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John Norris (00:29):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friends, Sam Clements. Sam, say hello.
Sam Clement (00:35):
Hi John. How are you doing?
John Norris (00:36):
Sam, I’m doing fantastically. Here we are. Thanksgiving week, tomorrow’s going to be the big day turkey and all that stuff here being Wednesday before Thanksgiving. And, you know what we haven’t heard too much about, yet? We’ve seen some of the displays go up, but I don’t feel as though the country’s in full holiday shopping mode yet. And it just begs the question just in what sort of shape is the U.S. consumer going to be here in the last month of the year, last week, as you well know, Target came out with its earnings for its third quarter and… just a caveat, we don’t own Target. We don’t make a market in it, all that stuff. It’s not a major position at Oakworth Capital Bank, I don’t own it personally, Sam, I doubt you would own it personally, all that. So no dog in the hunt here, but Target announced last weekend, it was very, it wasn’t good.
(01:24):
I mean revenue miss and EPS miss some warnings about the fourth quarter and all that stuff. Conversely, Walmart has been reporting pretty decent earnings, but are sort of putting some guidance out there, they’ve seen some weakness on the lower end in terms of consumer expenditures. There are enough sort of warning sirens out there. Now I’m going cut it short but say before I say red flags out there in terms of what the health of the U.S. consumer, however, what flags and omens there are or warnings generally would suggest that maybe we shouldn’t expect too much out of the U.S. consumer this holiday shopping season.
Sam Clement (02:03):
Well, on top of that, we’ve seen some retail sales data that’s weaker than it has been. Some is weak as you have to go back to 2018 levels to kind of see that. So we are seeing that, and again, we’ve talked the inflation narrative is not new and whether real wages are strong or not. We’ve talked about it since this has been a topic, is inflation’s kind of this snowball, it just kind of gets worse and worse or what finally breaks the camel’s back. People have stretched and stretched and stretched and we have seen that. We’ve seen it. We talked about it with the food industry. Hey, you need to start actually offering us some value for us to be coming back. And so I think it’s not as clear yet as it has been with the food industry, especially the fast food industry, but it seems like that’s kind of happening with the retail and coming up on the holiday season. It’ll be interesting.
John Norris (02:59):
It’ll be real interesting to see because I hear what you’re saying and inflation is like that snowball effect. Now what I’ll notice is personally and I wrote about it last week or maybe the week before in Common Cents, our newsletter / blog, a recent trip that I took to the Winn-Dixie on Monte Vale Road here in Birmingham, Alabama. I went in there to buy mouthwash and toothpaste and I walked out of there with a full buggy full of food. I’m old enough to call it a buggy, maybe I should call it a shopping cart. There you have it, but I got a Butterball Turkey, 99 cents per pound, Hormel Black Label bacon, $3.39 per package, Hillshire Farms turkey sausage, which I happen to love, buy one get one free. Just kind of goes on and on and on. For all intents and purposes, Sam, I had $150 bill that I paid 90 bucks for.
(03:44):
That’s not bad. I’m seeing more of this in terms of groceries. I am seeing a little bit more of it…fast food restaurants. I’m seeing automobile manufacturers are starting to offer some very attractive financing. I saw 0% financing for one recently, and I always know when the consumer starts getting a little weak when I start seeing companies like Mercedes advertising, Porsche advertising, what have you, typically those higher ones that don’t need to advertise. I’m starting to see a little bit of that. A lot of this is suggestive of me of a consumer that’s not necessarily falling apart, but kind of bringing it in a little bit.
Sam Clement (04:20):
It’s exhaustion almost.
John Norris (04:22):
It’s exhaustion and while all these things are going down and the BLS and people say, listen, the real wages are doing better than all that, it’s those things that are still part of the equation, which might take an outsize hit on certain people’s balance sheets. You like your car insurance?
Sam Clement (04:39):
Yeah.
John Norris (04:39):
Have you seen what’s happened with that recently? I have. And then that goes up. Financing costs are not necessarily part of the CPI equation. What’s happened to my property taxes, the house has gone up and up and up in value due to this weird housing market and as a result I’m paying significantly more in property taxes. That doesn’t really show up in the CPI narrative. So there are a lot of things that the U.S. consumer, which they have to contend more mean, it…still have to pay. That’s not showing up in the CPI data, so I’m kind of taking a look at all of it going, huh? Here we are holiday shopping season and I don’t have children any longer, so I don’t know what the new must-have toy or anything like that is, and I’m not aware of it and I’m seeing enough weakness out there. I think this is not going to be a horrible holiday shopping season. It is just, I don’t think going to surprise to the upside.
Sam Clement (05:31):
Yeah, I completely agree and I think that exhaustion may not be an economic term, but I think that’s what people feel with just continued high prices. I was talking about this earlier with another coworker, how you can talk about real wages and tell us the economy is doing well, but inflation, it’s hard to overcome seeing double the price that eggs or milk or what have you used to be. And so that kind of psychological impact is pretty significant and I think that’s something we’re going to continue to see. We’ve talked about it, Hey, the savings rates come down for a couple of years really since it ballooned during the COVID stimulus era and people are stretching and stretching and stretching, but you can only stretch so far, and I don’t think you’re saying this either, that the end is near where you’re going to have to start selling things and no Christmas, all that stuff, but we’re getting closer to the end and I think the closer you are to the end of something, the more you try and make it last, the more you try and stretch it out. And that just means kind maybe a lackluster retail season.
John Norris (06:35):
And that’s what I’m thinking is likely going to happen. When you mentioned the savings rate fall and currently I believe they’re estimating at 4.6%. It has been lower than that throughout history. I mean I can go back to two and three numbers prior to 2008, but 4.6% is below the 30-year average and certainly below the 50-year average and what have you. And then we take a look at just overall consumer credit in the U.S. economy, sort of that credit card, personal line of credit, all that stuff. Boasts $5.1 trillion generally with an interest rate in excess of 20%. Then you add on mortgage or residential real estate debt. Believe it or not, that’s another 18 trillion. So you add those two up and that’s 23 trillion worth of consumer debt out there. At the same time, the savings rate is 4.6%.
(07:26):
I can make a real coherent argument, Sam, that there’s not a ton of fuel left in the tank for the U.S. consumer in aggregate. Those top decile homes are you’re still going to have a very merry Christmas. People will open up wonderful gifts from Smathers and Branson and others, and however it’s this sort of lower second quartile, third quartile and fourth quartile. Again, I’m not saying coal in the stocking or anything like that, but there’s not going to be really a huge improvement over what their children or what their loved ones had the last year.
Sam Clement (07:57):
And what I think will be interesting to see, like I already said, we’ve seen it already with the food industry, the fast food industry… Hey, we’re coming out with more deals and Black Friday has now become the Black Friday Week thing. So we’re starting to see them today really or really over the last couple days, probably starting Monday, but it is become the stretched out thing. I don’t frankly look at deals that much for Black Friday week, but I’ll be curious to see whether that trend that we’ve seen in the food industry, Hey, here’s some actual significant value, really is something that pulls consumers in for one more year. Like, Hey, let’s blow it out again. There’s actually some good deals. And so I don’t know if that’s the case yet. I’d frankly rather look at it after the fact and see where the data comes in, but I think that’s something we’re going to see these retailers that some of them maybe have struggled. You mentioned Target already. Hey, if they want solid numbers, it’s probably going to be some better in some areas.
John Norris (08:56):
Well, I think you’re right about that. I also think that a lot of retailers, and while inventory levels are much better than they were for some retailers and wholesalers are still higher than they would like, although interest rates are coming down, they’re still financing their inventories at much higher rates than they were several years ago. This is just a wonderful opportunity to empty out the shelves as much as possible. And if you want to empty out the shelves, the best way of doing it is to lower prices. And so I’m not going to sit there and tell you, Hey, you’re going to get a 75 inch television for $150 bucks, but I don’t think you’re going to see blowout prices or maybe just huge prices increases for a lot of things. And I really do think probably the week leading up into Christmas, if you can wait that long, if you’re that person that can sit there and wait that long to do your Christmas shopping, I think we’re probably going to see a lot of deals from some retailers that are kind of maybe freaking out a little bit that they saw a nice Black Friday weekend and then nothing for a couple of weeks or relatively nothing.
(09:52):
And then the deals are going to come out of the woodwork. And that’s because as we mentioned, the consumer is in debt but doesn’t have a lot of fuel. And one last thing I think we should touch on when we’re talking about holiday shopping and talking about the health of the US consumer is the labor markets. Because while the US consumer is running low on fuel, as long as we’re creating a bunch of new jobs, that kind of masks that a little bit because it’s…
Sam Clement (10:17):
Hard to be too bad.
John Norris (10:18):
Yeah, it’s hard to be too bad. We’re not out there, at least I’m not out there saying that the labor markets are going to fall apart or anything close to it. But it is important to note that four out of the last five months, the private sector has created less than 100,000 net new payroll jobs according to this establishment survey. When you take a look at the household survey, job growth has been relatively anemic all year long, so you kind of take a look at the labor market is a lot cooler than it was this time last year. So that fuel injection from new paychecks is not as strong as it was this time last year. So you’re not getting a whole bunch of stimulus or tailwinds from a vibrant labor market. Labor market is just slower, not collapsing, but not great. And so it’s just another kind of log to the fire that leads me to believe that if you’re expecting to take a look at retailers and say, what a great Christmas this is, some will have them, but a lot of them won’t.
Sam Clement (11:20):
Yeah, I think a lot of it’ll be those weeks like you mentioned after the Black Friday and Cyber Monday sales, once we get into that true, just these are the prices, this is what you need to buy for Christmas, getting the data from those, I think we will get a better glimpse of this and to whether this is a trend that’s going to continue. I mean this savings rate is moving down, whether it’s…
John Norris (11:42):
Trending down, it was up a little bit last month, but it’s trending down.
Sam Clement (11:45):
Yes, the trend is definitely lower, and that trend doesn’t typically just reverse for no reason.
John Norris (11:51):
I mean, you would have some reason for a diverse such as, oh, I don’t know, 5 trillion thrown at it by the treasury as we did in 2020, direct deposits from the federal government. I mean something like that, or a sudden explosion in what employers want to pay their employees and what the softer labor markets… historically, that type of stuff hasn’t happened, so you’re right, 4.6%, maybe it’ll tick up another month, but the trend line is heading down.
(12:18):
Or probably if we can stay in the mid fours, that’d be great, but historically we’ll go a little bit lower than that and that’s when you start getting to the levels where you’re going, alright, we need to maybe take a couple quarters, sit back, let the U.S. consumer rebuild the balance sheet to see the U.S. economy cool a little bit to see the unemployment rate tick up a little bit as more people entering the workforce try to make up for softer levels of income. And that’s what we’re probably staring not just the holiday shopping season, but the first two quarters of next year before we get to the back half of next year. All those rate cuts will probably come into play and a lot of other things, consumers going to be maybe the savings rate back up over 5.5% by the middle of next year, and then all of a sudden we end 2025 with a little bit more steam in the engine or a little bit more wind in the sails. But that’s kind of what the crystal ball is telling.
Sam Clement (13:15):
That’s the hope!
John Norris (13:15):
That’s the hope. That’s what the crystal ball was telling me.
(13:18):
The tea leaves, the magic eight ball, all that stuff is : don’t expect too much out of the holiday shopping season. I mean, that doesn’t mean you’re not going to get some good gifts, so just don’t look for, Hey, this is the best ever or what have you. Probably will not meet some rosy forecast. Shouldn’t be all doom and gloom sort of like the first two quarters of next year. Just don’t count on the U.S. consumer to kind of fuel the growth like we normally do. It’s just going to be real sluggish. Back half of next year, much better.
Sam Clement (13:49):
No, that kind of begs the question, is that kind of a good thing that we’re starting to hold retailers feet to the fire a little bit. And obviously, if things are going so well that people don’t care about the prices, you’re not probably going to get too many great deals.
John Norris (14:05):
Well, when that happens, when people don’t care about the prices, that’ll let you know that the dollar is weakening in value and people don’t care about it. When people all of a sudden start taking a look and go, man, I’m not spending money for that. Start actually caring and taking a look at the bill and what have you, that’s when inflation starts going down. We’re going to start seeing it. It’s not going to collapse. Still some areas, Hey, I’ve got four cars of car insurance that hurt this year. It sucks. Won’t tell you that you got two I know that sucks for you. I’ve got four. That sort of type thing. But all that stuff for the store, televisions, groceries, all that stuff, anything just sort of right in the middle, not super high end. I don’t see any pricing pressure there at all.
Sam Clement (14:49):
So it’s kind of like any good has to come with a little weakness. I mean, we’ve seen it with, that’s the whole inflation thing. That’s what the Fed has frankly tried to do. Whether they’ve been successful or not, is we have to slow things down a little bit. We have to make barring a little tighter so that people can’t, if you can borrow zero, why would I care the price?
Speaker 3 (15:11):
Yes.
Sam Clement (15:11):
Home price doesn’t matter. I’m borrowing at 0%, so you need this. That’s the friction with all this is there’s these pros and cons and they’re all two sides to the same coin a little bit. We need some people to be concerned maybe a little bit about where their budget’s going or I’m not as confident in my wage growth next year and these kinds of things.
John Norris (15:37):
I think that’s all present.
Sam Clement (15:38):
You don’t want them to lose their job. You don’t want them to get pay cuts. I mean these kinds of things, but just enough hesitation to where cool things down, you demand better value.
John Norris (15:50):
Well, one last thing and that I believe we’ve gone on a little bit too long about this here today. You mentioned two sides of the same coin. You have to have some slow times in order to appreciate the good times.
(16:03):
It’s kind like happiness and goodness. You have to have evil in order to know what good is. You have to have sadness to know what happiness is. That’s very philosophical, but it is true. In order to have rapid economic growth, you have to have some slowdown so people can repair their balance sheets so they can repair, I mean, build up their liquidity so they can be in a position where they can continue to borrow. And that’s just part of it. That’s why they call it an economic cycle, and I think in terms of the U.S. consumer, we’re probably closer to the end of this economic cycle than the beginning. That’s the easiest statement I’ve ever made in my life. That doesn’t mean it’s going to collapse, it just means holiday shopping season might not be as merry as people would like.
Sam Clement (16:45):
And we’ve said that. I mean, again, you kind of said it, that it’s not the toughest bet to make. I mean, we’ve been in a period of by and large, pretty strong economic growth, some pretty strong expansion and I tend to agree with you.
John Norris (17:00):
Alright, well guys, thank you all so much for listening. We always love to hear from you all. So if you have any comments or questions, please by all means, let us know. You can always drop us a line at Trading or you can leave us a review on the podcast outlet of your choice. As always, if you’re interested in reading more or hearing more of what we have to say or how we think, you can always send us an email to . I’ve already said that. Or you can go to oak worth.com, O-A-K-W-O-R-T H.com. I don’t know what’s wrong with me here today. Take a look underneath the Thought Leadership tab and find access to all kinds of exciting information, including links to previous Trading Perspectives podcast, links to previous editions of our blog slash newsletter Common Cents, as well as our quarterly analysis and Update magazine, macro and market, as well as nice pieces from our advisory services group headed up by Mac Frasier. They’re all in there, so by all means, take a look and find it. Alright, Sam, can you end this a little bit better than I just tried to? That’s all I got.
Sam Clement:
That’s all I got.
John Norris:
That’s all I’ve got today too. Y’all take care.