The Federal Reserve holds its annual Jackson Hole Economic Symposium this week. The “theme” of the conference is a veritable word salad: Reassessing the Effectiveness and Transmission of Monetary Policy.
But that humdrum title obscures the fact that comments delivered from Jackson Hole can move markets. For instance, in 2022, current Chair Powell referenced Paul Volcker several times in his nine-minute address. Volcker, of course, was the Fed Chair who hiked the Fed’s key rate to 20% in 1980 to finally “whip” the inflation of the era.
Powell’s message at the time: He was serious about hiking rates to bring down inflation. Investors got the message, and the S&P 500 was down about 16% over the next two months.
Powell speaks again on Friday. Tomorrow, I’ll share my opinion of what Powell is likely to say and what it could mean for stocks going forward.
But while we wait…
I want to discuss one of the factors that will likely influence Powell’s comments: the American consumer.
Hot or Cold?
American consumers account for nearly 70% of U.S. GDP.
So robust consumer activity can signal the economy is running “hot,” which can then signal tighter Fed policy (higher rates). And slower consumer activity tends to signal – in Fed Speak – that monetary policy is “sufficiently restrictive.”
We’ve heard so much about this group for the past five years, and with good reason. But sometimes, the data seems to contradict itself, with one outlet reporting one thing and other information negating it. Or perhaps our own experiences and observations might not jive well with the narrative.
Regardless, in 2020, as most physical stores shut their doors and people avoided face-to-face interactions, the financial press became obsessed with who was buying what, when, where, why, and how.
This was new territory we all were in, making it difficult to predict the future… thereby making it difficult to know how to invest. Add in rampant inflation near the end of 2021, and we had even more reason to watch American consumers as a bellwether.
For years, the majority of outlets marveled at how well everyone was doing. And sometimes, to some degree, they had a point.
“Flush with cash” was the description not so long ago. Consumers had government stimulus money, plus all the money they hadn’t spent for two years or more on travel, get-togethers, commuting, and so many other expenses.
So, when the shutdowns ended and fear subsided, boy, but did they go a little crazy on vacations, eating out, and overall enjoying life.
That was 2022 and 2023 though. And this is 2024.
It’s a whole new world once again.
Consumers Are Cutting Back
Earlier this week, Goldman Sachs (GS) expressed its opinion that the U.S. is less likely to see a recession.
Previously, it put the odds of a downturn at 25%. Now, that’s dropped to 20%.
The big bank’s top economist, Jan Hatzius, even called fears of a recession “overblown,” telling CNBC that:
The last couple of weeks have basically said that the economy is still doing fine. And typically, when recessions occur, things happen pretty quickly. So if you see a couple of weeks of data that say the economy is still doing fine, you want to put some weight on that.
A day prior, he called out “reports of concern over the U.S. consumer” as being “greatly exaggerated.” Nothing to see here. Just keep moving right along.
I, however, am not convinced. And I don’t think you should be either.
There’s just too much negative data out there we cannot ignore.
For instance, earlier this month, The Wall Street Journal published “5 Big Takeaways From This Earnings Season.” There, it acknowledged how:
For the second quarter, companies in the S&P 500 are on pace to deliver a 5.2% jump in revenue from a year earlier. That’s higher than the 4.7% Wall Street expected at the end of June, but below the 6.7% average over the past five years.
That’s an interesting detail. So is its follow-up commentary that while these companies are seeing exceptional earnings increases, they’re underperforming in the revenue department. This “suggests profits are being driven by cost-cutting and one-time items rather than strong underlying performance.”
Consumers, it seems safe to say, just aren’t spending as much as they could be. And why should they be after more than two years of intense inflation?
I know the markets obsess over month-over-month and year-over-year inflation. But just because the cost of living isn’t increasing as quickly doesn’t mean it isn’t increasing – or that it isn’t up intensely, even unsustainably, so far this decade.
For instance, overall consumer prices are still up more than 20% since February 2020, according to multiple sources. Bankrate, for one, notes that Americans now “need about $1,208 to buy the same goods and services that cost $1,000 when the coronavirus-induced recession occurred.”
So, it’s no wonder they’re running out of cash. If they haven’t run out altogether.
You Can’t Explain Away $1.14 Trillion in Credit Card Debt
There’s no doubt that consumers are struggling.
I don’t even have to point out McDonald’s (MCD) admission in July that it needs to reorient itself around value offerings in order to lure customers back… or how Walmart (WMT) has been noting the higher-end customers it’s been attracting all year.
All I have to do is point out the Federal Reserve Bank of New York’s report from earlier this month: the one that noted how, collectively, Americans are saddled with a staggering record $1.14 trillion in credit card debt.
That’s $6,329 per person.
Some of that is due to stupid spending, no doubt. There are always irresponsible consumers out there buying ridiculous items for ridiculous amounts of money they don’t actually have.
But there are also a growing number of people struggling to pay their monthly necessities. Real estate marketer Redfin reported on August 2 that apartment asking rents in June were up 23% since 2019.
And while they say that wage growth has compensated for this increase…
And food inflation…
And insurance inflation…
And higher gas prices…
The credit card debt crisis indicates the situation isn’t anywhere so simplistic.
I’ll turn to Redfin once again, this time from a June 24 press release. It read that “only 39% of renters make enough to afford the median-priced apartment.” Moreover:
“Rents are growing at a snail’s pace compared to the rapid increases we saw during the pandemic and are unlikely to soar again anytime soon. As a result, wage growth should continue to outpace rent growth in the coming months, as it has been doing since 2022,” said Redfin Senior Economist Sheharyar Bokhari. “That will help narrow the affordability gap for renters, but for a lot of folks, the math still won’t check out. Many U.S. renters are and will remain burdened by the cost of having a roof over their head. And, unlike homeowners, they’re not building wealth through rising property values.”
Not that many homeowners are doing so much better. Those who bought a home in the last two years are handling high monthly mortgage payments that also affect their ability to responsibly spend elsewhere.
Consumers Cut Across the Board
Going back to that Wall Street Journal piece, one of its five findings was that “people are cutting back on the little things.” McDonald’s (MCD), Starbucks (SBUX)… even the almighty Chipotle (CMG) recently said its sales growth is cooling.
Considering the latter’s die-hard base that stays loyal through anything from e-coli outbreaks to massive price hikes, that’s noteworthy.
So is the Journal’s third finding: that even high-end shoppers are cutting back. It wasn’t long ago that we were hearing how well the luxury market was doing. Now, though:
The parent company of Louis Vuitton and Dior said sales rose a disappointing 1% from a year earlier. Gucci owner Kering said sales fell 11% and issues a profit warning. French distillery Rémy Cointreau flagged a sluggish market in China and posted an overall decline in sales. Germany’s Hugo Boss cut its sales guidance for the year.
People are quite simply tightening their belts across the board. And that tightening might only be getting started.
For my part, I’m still hoping for a garden-variety recession (catch up here).
But one way or the other, American consumers are not sitting pretty right now. They haven’t been for a while.
It’s foolish to pretend that reality away.
Regards,
Brad Thomas
Editor, Wide Moat Daily