As we all know, 2023 ended on a very high note. The economy grew at a relatively feverish pace during the last two quarters of the year, and the stock market rallied like nobody’s business in November and December. By the time the dust settled and the smoke cleared, last year was better than just about anyone expected it would be, by far.
So much so, it seemed there would be plenty of tailwinds to get us through at least the first quarter of 2024. All that jazz about inverted yield curves, a shrinking money supply, the Federal Reserve keeping the overnight rate ‘higher for longer,’ and global unrest? Does that stuff even matter any longer?
We shall see.
At first blush, it seems January was, shall we say, not as terribly robust as one would have wanted it to be. To say the economic data has been choppy and unpredictable, thus far, would be an understatement. Wall Street has whiffed on just about every estimate. By whiff, I mean missing a lot of them by at least two standard deviations in either direction.
To that end, this week’s Advance Retail Sales for January came in 2 sigmas to the left of the median estimate. That isn’t a good thing. Further, Import and Export Prices both came in roughly 4 standard deviations to the right. Those also weren’t good things. Conversely, the Philadelphia Fed Business Outlook index was almost 6 to the right, almost unfathomable.
However, that was actually a positive.
Basically, if it seems like the so-called experts are having a hard time making sense of what is happening in the economy, they are. Also, if it feels like I have touched on this issue previously, I have. As Yogi Berra once said: “it is like déjà vu all over again.” Indeed.
Therefore, I feel it is incumbent on me to tell you what is going to happen, at least directionally. Trying to predict data points many months in advance is a fool’s errand. So, I am not going to bother doing so. However, what I am about to impart is what will happen moving forward.
Currently, the labor market remains relatively tight, and employers are still complaining about the difficulty in finding qualified associates. The last three words of that sentence are key: finding qualified associates. That is a subtle, but still big, shift from not being able to find anyone willing to work, which had been the problem for literally years.
Almost to a person, if not actually so, every business owner with whom I have spoken complains not about the availability of workers, but, rather, the quality of them. Just give them someone who can do some basic math or is functional in the Microsoft Office suite of software (and isn’t lying about it).
As a result, I can report the labor markets are not as strong as they were this time last year. To be sure, domestic employers aren’t ready, in aggregate, to start getting rid of massive numbers of full time employees. They are just likely to be far more selective in their hiring decisions than they have been at any time in recent memory.
We are already starting to see some of this in the headlines. Some job cuts here and others there. Combined, they are a rounding error when compared to the overall size of the U.S. labor force. What’s more, in all probability, there are far fewer new job postings on the proverbial message board in the breakroom than there were 12-months ago. Corporate CEOs on the television are saying things like ‘cost savings’ and ‘being smarter with our money.’ Finally, talk to college seniors and ask them how their job search is going compared to people who graduated in 2021, 2022 and/or 2023.
So, softer but not completely soft. Regardless, it carries a powerful message to current employees: “I may not be as indispensable as I thought I was.” That could, and probably should, alter present consumption patterns.
Think about it. Are you more apt to spend freely when you are positive the money is safe? Mostly comfortable that it is? Or not so sure about it?
What we will find is this: American consumers are going to shift from positive to mostly comfortable as 2024 unfolds. As a result, the potential error is to the downside as it pertains to personal consumption expenditures. It will be interesting to see what items/services will get the ax first.
Intuitively, those things which are nice to have, but aren’t necessary, will be the first to feel the pain. While ‘demand elasticity’ is often relative, I probably wouldn’t want to be selling, say, new 4-wheelers when the consumer starts tightening their wallet. The same could probably be said of new vehicles in general.
Don’t get me wrong. I am not forecasting a consumer collapse or an implosion in the auto and recreational vehicle markets.
Simply that as worker security wanes, even a little, so will demand for those larger-ticket items which ‘can wait until later.’
I have picked on two, but you could easily come up with more of your own.
Trust me, it doesn’t take a huge decline in revenue for companies to start to look for ways to limit or reduce expenses. In fact, softer sales are often the impetus for a long-overdue examination of how the corporation spends its money. Obviously, it is easier to hide wastefulness when the topline is growing 15% than at, say, 5%.
So, where are we now?
If recent data is an accurate indication of anything, we are probably in the proverbial 2nd inning of the shift in consumer sentiment. Car sales have thus far slumped this year, in some places precipitously. However, consumers are continuing to spend money on certain experiences and, importantly, at restaurants. Though it doesn’t appear all restaurants are created equal.
Unless something changes, it is likely the number of fast food establishments in the country will, at best, stabilize. At worst, it will shrink. The reason being for this is simple: fast food is no longer cheap. According to menupriceslists.com, the national average price for McDonald’s Big Mac combo meal is $13.19. A hamburger ‘happy meal’ will set you back $7.19.
Of course, it could be either less or more at an outlet near you.
Now, imagine a family of four, young children. One spouse gets the Big Mac combo, the other has the crispy chicken sandwich combo and both kids get the happy meal. Before tax, that will set them back $41.38. Where I live, the sales tax is 10%. As a result, how does $45.52 at McDonald’s sound to you? Sure, the fries are tasty, but close to $50 for lunch? At McDonald’s?
Hey, I am not just picking on MCD. Prices are up everywhere. Not surprisingly, I have started to notice an increased number of fast food joints closing down. To be sure, it isn’t an avalanche, yet. However, you don’t have to look too hard to find empty buildings which were obviously once a Wendy’s, Burger King, McDonald’s or Pizza Hut.
With this said, consumers still seem to be willing to pay for service. This turns food ‘away from home’ into an experience, a night out. Further, it isn’t that much more expensive. For instance, the ‘old fashioned burger,’ which comes with fries, is $15.95 at The Cheesecake Factory here in Birmingham. While the relative difference in prices might seem steep, in absolute dollars and cents, McDonald’s and The Cheescake Factory aren’t terribly far apart in practical terms.
Now, even if you hate both places, where do you go on a Friday or Saturday with your significant other? And you can only choose between the two of them. McDonald’s or the Cheesecake Factory?
To be fair, the Golden Arches isn’t really a date place, and isn’t trying to be. McDonald’s brand has long been fast, affordable and decent food. A place to take the kids or when you are on a car trip. I completely understand that. However, my point is simply fast food simply isn’t as affordable as it once was when compared to restaurants above them on the proverbial ladder.
Perhaps for the reasons I have expressed up to this point, it shouldn’t have come to any great surprise that The Cheesecake Factory at the Summit here in town was groaning with people this past Saturday. I am talking about a line to get in line to put your name on the waiting list. This at around 5:05 pm. Craziness.
As a point of clarification, we were not eating dinner there. I had simply made the suggestion Beth should buy a piece of ‘dulce de leche’ cheesecake to take home after she finished shopping at Anthropologie. Now, how did she convince me to go with her to run these errands? I am still wondering this myself. I must have been beside myself with boredom.
All of this is to say, when you go to The Cheesecake Factory on a Saturday night and there isn’t anyone in the joint, you will know things have taken a turn for the worse. In fact, you could reasonably intuit unemployment is going up and household income is going down. It, and other places like it, are great indicators of domestic consumer stress. Seriously.
Therefore, if my eyeballs tell the truth, U.S. workers still feel pretty decent about things. However, as the year progresses, I fully anticipate the wait time at The Cheesecake Factory at the Summit in Birmingham to fall by 50% at 5:15 pm on Saturday evenings. That is as sure as the nose on my face.
This, then, will reflect slower growth and slightly higher unemployment than what we experienced last year. This will lead to lower inflation, and will allow the Federal Reserve to cut the overnight lending rate no fewer than 3 times this year. As I type, I haven’t changed my prediction for 4 cuts.
That should be enough for the U.S. to skirt an official recession, even if it might feel like it to some sectors.
So, there you have it: what will happen this year. Slower growth and shorter wait lines. The latter is fine by me. While I could take or leave the remainder of the menu at The Cheesecake Factory, and almost always leave it, the ‘dulce de leche’ cheesecake really is pretty darn good.
I just don’t want to have in line too long for it.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.