Consumers Confident but Student Loan Repayments May Pinch Holiday Spending

Consumer confidence is high.

The payments networks are about to report earnings, and banks have already pointed to some resilience, although spending is slowing.

Uneven retail sales data gives some puts and takes as to where that spending is taking place. Now, the resumption of student loan payments clouds the picture, at least a bit.

For retailers, the holiday shopping season may be one decidedly lacking in cheer.

The Conference Board’s Consumer Confidence Index, as measured for July, came in at 117. That’s the highest level notched in two years.

“Consumer confidence rose in July 2023 to its highest level since July 2021, reflecting pops in both current conditions and expectations,” said The Conference Board Chief Economist Dana Peterson in a press release that accompanied the data. “Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.”

Nearly a third of respondents said that their current financial situation is “good,” which is up from 28.8% as measured in June. Consumers were more optimistic about the short-term business conditions outlook in July. Elsewhere, 17.1% of consumers expect business conditions to improve, up from 14.6% before. Meanwhile, 14% expect business conditions to worsen, down from 17.7% in June.

Will Confidence Translate to Spending?

Confidence may take a while to translate into spending, and indeed, most consumers surveyed said that spending over the next six months in categories such as restaurants, recreation or travel will be the same as had been seen in July.

Elsewhere, June’s retail sales report missed expectations. Retail sales were up 0.2% from May, missing the consensus of 0.5% gains, and down from the May revised 0.5% increase.

Overall sales at department stores slipped 2.4%, after logging a 0.2% increase in May. Spending at healthcare and personal stores was down 0.1%, where that segment had been up 0.2% in May. Sporting goods and other leisure items, purchased at hobby stores and other outlets, lost 1%. The spending pressure logged in the June report may not get all that much lift in the coming months, at least as signaled by the Consumer Confidence Index data.

The student loan repayments, set to resume in October, would conceivably hit disposable income by mid-single-digit percentage points to low-double-digit percentage points, depending on where you look. Baby boomers and seniors average a debt of $44,000 per borrower, so more than 11% of their disposable income will now be used to pay back those student loans. Millennials and Generation X will lose 6.5% to 8.8% of disposable income, respectively, to the same monthly obligation tied to their higher education.

The Federal Reserve estimated late last year that student loan forbearance translated to $87 billion in contribution toward excess savings. PYMNTS data as recent as May showed that the excess savings firepower is waning. As many as 12% of consumers spent more than they earned in the six months preceding October. To cover these expenses, 27% of households pulled from savings to manage credit card debt alone, and 35% of that “extra” pandemic-era savings had been spent down.

There are some pockets of strength as millennials, for example, have $11,000 in savings compared to a previous average of $7,300 a year ago.