Oh watch out.
Sentiment appears to be climbing.
The animal spirits are beginning to rear their heads.
Despite the negative news out on the economy, the impending recession this, and the imminent crash of that, consumers are starting to perk up.
Let’s repeat that . . . CONSUMERS ARE STARTING TO PERK UP.
This . . . from the University of Michigan, those economists who track consumer sentiment . . .
“Consumer sentiment soared 13% in December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation. Sentiment is now about 39% above the all- time low measured in June of 2022 but still well below pre-pandemic levels.”
Zoom back a bit and you can see that even with the bump, consumer sentiment is still in the doldrums.
Which is exceedingly odd because look back further and you can see consumer sentiment usually follows employment, and we have one of the large divergences between unemployment rate (really low at 3.7% today) and consumer sentiment.
It’s almost as if we’re looking at each other sympathetically, sadly congratulating one another for staying employed, but ugly crying that we can’t afford anything.
Yay for us, but too bad, so sad.
That makes some sense though because ever since the COVID crisis, inflation has whacked the consumer, biting into their livelihoods. Inflation’s since slowed, however, and this week’s report showed inflation “only” increased by 3.4% overall. Strip out volatile energy and food prices, and the “core” rate is 3.1%.
Not too shabby, and with shelter prices (i.e., home prices and rents) to come in lower because of lagging data, we should see some decent prints to come. Shelter’s a freight train as we’ve described before, and the real world data will eventually ripple through to the government’s index, it just takes awhile to slow the momentum. Nonetheless, we should continue to see inflation stay around these lower levels.
Interestingly though as our wages are keeping up with inflation, including for the latest month . . .
. . . it could mean a resurgence of demand if consumer sentiment picks up. Higher demand will ironically fuel inflation pressures again, but as supply chains have repaired/reoriented themselves since COVID, it shouldn’t materially create an impact for the time being (notwithstanding the Houthi attacks in the Red Sea).
The Producer Price Index (“PPI”), which focuses on inflation from a producer’s perspective (as opposed to the CPI, which looks at the purchaser’s perspective) have also been muted, and today’s print also shows that. Since we purchase much of our goods from China, we can also see that PPI in China has been low as well.
So we’re starting 2024 at a decent place. The consumer isn’t terribly stressed, and may begin to believe that they’ll actually keep their jobs for longer. Not only that, but it may even start to make sense for people to switch jobs as pay for job switching just hooked up.
Consumer debt levels are also at a manageable level, so that’s a positive. In fact if we factor in total consumer credit with non-revolving debt (auto loans, motor vehicles, etc), it’s holding flat/down as a percentage of disposable income.
Long and short is that we’re able to pay our bills. The consumer for now is strong, and it’s starting to believe it. Probably explains why travelers and flights have started the year with a bang, up nearly 15% and 10%, respectively from 2019.
So as you gear up for 2024, know that animal spirits are really beginning to take flight. Tack on interest rates coming down in the coming days (if not already), we should get some more shots of caffeine as the year continues.
So get ready.
Ignore the naysayers and doomsdayers.
The consumer and the US economy?
May just take flight.
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Best macro analysis I've seen in a while
If you are correct, and animal spirits are taking off again, please explain again why inflation will decline and the Fed will cut rates. While there has been a cohort who continue to claim that shelter inflation is about to fall, there has been no evidence of that yet, and until shelter starts to fall, it is very difficult for inflation to fall overall. it is hard to look at an economy that continues to defy expectations and performs reasonably well and conclude the Fed is going to cut rates 150bps this year. just doesn't make sense