Dec 04, 2013 Walt Wojciechowski
The holiday season is usually the most lucrative time of the year for many businesses, large or small. Typically, consumers ramp up spending, as they look for the perfect presents for family members and loved ones. Most years, the spending spree is enough to help retailers that may otherwise sustain losses turn a profit.
For lenders, the season is equally as important. Some consumers opt to make big item purchases such as cars around the holidays. Also, spending trends are a great way for loan providers to determine what the borrowing market may be in the future.
Despite the typical optimism that is usually associated with holiday spending, this year could prove to be a difficult one for lenders and retailers alike. CBS News recently reported that the Conference Board announced the index on consumer confidence fell to 70.4 from October's 72.4 mark. The current reading is well below the 80.2 mark recorded in September.
The main driver of the confidence drop was the three-week government shutdown that took place in October. Although a budget agreement was struck, it's only temporary, perhaps the reason for the negative outlook among buyers.
Americans to spend less
As it comes just before the holiday season, the decrease in consumer confidence could be a major hit for American businesses. Potentially, it could lead to purchasers decreasing what they spend on presents this year. In fact, a recent Gallup survey found that consumers are likely to be more frugal when it comes to holiday expenditures.
The source reported that Americans will spend an average of $704 on gifts this year, a drop from the $770 spent in 2012. Also, fewer consumers said they would spend more than $1,000, while 8 percent indicated they won't spend at all.
Although these trends may be worrisome for retailers, lenders may not be as negatively impacted. Auto loan rates remain solid, and the fact that Americans are taking more control of their financial outputs may be beneficial. Lenders could see delinquency rates remain low, a trend that has emerged in the last year. If so, they will be able to safely approve more loan applications that in years past, and may even be able to support additional subprime loans.
A lack of spending is hardly a positive sign for retailers and lenders but it's also not an indication of impending hardships. Simply, it could show that Americans are more financially responsible. For lenders that could mean more on-time payments and fewer defaults.