It’s hard to believe that less than three weeks ago the S&P 500 closed at an all-time high. This was largely due to the enduring strength of the U.S. consumer economy. Unemployment was at one of its lowest levels, consumer confidence was high and consumer lending data showed a small percentage of late payments.
Today, mid-February feels like ancient history, and an urgent question for lenders is: Just how badly will coronavirus fears affect consumer spending?
Initially, observers who worried about the economic impact of the coronavirus outbreak focused mostly on disruptions in supply chains from China. But in recent days, as countless events are getting postponed and air travel dwindles, fears have been growing about the virus’ impact on U.S. consumer demand.
Christopher Gillock, executive chairman at Colonnade Advisors, said that he expects U.S. credit card spending to decline in the short term. “It could be precipitous, once the numbers come through,” he said. Card issuers that focus heavily on the travel segment should take a bigger short-term hit than those whose customers use their cards more for routine purchases like gas and groceries.
Over the longer run, Gillock raised the possibility of a fairly lengthy economic crunch, which would likely spark a rise in unemployment and make it difficult for many borrowers to pay their debts. Household debt topped $14 trillion in the fourth quarter of 2019 and has hit record highs in each of the last 19 quarters, according to data from Federal Reserve Bank of New York.
“Consumers are leveraged,” Gillock noted. “Auto debt is at an all-time high. Credit card debt is up there. Student loans, forget about it.”
This week, federal and state regulators urged lenders to “work constructively with borrowers and other customers in affected communities. Prudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.”
So far, U.S. consumer lenders have said little about the possibility of a recession and the impact it would have on their profitability. However, this could change as investors are beginning to anticipate more rate cuts — and even the possibility of a severe recession. According to analysts at Keefe, Bruyette & Woods, the share prices of some consumer lenders have already fallen by a larger margin than their earnings would be expected to decline as a result of a modest recession in the second half of the year.