Trouble Ahead, Trouble Behind:  Consumer Debt and BNPL Better Watch Their Speed

BNPL chart

As we’ve noted in the past, when trying to gauge where the economy is going, it is of critical importance to understand the mental state of the consumer.  So far, in this economic cycle, the consumer has shown remarkable resilience.  Certainly, the government’s helicopter money during height of the pandemic made consumers bank accounts swell, but with those days well behind us, it’s particularly impressive that consumer pricing (CPI) and Personal Consumption Expenditures (PCE) have remained so strong despite higher interest rates.  Certainly, both of these metrics have slowed on a month over month basis, but we’re still seeing upward pressure on goods of all sorts and we wonder if it might have something to do with the newest form of credit being offered to folks that shouldn’t be borrowing.  

In every economic cycle, there seems to be a new behavior that allows for debt to turn into a tinder box.  In the GFC it was a lack of regulation and easy money.  In this cycle, easy money has been the biggest contributor, but as we see an old form of debt with a new name that seems to be spreading into places it really doesn’t belong.  Layaway, or as it’s now called “By Now, Pay Later” loans (BNPL) have been growing in popularity thanks to the ubiquity that smartphones and new technology have availed.  These micro-loans have always had a place, but it’s always been on the fringes of consumer spending when either poor decision making, or desperate need have allowed people to buy things they otherwise couldn’t afford.

As we can see in the embedded charts, not only has BNPL been growing at a staggering rate, but it is also being used to buy things that ordinarily would not be part of the typical lending stack and frankly some of them are new even by layaway standards.  But as inflation continues to trend higher, people with lower income are not only finding appeal in the idea and ease of use of this product, but in many cases, they’re finding it necessary to manage their own working capital.  The current amount outstanding is still small, but as these products gain acceptance and the disparity between current cash flow and wanted goods expands, this market could be a trigger point for a growing swath of the population.  More importantly, there could be a problem for consumer spending should this credit tighten or borrowing capacity run out.

Sources: Bloomberg, bea, Fortune Business Insights


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