The resumption of student loan interest and payments has sparked a debate about its impact on consumer spending and the overall economy. On one side, there are concerns about a crash in consumer spending, while on the other side, some believe that consumption will remain strong. To form an educated opinion on the issue, it is important to consider both sides of the argument.
Data points suggesting that student loan payments are a big deal include the magnitude of student loans, which amount to $1.76 trillion. While student loan balances represent just under 10% of total annual consumption, the transition from no loan paydown to a 10-year repayment period could potentially impact GDP by up to 0.6%. Additionally, the recent spike in credit card and auto loan balances, along with a decrease in savings rates, support the argument that there has been reckless spending in recent years.
On the other hand, there are data points that suggest a more positive outlook for consumer spending. Despite the increase in spending, discretionary income is at an all-time high due to inflation and higher wages. Employment is strong, with higher wages and low unemployment rates. Nominal GDP is also soaring, indicating overall economic growth.
In reality, the truth lies somewhere in the middle between the bull and bear cases. While the resumption of student loan payments may lead to a slowdown in consumption, it is not expected to be a dire situation. The impact will vary for individuals, but on average, it will likely result in a minor tightening of purse strings as consumers save to pay down their debt.
In terms of investment implications, sectors like travel/leisure and retail may be impacted. However, it is more of a shift than a straight negative. Grocery stores, for example, are likely to benefit as consumers trade down in price point. Buying lower-priced groceries may seem to hurt sales initially, but grocery stores can capture more of the supply chain with store brands, resulting in higher margins. Albertsons and grocery anchored REITs like Brixmor, Kite Realty, and Kimco are mentioned as potential investment opportunities.
In the hotel industry, midrange hotels in the upper-upscale and upscale segments may see some losses as consumers opt for cheaper accommodations. This could impact companies like Airbnb, whose clientele skews young and affluent. However, luxury hotels are expected to remain unaffected.
In conclusion, while the resumption of student loan payments may have an impact on consumer spending and specific sectors, it is not expected to be a major economic event. Some sectors may be affected, but there are opportunities for investment in areas like grocery stores and certain REITs.