There’s a lot discussed here so I’ll just highlight this part:
To this point, consumers haven’t slowed spending in any concerning way. Retail sales growth remains solid year-over-year, and holiday shopping has posted good results thus far. But over time, the cumulative effects of increasing costs are taking a toll and consumers are feeling the pinch.
One of the ways we can monitor how extended consumers are is by looking at how they’re paying for their spending. The story had been for a long time that pent-up savings was able to support much more spending without putting consumer balance sheets under stress. That may be true in some cases, but if there’s so much cash sloshing around, why have delinquencies started to tick up?
Another concerning piece to this puzzle is the rapid growth in revolving credit balances, which despite decelerating since 2022 is still up 9.3% y/y as of October — that’s higher growth than anything we saw during the last economic cycle. Additionally, this year has seen record use of buy now, pay later services for holiday shopping. Together, these could be signs that consumers are getting stretched, and if we need spending to hold up in order for the economy to hold up, this is a trend that deserves a watchful eye.
The bottom line is that as long as the labor market holds up, consumer spending is likely to remain healthy. Therefore, a bet on a soft landing is a bet on the consumer. And a bet on the consumer is a bet on the labor market. This is partly why so much attention has now shifted from inflation to jobs data.
Good article!
(Okay I skimmed the article I am responding here to the summary you provided)
Your summary mentions a number of “puzzle pieces” which are seemingly less-puzzling if we begin with the assumption that we are in a largely 60/40 economy.
EX:
Assume 60% are better-off and spending including on travel (recently) and dining out (still now) so much their demand drives-up prices.
Assume 40% are worse-off and cannot keep up with the higher prices, they are resorting to credit cards etc…
There are other factors to consider (good and bad) but beginning with the 60/40 assumption makes things a lot clearer.
It seems like the pundits on Bloomberg and CNBC are fond of discussing “the most predicted recession ever,” and “the recession that never happened,” etc…
The bottom line is that as long as the labor market holds up, consumer spending is likely to remain healthy. Therefore, a bet on a soft landing is a bet on the consumer. And a bet on the consumer is a bet on the labor market. This is partly why so much attention has now shifted from inflation to jobs data.
That’s something that’s very difficult to predict. I believe that we will see the consumer pull back more on spending in 2024 (I plan to), but to what extent? Also regarding the labor market, will we continue to see the bigger companies cutting the good paying jobs, with the continued addition of the lower paying jobs by smaller businesses?
Roughly 30% of US households own their homes and have a mortgage.
Nearly all of them refinanced at ~3% and got, in effect, a $1,000/month raise.
Their saving rate, (deposits into banks) did not move at all. Nearly 100% of that money is being either a.) invested eg stocks and crypto, or b.) spent.
To the degree that they spend that on labor intensive things that buoys up the jobs market. (EG For a while they spent on travel, recently they’ve been spending on restaurants.)
As for unemployment, we’ve never had this much cash on the sidelines before, never anything close. So maybe this time really is different, but we know how the labor market typically behaves.
The key component to watch in the first half of 2024 is money market balances. Investors flooded into money markets throughout 2023 to capture the 5%+ yield with little to no risk. If rates remain high, it’s unlikely that we’ll see a huge outflow, but as Fed cuts come closer into view and rates fall, investors will have to decide if the yield in cash instruments is more attractive than the capital appreciation opportunity in other assets.
I put some money to work in CD’s as well, and will keep doing so for now.
CDs and bonds function the same way. Your money, both principle and interest, are safe as long as you hold until maturity . . . but if rates happen to rise in the interim, the “penalty for early withdrawal” can be heavy.
Total Retail sales, and Grocery Store sales were flat, (left side, black arrows)
vs
Online Retail, and Food and Drinking Establishment sales which positive, and neither faster than slower than the long-established trend, (right side, green arrows)
Since Total Retail sales moved sidesways in 2023, but two categories moved upward, logically, something within the retail sector must have moved downward in 2023.
It turns out those categories are
Home Furnishing Stores
Gasoline Stations
Retail Building Material & Garden Supplies (teensy drop in 2023)
Department Stores (have been dropping for 10+ years)
Apparently, the net increase in money market funds is not coming from household accounts. It is coming from banks (US and foreign), investment funds etc.
According to calculations by the the SF Fed inflation-adjusted aggregate household savings
are already below pre-pandemic levels for the bottom 80% of households
will likely become negative in total during the first half of the coming year.
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The 2023 economy can best be described “Well, it went up, but only because we count ‘the economy’ as ‘spending’ regardless of whether that spending came form income or from drawing down savings or from maxing-out credit cards.”
It is definitely not sustainable.
(Above figures are from fall. I expect updated numbers in the coming weeks)
Gold dropped because the fed pushed interest rates into the high teens, greatly strengthening the dollar in order to bring inflation under control. Gold was spiking in the beginning, then cratered after the rate hikes. Inflation then fell slowly, because the interest rates on US denominated debt drew massive foreign investment into those instruments.
Well that is (at least partially) correct.
Because gold is also used for speculation, ask a risk-hedge etc. there are periods when it rises and periods when it falls, but the overall trend is clear.
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Inflation affects all things, stocks, gold, and consumer items.
Because we measure inflation only by how it affects consumer items many people mistakenly think inflation is only about consumer items. They are wrong. That would be like saying “If you stop sneezing you no longer have pneumonia,” or “If you stop craving pickles you are no longer pregnant.”
Still when a mistaken belief becomes deeply-held, sometimes it is better to roll with it.
In that vain, I present the following: