Here's why it's so dangerous for Wall Street to bet against the American consumer

"Mortgage holders who refinanced around 3% and are investing in money market funds at 5% or more have positive carry and are acting like a bank."

• The American consumer has defied expectations over the past year.
• That's despite elevated inflation, higher interest rates, and a decline in excess savings.
• "Betting against the American consumer is a dangerous proposition," Ned Davis Research said.

The American consumer has defied expectations over the past year as spending remains resilient, but Wall Street continues to anticipate a recession.

The dynamic highlights why it's dangerous to bet against the American consumer, according to a Friday note from Ned Davis Research.

The investment firm highlighted that "economy bears" have pointed to a litany of reasons why the US is set for an imminent slowdown:

• the resumption of student loan payments
• the end of federal child care funding
• a looming government shutdown
• spreading labor strikes
• rising delinquency rates
• surging interest rates and the lag effects from prior rate hike
• the depletion of pandemic-era savings

But with some perspective, these concerns aren't as damaging for economic growth as they might sound.

For example, while delinquency rates for consumer loans have jumped, they are still well below their historical averages. The delinquency rate for consumer credit card loans is 2.58%, which is a full percentage point above its 2021 low, but still 31% below 32-year average of 3.74%. 

Meanwhile, rising interest rates only impacts new loans or refinancings, and just over 75% of mortgage holders have an interest rate below 5%. It's the same story for corporate debt, according to Bank of America's Savita Subramanian, who highlighted earlier this year that 76% of debt held by S&P 500 companies is long-term and fixed at low interest rates.

But perhaps the most commonly talked-about risk of the consumer over the past few months is the idea that they have spent down all of their excess savings from the pandemic.

"It has become so common for economists to mention that the excess savings have run out that it has become a red herring," NDR said.

And besides, consumers still have a lot of savings built up, with nearly $6 trillion alone sitting in money market funds.

"Last week's NIPA data revisions showed a significant downward revision to consumer spending in the past several years. As a result, it more than doubled our estimate of cumulative excess savings for August 2023," NDR said. "Moreover, saving is calculated as a residual after subtracting outlays from disposable personal income. But some of that saving is invested in financial and tangible assets."

An alternative measure of excess savings, which accounts for a consumer diverting some of their savings towards the purchase of financial assets like stocks and bonds, shows that the saving rate was close to 10% in the second-quarter, which is more than double the commonly-cited NIPA personal savings rate.

Finally, consumers across all income levels are largely still employed, and their built up savings are finally enjoying a higher interest rate, close to 5%, which ultimately results in higher interest income.

"This matters more today than in the past because the baby boom generation represents a larger share than it has historically. Although higher rates raise borrowing costs, they help those with savings continue to spend," NDR said. 

"In fact, all mortgage holders who refinanced around 3% and are investing in money market funds at 5% or more have positive carry and are acting like a bank. The naysayers seem to have forgotten that fact. It may also help explain why monetary policy has been less effective this cycle. Betting against the American consumer is a dangerous proposition," NDR concluded.