My recent blogs have been questioning how long consumers can keep shopping for good reason; their debts have been piling up, which seems to mean they have been able to borrow enough to stay in the game.
I occasionally quote Roosevelt’s very smart Federal Reserve Chairman Marriner Eccles who made an apocryphal statement on debt during the Great Depression—which in essence explained why it became the ‘Great’ Depression and explains every recession since then.
“The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.”
The credit of most Americans ran out when their banks failed in the 1930s because they didn’t yet have federal deposit insurance or today’s capital requirements, and 25% were jobless.
It was also the end of the last Gilded Age, when the Morgans, Rockefellers, and Vanderbilts held most of the wealth and labor unions were much weaker.
We may not be in as much danger today though four large banks have already failed that carried too many deposits not insured by the FDIC, or other guarantors. And cracks are appearing in the credit markets where the loan default rates of lower income folk are rising who tend to spend most or all their incomes.
We are living in another Gilded Age with record income inequality and ordinary Americans having to pay higher tax rates that most of the millionaires and billionaires since the 1980s.
Retail and food sales are a good indicator of consumer health, and is subject to large fluctuations. That’s why just reported July retail sales jumped +1.0%, up from a -0.2% decline in June. (It also plunged -1.1% earlier this year in January.)
I believe the current and sudden jump in sales might be because of consumers’ hubris, a bit of irrational exuberance, because they feel their jobs remain safe and the US economy has been fully employed for the past two years, so they are saving very little of their income.
But full employment may not last much longer, and consumers might be sensing this in consumer confidence surveys. Consumer sentiment picked up slightly for the first time in five months, say the latest headlines.
But according to the latest University of Michigan survey, “For the second straight month, consumer sentiment is essentially unchanged. July’s reading was a statistically insignificant 2 index points below last month, well within the margin of error. Although sentiment is more than 30% above the trough from June 2022, it remains stubbornly subdued.”
The Conference Board’s confidence survey said as much: “Compared to last month, consumers were somewhat less pessimistic about the future. Expectations for future income improved slightly, but consumers remained generally negative about business and employment conditions ahead.”
So, the question remains how much longer can consumers keep spending as they have?
The unemployment rate has been steadily rising from its low in January 2023 of 3.4 percent to 4.3 percent in July 2024. And annual hourly wage increases have declined to 3.6 percent.
I said of last month’s unemployment report that it was alarming because most new jobs were in the lower paying service sector that had 80,000 of the 114,000 jobs total, mostly in Leisure activities, Education & health care.
This is where consumers spend most of their Dollars and so it means job growth is still dependent on consumer spending, and consumers have had to borrow like crazy to keep spending, which can’t go on forever.
That is why financial markets are now betting the Fed will begin to cut interest rates at its September FOMC meeting.
Retail inflation has dropped below 3 percent for the first time since 2022 as measured by the U.S. Consumer Price Index (CPI). It has had two months of zero price increases, which could have been predicted because consumers have known for months that stores were discounting and shopped more at big box retailers like Target, Walmart and Costco.
So there seems to be some cognitive dissonance between what consumers are doing (i.e., continuing to spend) and what they are saying in confidence polls. Is that a danger sign? Might they suddenly stop spending, because “the game will stop” in Fed Chair Eccles words?
It depends on the health of our banking system as well. We’ll have to wait and see.
Harlan Green © 2024
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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