquencies. For example, cumulative defaults from the 2023 issuance vintage of credit products such as auto loans suggest that they are likely to peak well below the 2021 and 2022 vintages. This pullback from traditional lenders such as banks is making it more challenging for lower FICO borrowers to access credit, but also creating opportunities for private lenders to step in.
Implications for the economy and the Fed
For the Fed, the revised economic data should take some of the urgency and downside risk out of policy rate cuts, absent a more significant slowdown in the labor market. Upward revisions to the saving rate, together with an outlook for consumer delinquencies to stabilize around pre-pandemic levels, suggest U.S. consumers may not be as overextended as previously feared. While it's still reasonable to expect the U.S. economy to slow next year after two years of above-trend growth, the saving rate revisions, along with stronger corporate profits growth, productivity, and unit labor costs growth, all point to a very resilient-looking U.S. economy. Indeed, at a conference on Monday, Fed Chair Jerome Powell cited upward revisions to GDI and the saving rate as reducing some downside risks to the U.S. economy.
Despite all of this, we still think a more normal-looking U.S. economy warrants returning monetary policy to more neutral levels. We think the Fed will indeed deliver a sequence of 25-basis-point cuts over the next several meetings in an effort to realign policy with the current state of the U.S. economy. If the economy were to weaken more than expected, we don't think Fed officials will hesitate to act aggressively should the labor market slow further. Powell was careful to caveat that there are reasons to believe that the employment data offer a better real-time indicator of activity than GDP data. Still, it's reasonable to be optimistic that Fed officials can maintain a soft landing.
Investment implications
Migration of prime consumer credit away from banks and toward private sources of funding is creating opportunities for private lenders. And, while overall U.S. household balance sheets look healthy, FICO inflation and growing dispersion in performance between different consumers serve as important reminders of the need for careful underwriting, instead of overreliance on traditional indicators such as FICO score.
For more information on consumer-related lending, watch this video featuring PIMCO Group CIO Dan Ivascyn: "Private Markets: Early Innings for Asset-Based Lending."
- What's Behind the Fed's Bold Move? | 24 September 2024
- U.S. Presidential Election: Toss-Up in Swing States | 17 September 2024
- Could We Ever Go Back to 2019? | 10 September 2024
- Might Partisan Biases Color Our Forecasts? | 5 September 2024
- Reestablishing Pre-Pandemic Patterns | 21 August 2024
We welcome your questions about the global macro landscape. Don't hesitate to suggest themes or data for us to analyze and discuss: Please email [email protected].
For regular insights on U.S. policy via email, please sign up here to receive PIMCO Washington Watch from Libby Cantrill, head of public policy.
All investments contain risk and may lose value.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 ("CISA"), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015. The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2024, PIMCO.
CMR2024-1001-3904692