Transcript
Amada Agati:
Ho Ho Ho, is that a partridge in a palm tree, I see?! While Santa might be on summer vacation, it’s a perfect time to do a pulse check on True Love, and the overall health of the US Consumer, ahead of the holiday shopping season. So, here’s a quick hit to celebrate Christmas in July…
Consumer behavior is the drumbeat for the U.S. economy. With 70% of U.S. GDP tied to consumption, consumer health is always a critical driver for what goes on the “naughty or nice” list for markets and the economy.
In general, the U.S. Consumer continues to hang in there, despite a lot of pressure over the last few years, primarily because the healthy labor market has yet to show any real signs of weakness. Personal income trends have grown faster than inflation for the past three years. Like the happy elves in Santa’s workshop, the U.S. workforce has been well-supported by positive wage growth trends, which have, in turn, continued to fuel an acceleration in retail sales trends and consumption. It’s the gift that keeps on giving!
At the same time though, inflation concerns remain elevated, despite there not being much hard evidence of actual inflation nor a second wave forming yet! Consumer confidence survey data has remained quite volatile ever since the market correction in March/April. With markets bouncing back to new all-time highs in July, consumer sentiment is stabilizing to a degree. The University of Michigan survey for inflation expectations 1-year from now spiked to 6.6% in May, but are already back down to 4.4%, just a few tenths higher than the 5-year average.
Despite these concerns, the latest reading for the Consumer Price Index was just 2.7%, meanwhile the 2-year breakeven yield is also 2.7%, and the Cleveland Fed’s Inflation forecast is, you guessed…2.7%. Are you seeing a trend here? There’s a big disconnect between the actual hard inflation data and softer survey data…aka how consumers are feeling about the inflationary backdrop.
Consumers may be concerned, but that hasn’t stopped them from spending, per the June retail sales report. Like a kid on Christmas Eve, we’ve been eagerly anticipating the clarity that would come relative to the choppiness of the last few readings, and sure enough it was full of Christmas cheer and eggnog. Retail sales beat consensus estimates across most categories and the prior month’s numbers were revised higher, though services categories saw a bit of a slowdown.
Importantly, it also confirmed what we’ve been observing in higher frequency data points like the weekly Johnson Redbook Retail Sales Index - consumer spending activity just keeps on, keepin’ on.
On balance, household balance sheets continue to remain in pretty good shape overall, buoyed by more recent tailwinds from rising asset prices and a continued solid U.S. residential housing market, though affordability is certainly becoming challenging for some market participants. Lower income households and/or those with less access to credit remain under financial strain and that is certainly showing up in lower savings rate trends relative to history. The latest reading registered 4.5% versus a long-term average of >8%, though there are likely multiple secular forces at play…and that is definitely a video for another day.
There’s no doubt we will get many more data points between now and the launch of my favorite project of the year…the PNC Christmas Price Index…to help gauge consumer health and behavior trends. After all, it’s only Christmas in July. Back to school shopping is nearly upon us and the holiday shopping season will be right around the corner too.
While we await these guiding stars, I think it’s time for me to hit the pool and join those seven Swans-a-Swimming. Stay cool out there and have a great rest of the summer! I’ll be back in November to share where True Love’s full shopping list nets out this year.
