Many U.S. consumers are finding it hard to make ends meet, according to a quarterly survey conducted by UBS, and this puts the economic expansion in jeopardy, given that consumer spending is about 70% of U.S. GDP, Bloomberg reports. Meanwhile, rising household debt has prompted consumer finance analyst Richard Shane of JPMorgan to lower the price targets on every stock that he covers.

“While the sector should continue to enjoy solid fundamentals through year-end, our outlook headed into 2020 becomes more cautious,” Shane writes in a recent report quoted by Barron's. “Specifically, the prospects of a slowing economy, indications of pockets of labor weakness and heightened political uncertainty all may weigh on the group,” he added. Three stocks about which he is more pessimistic are American Express Co. (AXP), Capital One Financial Corp. (COF), and auto lender Ally Financial Inc. (ALLY).

Significance for Investors

The UBS survey drew 2,100 U.S. respondents. Among them, 44% either spend more than their income or virtually all of it. Meanwhile, 40% said that they had a credit problem in the last year, such as difficulty in obtaining a credit card or defaulting on a loan, up from 37% a year ago. Only 17% report an improving financial position over the last six months, down from 20% a year ago.

While 75% believe that they can obtain a home mortgage loan easily, this is down from 81% last year and the lowest percentage since late 2014. As banks tighten lending standards, 21% admit that they have falsified information on loan applications, up from 19% last year.

Late credit card payments and student loans that are delinquent for 90 days or more have risen. While delinquent auto loans have not risen, they remain at high levels.

“The lower income cohort led the deterioration, suggesting the lower-tier consumer remains under disproportionate pressure,” the UBS report states. “Credit trends in U.S. consumer markets are more worrisome, particularly in unsecured loan markets as the lower-tier consumer comes under further pressure with lending standards tightening, delinquencies rising, and interest rates near peak levels,“ it added.

As creditworthiness deteriorates among consumers, UBS anticipates that corporate bond yields will rise during the rest of 2019. They expect the average risk premiums over U.S. Treasury debt to increase from 1.19 to 1.25 percentage points for investment grade debt and from 4.19 to 4.25 percentage points for high yield bonds.

Total U.S. household debt grew to $13.9 trillion in 2Q 2019, for 20 straight quarters of growth, Shane notes. That represents more than $42,000 per capita. While most of that borrowing is related to housing, he indicates that there are $1.3 trillion in car loans, $0.8 trillion in credit card balances, and $1.5 trillion in student debt.

Looking Ahead

While consumer debt is at a record high in absolute terms, it is not when compared to household wealth, Shane notes. He also observes that mortgage, credit card, and auto loan delinquencies are stable and at much lower rates than persisted during the financial crisis of 2008. Moreover, he says that “unemployment remains benign at 3.5%,” which should support consumer spending. In this vein, a below-average percentage of respondents to the UBS survey are worried about losing a job.

Despite the worrying trends in consumer credit, a UBS indicator of recessionary risks is far below its readings prior to the last two recessions in 2001 and 2007. Shane also does not expect the U.S. economy to crash.