KBRA Financial Intelligence

3 Things in Credit: Consumer Finance Guidance, Consumer Spending, and The Forward Look

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Welcome, market participants, to another 3 Things in Credit. I’m Van Hesser, Chief Strategist at KBRA. Each week we bring you 3 Things impacting credit markets that we think you should know about.

Are things settling down? Judging by the primary market, it seems so. A quick scan of Bloomberg headlines points in that direction—U.S. Primary Back Open for Business. Junk Heads for a Second Week of Gains. [Leveraged Loan Market] Finally Reopens. More ABS Join Fray, Several Deals to Price.

And stocks seem likely to finish up on the week. It’s all good.

This week, our 3 Things are:

1. Consumer finance guidance. Differing opinions about the future.

2. Consumer spending. We give our take on this all-important driver of global growth.

3. The Forward Look. Here’s what we think is worth watching in Q2.

Alright, let’s dig a bit deeper.

Consumer finance guidance.

We’ve talked in recent episodes about the current earnings season. How it’s all about guidance, not actual Q1 earnings. In fact, I can’t ever recall a quarter, where the last three months are less relevant than what’s ahead. Well, if I think about it, Q2 earnings in 2008, on the brink of the financial crisis, that’s probably a comparable one. That’s not a reassuring flashback.

In any event, I admit to being a bit surprised by the guidance coming out of the large consumer lender Q1 earnings calls—it’s been decidedly constructive. We touched on this a couple of weeks ago, noting similar confidence coming from the largest banks. We noted at the time that those banks primarily cater to prime/super-prime consumers, those who made a lot of money in 2024, and were enjoying the powerfully positive wealth effect from stock markets up plus-20% for two years in a row. Right through Q1, that cohort spent a lot.

The companies that reported this past week cover more of the consumer spectrum in terms of income/wealth strata than the largest banks. Yes, we have American Express (Amex) , which is positioned more along the lines of the largest banks. But we also got results and color from Synchrony, the full-spectrum private label card issuer, Capital One, a broad spectrum card and auto lender, and Ally Financial, the consumer bank with a large auto finance business.

At Amex, CEO [Stephen] Squeri was adamant that there was no pull forward on the part of his predominantly upscale customers. He added that while his cardmembers may say they don’t have any confidence in the economy, they continue to spend regardless of what’s happening in the stock market. No ambiguity there. Full-year revenue and earnings guidance reiterated at 8%-10% and 12%-16%, respectively.

Over at Capital One, there was a loan loss reserve release, which is noteworthy and positive given the environment. CEO Rich Fairbank, always one of the more insightful industry observers, described the U.S. consumer as “remaining a source of strength in the economy. The unemployment rate is low and stable, job creation remains healthy, real wages are growing, and debt servicing burdens remain stable.” He did note that some pockets are feeling pressure from the cumulative effects of inflation and higher rates. He has observed some pull forward of purchases, and an easing in T&E [travel and expense] growth and airfare.

At Synchrony, CEO [Brian] Doubles pointed out that spending held up right through the first two weeks of April, and that he feels “pretty constructive” around the consumer and the trends they’re seeing, including credit trending better than the company was expecting. He is very much in the camp of seeing consumer confidence dip, but not seeing that impact what they are actually doing, i.e., spending. He did point out that lower income consumers did pull back spending a year ago in response to higher inflation.

At Ally, CEO [Michael] Rhodes admitted the company doesn’t have perfect insights into the current environment, adding “I don’t think anyone does right now.” He noted that used car prices are rising, which is beneficial to the company’s recoveries and lease gains. He believes there is some pull forward of origination volume.

Summing it all up, credit and spending deterioration is all about the future. As Synchrony pointed out, the sequencing of events, should we tip over into recession, is as follows: growth slows, people lose their jobs, they receive severance, they file for unemployment benefits, they adjust their financial situation, and some end up in and rolling through delinquency. All long before they charge-off. If that sequence were to occur today, charge-offs are more of a 2026 issue. All well and good, but the hit to spending happens sooner, and markets will sniff out that credit deterioration sooner. The key remains, what is the likelihood of tipping into recession.

Alright, on to our second Thing, Consumer spending deceleration.

Having heard from the big consumer lenders, here’s a more bearish case for the outlook for consumer spending. Let’s start with wealthier households, the segment that is least impacted by inflation or tightening access to cost-effective credit, and where the top 10% of consumers account for 50% of spending. You heard Amex’s rather bullish view. But this is the group that has disproportionate holdings of stocks. That portfolio, up plus-20% in each of the past two years, drove strong spending over that period.

This year, it’s a different story. Turns out stocks don’t grow to the moon. We’re down 13% from the February peak, that’s a $7.5 trillion negative wealth effect. Does that leave a mark on potential spend? Ask the airlines, which have all essentially downgraded or pulled guidance.

But it’s not just the top 10% that is reacting to the news flow. In the University of Michigan’s Survey of Consumers, sentiment has plummeted to levels not seen since the GFC [global financial crisis] for the top third of earners, the middle third, and the bottom third. That has spilled over into job security where, in that same survey, those expecting higher unemployment a year from now spiked to levels— you guessed it—not seen since the GFC. [In the] same survey: “Will you be financially better off/same/worse a year from now?” A “worse off” spike to levels not seen before—not even in the GFC.

I know, I know, it’s all soft data. Now the hard data is coming. We’ve seen a spike up in the savings rate. Retail sales, clearly, had some pull forward.

Now look at businesses. Confidence down, which should translate into less capital expenditure, less expansion, less hiring. Immigration controls will limit the size of the labor force, less spending. Federal government downsizing will also slow labor force growth, and remember, the impact here will extend to state and local government hiring, as well as adjacent sectors such as health care and education.

The point is, this all got a bit softer after April 2. We don’t want to overstate things here—after all, we still believe we will avoid recession due to the strong starting point of both consumers and businesses, and the presence of policy guardrails in the form of the Treasury Secretary and GOP party officials worried about future elections. But, in the aggregate, expect economic slowdown in part due to softer consumer spending.

Alright, on to our third Thing, The forward look.

Looking ahead, here are things to focus on.

One, visibility. We had this to an impressive degree in 2024. Inflation moving convincingly to target, economic growth solid (if normalizing), robust corporate earnings growth, a healthy labor market, well-behaved energy prices, and a clear policy framework.

Obviously, things have changed with the new administration’s policy initiatives, [which] have put at risk [such things as] inflation expectations, economic growth, the labor market, and corporate earnings growth. With greater clarity around trade deals, and a responsible and markets-aware fiscal plan, much of the uncertainty could fall away. Those outcomes will drive markets in 2025.

Second, the labor market.

Will it crack? Will rising unemployment result out of the uncertainty? Will the Sahm Rule be triggered? Will we have a negative nonfarm payroll print?

That’s a lot of questions for a labor market that is relatively healthy. But that is what happens when the economy faces a shock. The good news is that we are not managing through some exogenous shock. Much of the risk can be ameliorated through policy means.

Third, the financial system.

Will the uncertainty, the volatility, reveal weakness? Thus far, the system has held up well. Credit markets, for the most part, are holding up fine. The equity downdraft might just be a correction and not something more ominous. Troubled loans on bank and nonbank balance sheets are relatively few. And there is evidence that private credit is acting as a better shock absorber to dislocating markets than regulated banks did back in the leadup to the GFC. The threat of any downturn can be seen in the performance of the financial system. The extent to which it has held up thus far suggests that this change in economic fortunes is quite manageable. But keep close tabs.

And four, watch for signs that consumer spending has hit an inflection point. We discuss all of this in an upcoming report—The Forward Look—part of an ongoing quarterly series that we will launch along with my colleague in London, Gordon Kerr, who will launch a similar report focused on the UK and Europe. Keep an eye out for them.

So, there you have it, 3 Things in Credit:

1. Consumer finance guidance. Some concern about the macro environment, but overall, these were positive reports.

2. Consumer spending. We do think the downbeat soft data will soften the hard data. Not enough to tip over into recession, but that risk is clearly elevated.

3. The Forward Look. Watch for policy visibility, the durability of the labor market, the strength of the financial system, and the level of consumer spending. That’s a lot of uncertainty to be defined.

As always, thanks for joining. We’ll see you next week.