Kyle’s Chart of the Week
Is consumer strength in the face of economic slowdown starting to crumble?
Despite macroeconomic pressures, high inflation, bear markets, and aggressive monetary policy, the U.S. consumer (people spending, saving, borrowing, and investing in the economy) has shown considerable strength. Signs of this strength include data points such as:
Wages continue to show year-over-year nominal (non-inflation adjusted) growth. The Atlanta Fed Wage growth Tracker reported in June that hourly earnings raised 6.7% over the previous 12 months;
Consumer spending, which accounts for over two-thirds of GDP, rose by 1.1% (seasonally adjusted) in June; and
Household debt remains lower than levels recorded prior to past recessions. For example, U.S. household debt was 75% of GDP in Q1 2022. In contrast, household debt neared 100% of GDP in the lead up to the Global Financial Crisis (GFC).
While these metrics have contributed to slowing the contraction of the economy, we are starting to see signs that forecast a cloudier outlook. First, as shown by the chart below, consumer sentiment indexes demonstrate extremely negative feelings about the economy. In July, the Conference Board’s Consumer Confidence Index (CBCCI) decreased to its lowest level since February 2021, and the U. of Michigan Consumer Sentiment Index (MSCI) reached its lowest ever level in June. So far, feeling bad hasn’t translated into spending less, but that could quickly shift. Second, raising rates to fight inflation has created a significant wealth effect. Household portfolios have experienced large corrections in equities, bonds, and other assets. Given that, in our view, there’s no sign of the Federal Reserve halting rate increases in the near future, it remains to be seen if the recent market rally is the start of a recovery or a pause in a greater correction. Third, although household debt has not yet reached pre-GFC levels, it is increasing. In Q2 2022, household debt rose by 2%, mortgages balances rose by $207B due to rising mortgage rates, and credit card debt had a year-over-year increase of 13%. Lastly, excess savings that have been helping families maintain spending are dwindling.
In investing, we believe one of the most difficult aspects is trying to figure out what expectations are currently built into market prices and then determining how those market expectations differ from the individual investor’s view of the future. In this case, we see a market that expects the strength of the consumer to help weather the severity of the recession while we believe it’s too early to look past the end of the current slowdown to brighter skies until we have a better sense of the impact of future rate hikes and the current layoffs at businesses around the country, among other key elements.
This material is provided for informational purposes only and is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change at any time without notice. The information and opinions contained in this material are derived from proprietary and nonproprietary sources we deemed to be reliable and are not necessarily all-inclusive. All investing involves risk, including the possible loss of principal.