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The day after Thanksgiving, known as Black Friday, has evolved into one of the busiest shopping days in the U.S.
Major retail chains typically entice shoppers with exclusive money-saving deals on a range of products, both in-store and online, aiming to attract crowds, boost sales, and move inventory.
And it’s historically a decent way to gauge consumer activity.
There are two big reasons for this:
1. Many households like to (hopefully) take advantage of discounts on goods.
2. Holiday shopping is historically a boon time for spending.
Thus, looking at the recent Black Friday shopping data may help us get a snapshot of how U.S. consumers are feeling this holiday season.
But it appears there’s mixed data from this – making the economic picture murky.
More troubling is the rising trend in buy now pay later (BNPL) schemes – something I believe shows some potential issues in the economy.
So, let’s take a closer look at all this. . .
Black Friday Drew Crowds, But Sales Gain Were The Weakest in Half A Decade
U.S. in-store retail sales grew last week by the most since December 2022. Meanwhile, shoppers spent $12.4 billion on Cyber Monday, a record result.
Not bad, right?
Well, there’s a caveat here. . .
According to the Johnson Redbook Index – which samples about 9,000 U.S. general merchandise retailers – sales only rose 6.3% year-over-year in the week ending November 25th.
And while it’s a positive reading, it was also the smallest annual increase since the 2017 Black Friday, which was more than half a decade ago.
Redbook noted1 that, "Some reported that shoppers hesitated to buy higher ticket items and were more value-conscious as people compared prices and shopped online… Others held off shopping and waited for deep discounts on the upcoming Cyber Monday."
Now, when gauging year-over-year data, it’s important to make clear that this shows the rate of change.
Or – put simply – it shows the momentum over a set period.
So, while posting a positive Black Friday gain in 2023 is nice, its momentum was the weakest in years (according to the Redbook Index).
Regardless, consumers continue to spend.
But it's how they're spending (debt) that I take issue with. . .
Consumer Spending Fueled By Debt? It Appears So – And Here’s Why It Matters
So, while the consumer – which is the backbone of the U.S. economy – continued to spend into Black Friday, it was at its softest pace in six years.
Now, that isn’t too worrying. But what I believe's an issue is where the consumption is coming from.
For example:
· If it’s organic consumption – justified by rising wage growth – then it’s a good thing.
· But if it’s driven by debt – which is inorganic consumption – then it’s not quite a good thing.
So, which is it?
Well, the data shows a relatively bleak image.
To put this into perspective – according to a recent2 Wells Fargo report – U.S. revolving debt (like credit cards) has surged over the last two years.
To give you some context: in the previous cycle (2008-2020), revolving credit increased by $80 billion, roughly $6.7 billion annually.
But in the current cycle, consumer credit surged by $187 billion in less than four years, averaging about $46.8 billion each year.
Simply put, credit card debt has escalated seven times quicker in this cycle compared to the prior one.
Making matters worse, credit card rates have surged – jumping from 15% last year to 21.2% in the third quarter of 2023.
It’s important to note that in the last three decades, the average credit card interest rate never surpassed 17%.
This means that today's cost of credit exceeds what consumers have typically paid by over four percentage points for financing their credit card debt.
Thus not only are balances higher, but so is the cost of interest on it. . .
I can’t stress this point enough – credit is demand.
It’s someone, somewhere, taking out a loan to buy something now and pay it off later.
For example, if you can’t afford a car with cash alone, you’ll have to wait and save up to buy one. But car makers don’t want to wait that long to register a sale, so they will offer financing - such as a car loan.
It may even seem like a win-win – you get the car now, and the car company makes a sale while collecting some interest.
What could go wrong?
Well, if real wages don’t keep growing (they haven’t since3 2020), then eventually more disposable income must be deferred from new spending to repay old debts (can’t do two things with the same dollar; either spend or save/repay debts).
All in all, the main thing here is that consumers are borrowing at high costs to cover some spending.
But this trend seems to shifting to another unregulated side of the market. . .
I’m talking about the buy now pay later (BNPL) schemes. And Black Friday showed this well.
Buy Now Pay Later: A Growing Potential Problem?
In short, BNPL is a type of short-term financing that allows consumers to make purchases and pay for them over time, usually with no interest.
I’m sure you’ve seen this when checking out on Amazon or any online retailer, most give you the option to pay for your purchase spread over months.
And during black Friday, there was a surge in this type of buying.
For instance, Adobe Analytics reported4 that there was a 47% increase in the use of BNPL during Black Friday versus a year ago.
There’s also the issue that the rising popularity of BNPL plans poses potential risks both to consumers and financial stability.
According to the Bank of International Settlements (BIS)5, BNPL users have a higher delinquency rate across products.
At the same time, their use by young adults - who are typically heavily indebted and have low credit scores - means they focus on the more vulnerable borrowers.
The BIS noted, “The rapid ascent of BNPL could be of concern to public authorities for two reasons: consumer-protection issues and the accumulation of credit risk… It is thus important to establish whether BNPL schemes take advantage of financially constrained individuals through misleading promotions and inadequate information.”
In Conclusion
So, wrapping it up, the positive Black Friday numbers were nice – but growing at its lowest annualized rate since 2017 wasn’t so nice.
Meanwhile, the surge in revolving credit - such as credit cards - and BNPL schemes raise eyebrows.
I believe many economic pundits focus on the spending data by themselves but don't look at how that spending happened.
For instance, if it’s organic growth through higher wages? Great.
But if it's inorganic growth coming from debt/BNPL-fueled spending? That’s not so great.
As always, just some food for thought.
Sources:
2. https://wellsfargo.bluematrix.com/links2/html/6d4c6a35-4e10-4a27-8fbf-6610a2b74d5c
3. https://fred.stlouisfed.org/series/LES1252881600Q
4. https://www.thestreet.com/retail/black-friday-cyber-monday-highlight-buy-now-pay-later-experts-wary
Disclosure:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice or an investment recommendation, or as a substitute for legal counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.