Consumer Sentiment Rises in November

Consumers felt a little better about the economy in early November, even as many said high prices were eating into their standard of living. The University of Michigan’s preliminary sentiment index rose to 51.0 from 48.0 in October, with views of current conditions improving more than expectations for the future. A separate Federal Reserve release on Friday showed that household borrowing had already picked up in September, particularly on revolving accounts such as credit cards. Together, the reports give us a better sense of where consumer demand might hold up and where lenders still have reason to be careful.

The improvement in sentiment reached lower- and middle-wealth households, and expected inflation over the next year eased to 4.3% from 4.7%. That gives businesses selling to those households some reason to be encouraged. But the survey found that 57% of respondents brought up the effect of high prices on their living standards, and the headline index was only back to where it stood a year earlier. The interviews also ended November 2, so the survey tells us how people felt going into this week.

September’s credit figures help explain why the distinction matters. Revolving credit balances grew at a 14.5% annualized pace after falling in August. That annualized figure shows how fast balances would grow over a year if September’s pace continued. It was a sharp one-month swing, while the third-quarter pace was a much slower 4.1%. Higher balances can bring in more interest for consumer lenders, but they tell us little by themselves about whether households are paying on time. The Fed figures also cover consumer credit outside real estate, so they do not establish what happened to mortgage borrowers.

Within the Fly High universe, the effect depends on where the income comes from. Retail landlords benefit if steadier customer spending helps tenants pay rent. Business development companies that lend to consumer-facing businesses could see a similar benefit through those borrowers’ sales and ability to make interest payments. For consumer lenders and funds that invest in consumer debt, the more direct question is how much interest income survives funding costs and losses on unpaid loans.

Our view is that the survey offers modest encouragement for businesses that depend on household demand, while the credit figures leave the outlook for lender earnings open. The evidence that would make us more confident about dividend support is steadier sales alongside fewer late payments or loan losses. If borrowing keeps rising while payment performance worsens, the extra interest income may do little for earnings.

Sources

• University of Michigan preliminary November Surveys of Consumers
• Federal Reserve September Consumer Credit release

This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.