Credit and the Macro Environment: The Power of the Consumer – or Lack Thereof

Credit and monetary policy have an inextricable relationship. Credit helps spending, which, in turn spurs inflation. When the economy starts to overheat, monetary policy gets tightened, making credit more expensive. As the belt gets tightened, budgets get cinched and paying back that credit becomes all the more difficult. This credit debt balancing act and the Federal Reserve’s policy moves are among the things keeping alternative asset managers up at night—and among the topics discussed at the second annual Maples Insights Montreal (“MIM”) symposium. Held 11 June at the Maples Group’s office in Montreal, the event brought together some of the alternative asset management industry’s biggest thought leaders for a day of lively discussion about the issues facing institutional investors and fund managers. Perhaps the overarching question characterising US macroeconomic policy halfway into 2024 is “Can the consumer power us through?”

The US economy is adjusting to its “new normal” away from ultra-dovish monetary policy. Consumers are still spending, although with a debt load heightened by dwindling savings on the back of inflation and a higher-interest-rate environment. As one panellist noted, during the COVID-19 pandemic, FICO scores grew artificially inflated as stimulus checks padded US consumers’ bank accounts and there were fewer opportunities to spend money. As the world opened back up, consumers began savings-fuelled spending and “revenge travel” en masse. Inflation did not deter this freer spending, however, with consumers turning to credit cards to fill the gap. The panellist continued that “we’re now seeing loans made to borrowers who appeared to be much stronger than they were in actuality.”

The most prime borrowers, the panellist pointed out, are often homeowners. Voilà a Millennial economic chicken-and-egg scenario. The higher-interest rate environment means more expensive borrowing. Coupled with the housing shortage and inflation, this macroeconomic quandary has left Millennials stuck in terms of real estate. As the older end of the Millennial cohort hit mid-career, homeownership briefly appeared within grasp after years of wage pressure following the late-2000s financial crisis. Yet inflation—real and wage—as well as the lack of housing stock and more expensive mortgages, means Millennials are real estate poorer than they may like.

Yet the macroeconomic environment in the US of late presents a bit more nuanced of a story. As one panellist pointed out, the combination of wage-driven inflation and high interest rates can make for some real estate segments, such as multi-family, to do quite well. Certainly, such stock is a solid fit for consumers looking to upgrade their housing without obtaining a mortgage. Another panellist noted that with residential lending down and interest rates rising, commercial real estate remains in a distressed / dislocation cycle.

“Debt is demand from the future that you decide to spend today,” one panellist reflected. How much demand young people are able to snare from the present may be just too far out of reach for the future.

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