Normalizing Consumer Strength

Question: In the news there is much discussion of how resilient consumers are and the impact this has on economic growth. Can this continue? 

Answer: To say that consumer spending remains strong is almost a bit of an understatement these past few years. After a strong increase in real incomes during the pandemic, real income growth (after inflation) has begun to slow. 

The first slowdown took place when the federal government ended the income transfer program as the economic impact of the pandemic lockdown eased. In 2021 as inflation hit hard as supplies were limited, and there was “excess” money in circulation pushing prices higher for fewer available products. At the moment, inflation’s impact is lessening as real disposable personal incomes are growing at about 3.2% on a 12-month moving average in contrast to the cost of real personal consumption expenditures increasing at a rate of slightly below 2.0%. expenditures. To translate in English, this should result in “normalized” steady economic growth following the economic fallout of the pandemic. 

The devil is in the details: only three sectors of the economy added workers at a fast pace as reported in November. The areas seeing an increase were the healthcare and social assistance sector, leisure and hospitality sector, and the government sector. Healthcare and social service sectors typically do well during good and bad economic times, while the leisure and hospitality sector continues to recover from the pandemic, while increased government speaks for itself. As a caveat, the employment numbers may not be as strong as indicated because the Screen Actors Guild and United Auto Workers groups are off the picket lines and back at work which was reflected in November employment numbers.

What does all of this mean for the potential path of the US economy? Overall economic growth is expected to “normalize” somewhere between a 0.8% to 1.00% annual rate for 2024. This indicates a milder than expected recession anticipated to begin in the second quarter of 2024. These observations are based on better-than-expected job numbers, higher real disposable personal income growth, and the Bureau of Economic Analysis’ revised savings rates. Speaking of those details, higher interest rates have prevented or slowed overall capital expenditure investment spending leading to an opinion that interest rates will stabilize with no rate hikes necessary going forward.

 Consumer Sentiment

In December, the consumer sentiment index rose 13% according to preliminary numbers from the University of Michigan. Inflation expectations moved significantly lower, declining to the lowest level since March 2021. Five-year forward-looking inflation expectations fell to 2.8%. Gasoline prices continue to fall hitting the lowest levels of 2023 on December 7th playing a significant role in this month’s incredible decline in inflation expectations. 

This is all good news, but it’s important to remember that inflation expectations are just one of many indicators being monitored. For instance, the US trade balance deficit (exports less than imports), although improving and declining at a slower rate, is a metric worth keeping an eye on as Holiday spending reports are generated in January. Also worth watching are labor force participation rates, and activity in professional business services and manufacturing job growth which tend to provide higher wages than hospitality and leisure sectors. 

According to the University of Michigan Consumer Sentiment release, “long-run inflation expectations remain elevated at the 2.2-2.26% range, slightly higher than those seen two years pre-pandemic.” One-year ahead inflation expectations moved lower from 4.5% in November to 3.1% in December, indicating that the process of bringing down inflation will continue but takes time. 

Consumer debt and credit card levels are the elephant in the room. In the third quarter of 2023, Americans’ total credit card balance is $1.079 trillion according to the Federal Reserve Bank. Credit card debt dropped during COVID (stimulus money helped consumers pay down debt) but it’s creeping back to pre-pandemic levels. Rising credit card balances and higher interest rates may add financial strain for many consumers. This highlights the importance of living beneath ones means and paying off credit card balances in full each month. 

All of this data leads to the answer to your question about whether consumers can maintain their contribution to continued, albeit slower economic growth, and the answer is “it depends.” The projections for 2024 are for it to be the most normal year post pandemic. The definition of the word “normal” is the critical factor as we strive to maintain discipline and balance in our economic affairs. Stay focused and plan accordingly.