Consumers Are in a Bad Mood


Retailers show the U.S. consumer pulling back … are we headed into deflation? … why Louis believes a tired consumer means rate cuts are imminent … the latest data on the U.S. consumer

…In the last couple of weeks of October, there were certainly some trends in the business that made us pause and kind of rethink the health of the consumer…

We are more cautious on the consumer than we were 90 days ago.

That comes from Walmart’s Chief Financial Officer John David Rainey.

Yesterday, the big box retailer reported earnings that topped Wall Street forecasts. But its stock price slid due to management’s cautious outlook based on weaker consumer spending.

Rainey’s comments echo what we learned about the U.S. consumer from fellow retailer Target earlier in the week.

From the Associated Press:

Target on Wednesday reported a hefty third-quarter profit increase…[but] revenue slipped more than 4%, however, as customers saddled with broadly higher costs pulled back on spending as the holiday season nears.

…Many customers are making tough decisions about what they can afford because prices for food and other basics have climbed. Inflation has moderated, but a bigger chunk of paychecks is needed to cover immediate needs.

The latest retail sales report that came out Wednesday also confirmed this consumer spending slowdown. It showed sales falling 0.1% in October, which was the first drop in seven months.

Rather than being concerned by this weakening U.S. consumer, legendary investor Louis Navellier welcomes it

That’s because Louis is connecting the dots between a weaker consumer and rate cuts from the Federal Reserve.

For more, let’s jump to Louis’ Growth Investor Flash Alert podcast from yesterday:

The retail sales report…was weak when we look at the details.

Fully seven of the 13 categories reported a sales decline. It was led by furniture, vehicles, and gas station sales. Grocery store sales rose 0.65% in October – higher food prices might have boosted that figure.

The only real bright spot was health and beauty care spending. It rose 1.06% in October.

So, in the past 12 months, retail sales are only up 2.48%. That’s a lot less than the inflation rate. So, that’s why consumers are in a bad mood. And that’s going to make the Fed cut rates.

We have inflation fizzling fast [including] the components of inflation that irritated the Fed in the past, things like owners’ equivalent rent in the CPI, wholesale service costs in the PPI. And now we’ve got retail sales running lower than inflation.

They’re going to be cutting rates, folks.

One detail that increases the odds of cuts sooner than later comes from Walmart

Here’s Chief Executive Officer Doug McMillon:

In the U.S., we may be moving through a period of deflation in the months to come.

If we start seeing actual deflation consistently popping up across national retailers, it will make the Fed’s interest rate decisions far easier. Louis is already latching onto this, anticipating rate cuts coming earlier than Wall Street’s current forecasts.

As I write, the CME Group’s FedWatch Tool shows that most traders believe we’ll have to wait until May before the Fed cuts rate the first time.

Here’s how this looks, with the odds of a May rate-cut coming in at 49%.

Chart showing the CME Group's FedWatch Tool showing 49% odds of a rate cut in May 2024
Source: CME Group

But Louis doesn’t believe we’ll be waiting that long.

Here’s what he said about the timing of cuts last week:

We’re getting there, folks. They won’t cut rates in December, but it looks like they will be cutting rates in January or February.

As we noted in yesterday’s Digest, the single greatest driver of short-term price movements is a surprise to the prevailing expectation. With expectations being that the Fed won’t cut until May, if Louis is right and we see a cut in January or February, we’re in for bullish fireworks.

An early cut would be especially welcome since we’re entering the most dangerous part of the Fed’s financial tightening effort

As you know, the Fed has had an incredibly challenging job – tighten financial conditions enough to bring down inflation, but not so much that it kneecaps the U.S. consumer, tipping the economy into a recession.

This final stretch – when rates remain high while the consumer is flagging – is the most dangerous period.

It’s not as though the hardest work is behind us, and the Fed can now coast into the finish line. Instead, we’re down to a neck-and-neck photo finish – will the Fed cut rates before the fatigued U.S. consumer rolls over? Or will the Fed’s refusal to cut rates result in the amazingly resilient U.S. consumer finally collapsing…just “yards before the finish line,” so to speak?

If Louis is right that rate cuts are coming in January or February, the edge goes to a happy ending – the elusive “soft landing” we all want.

But if the Fed isn’t bluffing about its “higher for longer” policy prescription, consider the danger in light of the most recent signals from the U.S. consumer…

Hardship Distributions: The number of people taking “hardship distributions” from their 401(k) accounts jumped 13% between Q2 and Q3. This represents 18,000 people, which might not sound like many, but it represents the highest level in the past five quarters.

Credit Card Debt/Delinquencies: During Q3, credit card balances hit a new high of $1.08 trillion. Meanwhile, credit card APRs are pushing 30%. This has resulted in a surge in the rate of households becoming delinquent or entering serious delinquency. We’re now at the highest level since 2011.

Car Loan Delinquencies: According to Fitch, the percentage of subprime auto borrowers at least 60 days past due on their loans jumped to 6.11% in September. We’re at the highest level since 1994.

Savings Are Dropping: After a mild uptick in the personal savings rate in the first half of the year, savings have been falling. As you can see below, September’s personal savings rate of 3.4% is on par with summer 2008 levels when we were in a recession.

Chart showing the personal savings rate clocking in at low levels on par with the 2008/09 recession
Source: Federal Reserve data

Consumer Confidence is Waning: The Conference Board’s most recent consumer sentiment survey from October 31st featured the title “Consumers Remain Pessimistic About the Future – Even as They Continued to Spend.”

From Dana Peterson, Chief Economist at The Conference Board:

Consumer confidence fell again in October 2023, marking three consecutive months of decline… Fewer consumers said that business conditions were good, and more said they were bad. 

Meanwhile, the report found the consumers’ perceived likelihood of a recession in the next 12 months isn’t as high as it was in May, but still clocks in at roughly 70% of respondents saying a recession is “somewhat” or “very likely.”

None of this means the U.S. consumer is destined to roll over

But it would be unwise to ignore the significant weakening we’re seeing.

Let’s hope Louis is right and this photo-finish race ends with an unexpected January rate cut.

In the meantime, put December 13th on your calendar. That’s when the Fed concludes its December meeting at which they’ll update their Dot Plot. This will show us what each FOMC member believes will be the path for interest rates over the coming months.

We’ll be looking for clues supporting Louis’ January/February rate-cut forecast.

Have a good evening,

Jeff Remsburg

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