Goldman Sachs: U.S. consumer sentiment is deteriorating rapidly

Already negative U.S. consumer sentiment is rapidly worsening due to the collapse of Silicon Valley Bank.

Scott Feiler, a consumer retail trader at Goldman Sachs, pointed out in a March 29 article that U.S. consumer sentiment was already growing pessimistic before the Silicon Valley Bank collapse because of declining government tax refunds and record-high revolving consumer debt (such as credit card use).

And now that the Silicon Valley Bank collapse has brought employment issues to the forefront of market attention, sentiment is rapidly turning negative. Feiler points out that employment is the biggest driver of consumer spending, and the market now generally believes that Silicon Valley Bank's problems will eventually have a greater impact on consumption, and consumer sentiment is becoming very pessimistic:

Almost everyone is certain that consumer spending will slow in March, and now investors are concerned about how long the slowdown in consumer spending will last and what response options are now available.

Consumer sentiment has been deteriorating for a long time

Feiler believes that U.S. consumer sentiment has been showing signs of deterioration even before the Silicon Valley Bank collapse because of:

1. The U.S. government plans to cut SNAP (i.e., food stamp program) welfare benefits starting in March 2023.

According to media analysis, SNAP is a welfare program provided by the U.S. government to low-income people in need to buy food, and the reduction of welfare benefits may affect the consumption of millions of Americans.

1. Compared to the same period last year, the amount of U.S. government tax refunds has declined.

Analysis shows that the decline in tax refunds is due in part to a decline in taxpayer income compared to the same period last year, as the amount of tax due decreases and so does the amount of tax refunds.

1. Revolving consumer debt (e.g., credit card use) is at an all-time high. Media analysis indicates that U.S. households may be being overwhelmed by debt step by step.

2. The student loan repayment moratorium ends in the second quarter, and students will resume repaying their loans by the end of August, meaning 45 million people will begin repaying their loans.

Thomas Simons, a money market economist at Jefferies, citing analysis of New York Fed data, noted that for people with student loans that cannot be deferred, the average monthly repayment is $393, or about 1 percent of spending, after which there is a significant slowdown in spending:

"This may sound like a small shock, but the impact on income is very similar to the 'debt cliff' of 2013, with a significant spending slowdown."

Simons noted that loan delinquency rates are currently essentially zero because students are not required to repay their loans, but delinquency rates on auto loans, mortgages and credit cards have risen recently. He said:

"The pressure on household balance sheets from the resumption of student loan payments could lead to increased loan demand, and declining loan demand was already a profitability risk for small and regional banks before the recent stress and loss of deposits. The risk will increase further in the future as household credit quality deteriorates."

And in the wake of Silicon Valley Bank's collapse, Feiler noted that employment issues became the focus of market attention, with employment being the biggest driver of consumer spending and the general market belief that Silicon Valley Bank's problems would ultimately have a greater impact on consumption.

Consumption problems gradually emerge from the data

Feiler noted that while consumer spending remained strong during the early months of 2023, over the past two weeks they have seen investors' attitudes toward consumer spending begin to shift from "theoretical short" to "finally seeing it in the data ":

A number of consumer spending surveys over the past two weeks have highlighted the slowdown in consumer spending in early March (including spending data from JPMorgan Chase and Bank of America).

The preliminary March University of Michigan Consumer Expectations Index of 61.5 was below expectations of 64.8 and fell for the first time in four months. In the report, the University of Michigan stated that

Since the Silicon Valley bank collapse has been completed before the interview for about 85% of the total number of respondents, and the regional bank crisis is likely to produce additional pressure on consumer confidence, so the final value of the U.S. consumer confidence index in March may be lower than the initial value.

Feiler noted that although the savings accumulated between previous epidemics played a role in inflation, more than half of them have now disappeared and there is little room for future increases in consumer spending:

I think most of the savings accumulated during the epidemic were concentrated in wealthier households, and there is still about half of the excess savings on household balance sheets, but now