Consumer pressure signals problems in cosmetics and clothing sectors

TS Eliot wrote that the world will end not with a bang but with a whimper.

The unstoppable wave of consumer spending may end this way, and not with a complete halt — a blow that hits retailers all at once.

We may see belt-tightening, which will accelerate as consumers find that savings are not enough to cover spending, and debt adds additional pressure.

And it’s lower-income consumers who may provide the clearest clues to what retailers can expect, particularly in discretionary spending sectors like cosmetics and apparel.

As PYMNTS Intelligence has discovered, and as Karen Webster highlighted in a recent column, 10% of American consumers have an annual income of $50,000 or less, live paycheck to paycheck and already have issued debt to pay their monthly bills. The challenge for this segment is to maintain 8% of all consumer spending.

When it comes to liabilities, Webster wrote, “it’s not that they won’t end up getting paid, but each month becomes a game of bill roulette as consumers decide which billers can wait a little longer. Interestingly, of all the household bills, utilities, insurance, cellphone and credit card bills are the monthly ones — the billers who bear the greatest risk of loss if they don’t get paid,” she wrote. But (stretched) funds spent on these needs translate into less money to spend elsewhere.

Lower-income consumers are being left behind

There have been a few signals from earnings season so far, particularly from banks. Most payment networks have yet to report, but companies like JPMorgan Chase, Wells Fargo, and Citi have all seen year-over-year increases in delinquent rates for cards and auto loans, with some sequential improvement. We note that delinquency rates are indicative of some of the juggling act references above—obligations have not yet been written off.

JPMorgan’s earnings addendum indicated that, when it comes to delinquencies, the 30-day delinquency rate of just under 2.1% in the second quarter was higher than the 1.7% seen during the same period last year, but better than the 2.2% seen in the first quarter. Overall card spending was positive, but management noted the weakness seen among lower-income cohorts.

During Citigroup’s earnings conference call, management noted that people with higher credit scores continue to use cards, while consumers with lower FICO scores are being left behind.

Chief Executive Jane Fraser said Citi is seeing “differentiation in the credit segment, with lower-income customers feeling the squeeze,” and Chief Financial Officer Mark Mason said that “lower FICO customers are seeing bigger rate declines and are borrowing more because they are more affected by high inflation and interest rates.”

The 90-day delinquency rate was 1.1% in the latest period, down from 0.8% a year ago and up from 1.2% in the first quarter. Wells’ documents show that credit card loans are more than 30 days delinquent at 2.7%, down from 2.3%.

Other loan segments are also seeing increases in delinquency rates. The delinquency rate was 1.12% in the latest quarter, up from just over 1% in the first quarter and 0.9% a year ago, according to JPMorgan.

We’ve seen that “most” payment networks haven’t reported yet — Visa and Mastercard are still in the game. But Discover reported earnings last week, and with card sales down 3%, we’re seeing what CFO John Greene called a trend that “sees a cautious consumer, as evidenced by lower spending by cardholders, with lower-income households being hit the hardest,” the CFO said.

The data shows that the 30-day delinquency rate for its card portfolio was 3.7% in the June quarter, up from 2.9% a year earlier. The net capital charge-off rate was 5.6%, up from 3.7% a year ago. Greene said losses should “peak and plateau” by the end of this year. The supplements reveal that net charge-off rates, overall, should be in the range of 4.9% to 5.2%. The company’s latest annual report says that 80% of its card business is tied to consumers with FICO scores of 660 or higher, with the remaining basket falling below that level.

PYMNTS Intelligence reported that a significant percentage of younger consumers — millennials and Generation Z who are single, married without children, or single with children — fall into the “under $50,000” income bracket.

These are the same segments that are under pressure to live paycheck to paycheck, and our data shows that only about 22% bought clothing, and about a third bought health and beauty products, which falls behind the densely populated households with children, where these items may be the most important, wear out, need replacing. These are the retailers that may feel the pressure as lower-income consumers cut back and families make trade-offs.

The above chart, from PYMNTS, shows that about half of consumers who are having trouble paying their bills are in the subprime category, the lower end of FICO that is identified on earnings conference calls as being under stress.

Deposit trends suggest that savings may not help much. JPMorgan said its consumer banking deposits fell 3% from the first quarter and 9% from a year earlier.

PYMNTS Intelligence data shows that easy-to-access savings—at all income levels but most pronounced among lower-income consumers—are not a buffer against shocks or, perhaps, to pay off cards or sustain spending. For a paycheck-to-paycheck consumer struggling and juggling monthly obligations, that adds up to about $1,700.

Those same consumers have an average of more than $5,000 in outstanding balances—and even among relatively affluent households, the balances are even higher, exceeding $10,000. This juggling act is more like walking a tightrope.