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Cracks in consumption have started to appear

Chief Economist Eugenio J. Alemán discusses current economic conditions.

From a very weak retail sales report for January 2024 to stronger inflation readings as well as increases in credit card and auto loan delinquency rates during the last quarter of 2023, the picture for consumer demand has weakened considerably. However, this doesn’t mean that the economy is going to enter a recession during the first quarter, just that economic growth compared to the previous quarter has probably weakened.

Wednesday’s release of the Federal Reserve (Fed) minutes from the January Federal Open Market Committee (FOMC) indicated that “some participants noted signs that the finances of some households – especially those in the low- and moderate-income categories – were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption. In particular, they pointed to increased usage of credit card revolving balances and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”

Other than some concerns regarding lower- and middle-income households, the minutes from the January FOMC meeting were pretty positive for the overall economy, however, they indicated that consumer demand may weaken during this year compared to the strong pace seen during 2023. Interestingly, this is happening at a time when measures of consumer sentiment as well as consumer confidence have finally started to move higher after lagging behind during the last several years.

However, the minutes also pointed out the high levels of uncertainty on the path forward for inflation as well as for economic growth while supporting Fed Chairman Powell’s comments regarding the continuing lack of convincing evidence that the disinflationary process will continue to move forward. The Fed, once again, reminded markets that there are plenty of risks lurking around the issue of supply chain normalization and that it is going to take a careful look at the incoming data in order to make its interest rates decisions going forward.

Continue to pay attention to employment and inflation

We continue to believe that a continuation in employment growth is the key to what will happen to the economy during 2024 as was the case during 2023. However, this year, consumers will no longer have the ability to continue to draw down excess savings accumulated during the pandemic, so this means that consumer demand is slated to weaken compared to last year.

Perhaps the biggest unknown is how long can households, especially those with low- to moderate- income levels, as indicated in the Fed minutes, could keep their spending going by continuing to borrow at current, very high, rates of interest. On the positive side, overall households’ financial conditions have remained relatively stable and better during the current economic cycle compared to past cycles, which should help economic conditions in the aggregate, with the caveat that conditions are different across different income groups, as we have said before.

If this is the case, and consumer demand continues to slow this year, the Fed should become more confident that the disinflationary process will continue. Without the ability to access excess savings, a positive but weakening employment growth landscape, and still high interest rates on credit cards, consumers will continue to consume but only if firms make a bigger effort to compete on prices, which should continue to keep the disinflationary process going.

The flip side to this is that business margins will remain under pressure for the rest of the year if these competitive pressures persist. Thus, expect employment growth to also continue to weaken as firms continue to resize their need for labor in an environment of slowing consumer demand, highly competitive sales environment, and downward pressures on margins.


Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren’t part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy’s movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies. The Index goes up when the U.S. dollar gains “strength” when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers’ Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023

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