The New $40 Billion Hole in Discretionary Spending
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The economy might just have been saved by last week’s debt ceiling deal, but the tradeoffs to avert disaster are about to force a new reckoning for student loan borrowers.
Under the terms of the deal between President Joseph Biden and House Speaker Kevin McCarthy, the roughly 43 million Americans with student loans are going to have to start making payments again in September.
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That could come as a splash of cold water for the already struggling fashion world after a three-and-a-half-year reprieve from repayments, which helped support the pandemic splurge on apparel and other goods.
Joseph Brusuelas, chief economist at the RSM consultancy, estimated that the repayments will over time amount to a nearly $40 billion reduction in disposable income.
While the debt ceiling deal avoided U.S. default — which would have been unprecedented and by nearly all accounts catastrophic — fashion could acutely feel the loss of the dollars that will now go to student loans.
Jay Sole, a retail analyst at UBS, was already bearish on softlines stocks and only became more so in the wake of the deal.
“One aspect of our call has been lapping stimulus — such as the student loan payment moratorium — will cause a bigger consumer spending slowdown than the market expects,” Sole wrote in a research note on Sunday. “Our new analysis of U.S. consumers with student loans suggests they are likely to disproportionately reduce spending on soft goods vs. other categories as they shift funds to paying down student debt.”
And it’s a customer base that prefers brands, prompting Sole to single out American Eagle Outfitters Inc., Foot Locker Inc., Gap Inc., Nordstrom Inc., Under Armour Inc. and Victoria’s Secret & Co. as among those likely to be hit hardest by the student loan restart.
Sole sketched out just who this consumer is, citing a survey of 1,392 U.S. consumers with student loans. According to the study:
Student loan consumers are 37.4 years old on average, younger than the average adult at 47 years old, with annual incomes of $65,400.
About 63 percent of them say brands are important to them vs. 53 percent for the overall population.
They more often buy at full price and about 62 percent of them agree with this statement: “My philosophy of spending is ‘Live for today because tomorrow is so uncertain’.”
They prefer specialty retailers over department stores and discounters.
Student loans have become wrapped up in the increasingly divisive debate in Washington, with Biden keen to pause repayment and cancel some debts while McCarthy and his allies have pushed to get that money flowing back into the federal budget.
House leaders said the broader debt deal would “save taxpayers trillions of dollars by reclaiming unused COVID[-19] funds, stopping Biden’s student loan giveaway to the wealthy, and defunding his army of IRS agents.”
Biden, who has clearly pushed for student debt relief, said in his Oval Office address on the deal: “No one got everything they wanted, but the American people got what they needed. We averted an economic crisis, an economic collapse.”
Maybe so, but shoppers on the edge with student debt looming are going to have to pay closer attention now.
“The consumer’s going to spend until they can’t,” said Mike Graziano, consumer products senior analyst at RSM. “Consumers don’t stop spending when they should — they stop spending when they have to stop.”
Graziano said lower-income consumers are probably at the point “where they have to really think about what their monthly purchases are going to be.”
The pandemic — which brought government stimulus, hybrid working, wage growth and a shift away from travel and dining out — supported the purchase of goods, Graziano said.
Apparel, he said, jumped from 3.1 percent of monthly consumption in the five years before the pandemic to 3.5 percent in 2021, with the sector now reverting back closer to its norm.
“Apparel spiked considerably in the last three years compared to the five years prior to the pandemic,” said Graziano, pointing to the boost to athleisure as people stayed closer to home.
Likewise, luxury goods had “a really good couple of years because consumers across the income spectrum were buying more,” he said.
Now many shoppers who have grown accustomed to spending are going to have to reset their budgets as student loan payments come back into the picture.
“They’re going to have to cut areas that they’ve gotten used to spending in,” he said. “Whether that’s luxury, whether that’s apparel — it’s likely going to be in the discretionary category.”
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