The right conditions: Between trade wars and upcoming elections, consumer credit conditions remain favorable

Apparently, from the current vantage point, consumer credit providers appear reasonably confident heading into another presidential election cycle. Consumer confidence is generally high; the appetite for optional purchases, such as furniture, appears strong. So far, trade tensions between the United States and China have not had much negative effect on retail furniture sales.

According to consumer credit experts recently contacted by Furniture Today, the factors that tend to make demand for credit go up or down — specifically at retail furniture stores — have not changed much. Those factors may include the age of the consumer, the state of the economy, consumer confidence and employment levels.

For now, however, the economy seems in good shape, employment is high, and so is consumer confidence. The relative youth of the market has a tempering effect, since younger people ordinarily aren’t in a position to borrow heavily.

The current uncertainty revolving around tariffs seems not to have dampened retail sales much. So far, the retail buyer seems not to be much worried, and the trade war seems to have wrought no changes in the consumer credit business overall.

As for the political situation, it’s apparently too early in the game for the presidential campaign to worry consumers, beyond a vague uncertainty. That could change, once it becomes clearer who will be inaugurated in January 2021.

What to watch for

What factors tend to make demand for credit, specifically at retail furniture stores, go up or down? Michael Rittler, general manager of retail card services at TD Bank, says the overall state of the economy and consumer confidence levels provide the best indicators of where that business is headed.

Today, he reports, consumer confidence appears to be stable and retail sales are looking strong on a year-over-year basis.

“However, broader factors like the trade war and slowing global economic growth have the potential to diminish confidence and, in turn, credit demand,” he warned. “This can be especially troubling for the retail sector, as economic uncertainty typically leads to slower purchasing volume on larger-ticket items like furniture.

“As a positive for consumers, the recent cuts to the Federal interest rate also influence credit, as borrowing money becomes less costly with a rate cut. For retailers offering promotional financing, an interest rate cut may result in merchants offering longer terms on their promotions, again benefitting consumers.”

But while interest rate cuts have short-term positive impact on the cost of credit, Rittler noted, they usually come in reaction to softening economic conditions, which also impact consumer confidence and overall consumer consumption down the road.

Steve Surman, vice president of sales and marketing at Progressive Leasing, noted that his company offers lease-purchase options, as opposed to consumer credit programs. Still, his data show that some of the same factors impact lease-purchase demand: the age of the customer, customer sentiment towards credit and ownership, and strength of the economy and availability of credit.

“For example,” Surman said, “younger generations haven’t yet had an opportunity to develop a credit file and therefore may not qualify for traditional financing. These customers are perfect candidates for our lease-purchase option.”

“Demand for credit within the furniture vertical tends to track overall consumer economic trends for large, durable purchases,” said Ryan Slobodian, executive vice president of Snap Finance. “Furniture is a needs-based purchase, so there continues to be demand even through economic downturns, but this demand is somewhat muted as consumers may be more willing to delay purchases if there is greater economic uncertainty.”

Trade-war effect

How is uncertainty about American trade relationships with China and other exporters affecting consumer credit? Slobodian says the first round of tariffs seemed to have had little impact, as manufacturers and suppliers were willing and able to absorb those costs.

“The second round has led to price increases, which actually increases the need for financing as average ticket sizes increase,” he noted. “We have found that a financed ticket will be 25% to 40% higher than an average cash sale. I would expect to see increasing financing activity as the price increases due to tariffs work their way into the market.”

Surman concurred. “We really haven’t seen a difference in our business, although it is something we’re watching. We continue to see strong demand for our lease-purchase option across all retail verticals, and we’re pleased to see continued growth for our retail partners.

“To the extent that tariffs drive an increase in retail prices, we may see incremental demand for leasing as a payment option,” he added.

Rittler agreed that tariffs affect consumers’ perception of the state of the market, which, he concedes, is just as powerful as the reality of the situation. As the trade war carries on and fears of rising costs persist, he predicts, retailers will continue to operate in a state of uncertainty.

“In a recent survey from TD Bank at the Las Vegas Market, 54% of furniture executives cited the trade war as the biggest concern that could impact their business over the next year,” Rittler said. “Ninety percent of the people surveyed expect furniture pricing to rise in the face of proposed tariffs.

“While most executives we surveyed predict steady or strong sales during the remainder of 2019, a prolonged conflict between the world’s two largest economies could ultimately have lasting impacts on furniture supply chains, prices, and businesses’ bottom lines.”

The political factor

How is the domestic political situation currently affecting consumer credit? As the 2020 presidential campaign heats up, it might consumer credit. Historically, Rittler noted, the period leading up to a presidential election ushers in a time of financial uncertainty.

“But while market sentiment indicates the economy could be slowing down,” he said, “consumer confidence remains relatively high, as evidenced by steady spending and bolstered by interest rate cuts.”

Policy and political agendas certainly influence consumer credit, Rittler said, but more so in the long term. Political action usually moves slowly, and as a result, its impact on consumers usually has to be observed over a long period, and can only be assessed in retrospect.

At press time, the Democrat field for the presidential race remains heavily populated, and polls are inconclusive as to how an eventual nominee might perform against incumbent President Donald Trump, not that the polls proved all that reliable in the last Presidential election cycle.

Historically, a change in administration causes some consumer uncertainty, but politics and its impact on the economy have appeared defiant of conventional wisdom for the past five years or so.

“Although we’ll have to wait and see what happens in the 2020 presidential election cycle, the current demand for consumer credit is high,” Rittler said. “TD Bank’s Las Vegas Market Survey found that most furniture executives — 56% — have noted a growing demand for financing options to facilitate furniture and home décor purchases.”

“Uncertainty is inherent in any election,” Surman conceded, “particularly if there is a change in administration. We’re not expecting any material changes in the foreseeable future, but, again, this is something we’re watching closely. We have to point out that Progressive Leasing has been successful under every administration in its 20-year history.”