Jamie Dimon is concerned about the U.S. consumer … Bloomberg says the consumer is about to crack … a tour through the data … what will change next year?

 

To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake.

That’s from JPMorgan’s CEO Jamie Dimon on Monday.

As we began 2023, recession fears filled the headlines. But as economic and consumer data came in stronger than expected each month, economists and analysts began changing their tune.

By this summer, most of them threw in the towel, reversing course to say that a recession was no longer likely. Several things were behing this pivot, but at the top of the list came the “resilient” U.S. consumer.

This morning brought the latest headlines about this alleged consumer resiliency

The Commerce Department reported that retail sales increased a higher-than-expected 0.6% in August. That towers above the Dow Jones estimate of a 0.1% increase. As you’d expect, the phrase “resilient consumer” peppers the news articles reporting these numbers.

But let’s be clear – this heavy spending didn’t reflect a flush consumer out on the town buying all sorts of consumer goods. A huge part of this morning’s increase came from the necessity of greater spending at gas stations due to surging oil prices. If we exclude gas, retail sales were up just 0.2% in August.

Here in the Digest , we’ve remained skeptical about the recent calls of “no recession” thanks to this resilient consumer for one primary reason – we believe the resilience is smoke and mirrors.

All that robust spending? It has increasingly come from non-replenishable pandemic stimulus money and/or record-setting credit card debt that’s snowballing at the highest interest rates ever.

We’ve been concerned about what happens when the pandemic savings are exhausted and credit card balances grow so unruly that consumers are forced to curb their excessive spending.

Bloomberg suggests that reckoning is nearly here:

After staving off recession for longer than many thought possible, the US consumer is finally about to crack, according to Bloomberg’s latest Markets Live Pulse survey.

More than half of 526 respondents said that personal consumption — the most important driver of economic growth — will shrink in early 2024, which would be the first quarterly decline since the onset of the pandemic.

Another 21% said the reversal will happen even sooner, in the last quarter of this year, as high borrowing costs eat into household budgets while Covid-era savings run down.

It’s easy to become so buried in the details of various economic data that we miss the big picture

So, let’s simplify.

Whether or not we fall into a recession largely reduces to the U.S. consumer. That’s because consumer spending accounts for roughly 70% of our economy.

Now, we have three crudely simplistic scenarios for the U.S. consumer…

Healthy green light: Here, the U.S. consumer has income that exceeds expenses. Spending comes from disposable income, expanding the economy in a sustainable manner.

Cautious yellow light: The U.S. consumer has income that isn’t regularly exceeding expenses, however, he/she is still spending. This is coming from a mix of some disposable income along with savings and/or debt. Though the spending expands the economy, it’s not sustainable long-term.

Unhealthy red light: The U.S. consumer has insufficient income to match expenses. Savings are depleted. Spending is primarily sourced from debt, though there are limits to that spending due to swollen credit balances and interest rates. The economy contracts and corporate earnings suffer.

This year’s economic data have shown the U.S. consumer moving deeper into yellow, getting ever closer to red.

Not missing the forest for the trees

We are obsessed with inflation data, the Fed, and interest rates.

While that’s understandable, we should be obsessed with the U.S. consumer’s income relative to expenses.

To kick off such an analysis, here’s a big-picture statistic …

According to research from LendingClub out just two weeks ago, nearly 61% of Americans are now living paycheck-to-paycheck.

Clearly, lower-earning Americans are most affected, but even four in 10 high-income Americans (earning more than $100,000) report they’re in the same position.

But what about falling inflation? Aren’t we on the other side of all the financial pain today since inflation is dropping? What about that soft landing?

Well, let’s be clear about what inflation is and is not.

Inflation is just a comparison between two numbers. It reveals changes in prices. It doesn’t reflect the absolute value of the prices themselves, whether they’re high or low.

In recent months, we’ve seen plenty of declarations of victory over inflation as data have cooled significantly. And by extension, many analysts have said that a soft landing is in the cards and we’ll all happily ride off into the sunset.

But while inflation (which – again – measures price changes ) can be cool, the absolute prices of those same goods and services can be red hot…and painful for millions of Americans.

Take shelter costs, which commands the heaviest weighting in the Consumer Price Index

This CPI category is intended to reflect what Americans spend on their rent/mortgages. For most Americans, this is the largest line item on a family budget, clocking in at roughly 21% of total expenses.

In recent months, you’ve seen the headlines pointing toward falling shelter cost inflation, with more cooling estimated to come.

For example, here’s Yahoo! Finance quoting an analyst following yesterday’s CPI print:

…Experts say that these figures show that we’re way past peak inflation on the housing front.

Shelter costs, which makes up 1/3 of overall CPI, increased 0.4% on a monthly basis. This was the same in June.

Overall, shelter costs over the past year have eased. Experts say that housing disinflation will continue to pick up momentum in the coming months. 

Now, this is all true.

Below, we look at data from the Fed, showing the percent change for average shelter costs in the U.S. After topping out last December, it’s been dropping steeply.

Hooray! We’re saved!

But remember – this reflects a percent change. What’s the status of the absolute dollar value that American families are spending on shelter costs?

It’s at all-time highs.

All that the first chart showed us is that shelter costs aren’t getting more expensive as quickly as before.

It’s the same thing with food costs.

Below is what the talking heads are telling you – food inflation is crashing! Prepare for a soft landing!

And yet, as you know from your own grocery bills, we’re not saved.

Here’s the reality: The absolute dollar amount of elevated food prices is emptying your wallet more than ever before.

To see what this looks like on one chart, let’s turn to Personal Consumption Expenditures

That name should sound familiar. Personal Consumption Expenditures inflation, or “PCE” inflation, is the Fed’s preferred inflation gauge. We’ve highlighted it regularly over the past year.

While Wall Street has rallied and crashed based on 0.1% or 0.2% incremental moves in PCE inflation in recent months, let’s see the big picture…

How much are Americans spending right now for their goods and services on an absolute dollar basis?

More than ever.

And they’re doing it with the highest household debt level ever recorded…

…with the highest credit card balances ever recorded…

…that are charging consumers the highest interest rates ever recorded…

…and yet, this has all been happening while our unemployment rate has remained at one of the lowest levels ever recorded…

Which prompts an important question…

What’s going to happen when the Fed finally gets what it wants and causes that unemployment rate to climb?

Will things get better or worse for U.S. consumer spending?

In the meantime, right now – with unemployment as low as it is – the delinquency rate for auto loans clocks in at the highest level since 2006.

Right now, bankruptcy filings – while still low historically – have spiked to levels not seen since the Great Financial Crisis and the Pandemic meltdowns on a 4-week moving average.

Right now, the number of people making a hardship withdrawal from their 401(k)s surged 36% from the second quarter of 2022 according to Bank of America.

Right now, Bloomberg reports that U.S. inflation-adjusted household income fell in 2022 by the most in over a decade – and it was the third straight annual decline.

Continuing with our crudely simplistic analysis, these data prompt a critical question – what’s going to change over the next 12 months to help/hurt the U.S. consumer?

Well, we’ll probably see inflation continue to drop. But remember, inflation can be a zero at the same time that nosebleed absolute dollar prices hurt family budgets.

So, can we expect big help there for the U.S. consumer facing budgetary strains? Not really.

We’ll also probably see the Fed cut rates next year. However, those cuts likely won’t tally more than 50- to 100-basis points barring a recession that requires deeper cuts.

So, while that might mean just a bit more breathing room on credit card interest rates and mortgages, it’s unlikely to be a “save the day” rate reduction for stretched U.S. consumers.

According to the Human Resources association SHRM, employers are budgeting for smaller pay raises than what they’ve paid out this year.

Meanwhile, Americans with student loan debt will be back on the hook to pay their debt service barring more attempted cancellations from President Biden. That will further erode disposable income for millions of Americans.

And we’ll likely see the commercial real estate/small banking sectors begin to roll over with a handful of bankruptcies. So, that will likely tighten credit and economic growth, none of which is supportive of the U.S. consumer.

Amid all this, FactSet reports that analysts are projecting the S&P 500 will enjoy earnings growth of 12.2% next year

For context, YCharts reports that the average S&P earnings growth rate is 9.03%.

In other words, despite the various U.S. consumer headwinds we’ve just looked, analysts predict that consumers will open their wallets in support of not just “normal” earnings growth next year, but well above average growth.

That seems like quite the gamble.

Despite all these headwinds, our position on the stock market hasn’t changed

Trade it higher while the broad bull market is with us (no, recent wobbles from August don’t mean the 2023 bull market is over).

But mind your stop-losses, and pick your head up to see the big picture.

On that note, let’s come full circle to revisit Jamie Dimon’s quote that opened us today…

To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake.

We couldn’t agree more.

Have a good evening,

Jeff Remsburg