Last night, I went to Winn-Dixie to get mouthwash and toothpaste. Nothing more. By the time I got to the checkout line, I had a 16-lb. frozen Butterball turkey, 4 boxes of Kraft Velveeta shells & cheese, 2 bags of Pepperidge Farm stuffing mix, 3-lbs. Hormel bacon, 2 Hillshire Farms smoked turkey sausages, 2 large packages of French’s crispy fried onions, 1 small bottle of Kikkoman soy sauce, 1-lb of ground chuck, 1 (32-oz.) bag of Ore-Ida crinkle cut French fries, 1 bottle of old-school Listerine, and a tube of Arm & Hammer toothpaste in my buggy.
No, I wasn’t hungry when I went to the store. Yes, just about everything in the place seemed to be on special. The turkey was 99¢/lb. The shells & cheese were BOGO (buy one get one free), as were the sausages, crispy fried onions and stuffing. The bacon was even better than a BOGO at $3.39/package. The soy sauce and ground chuck were also marked down. Interestingly, perhaps even laughingly, the only items which weren’t on special were the mouthwash and toothpaste.
All told, I ended up paying something like $90 for what would have ordinarily been around $150. That is pretty darn reasonable. In case anyone was wondering, I had previously bought the green beans and cream of mushroom soup for the rest of the casserole at Sam’s this past weekend.
I bore you with my trip to the grocery for a simple reason. If the Winn-Dixie on Montevallo Road in Birmingham, AL, is any indication of anything, inflation is, shall we say, under much better control than it was. In fact, as a consumer, I can happily say prices seem to have stalled at the store, with the possible exception of eggs and refrigerated milk.
Chances are you have already noticed this. Maybe you have seen the “value meals” popping up at restaurants all over the place. Perhaps there are more BOGOs at your local grocery. Have you seen the automobile financing rates that companies are advertising on the television? Some of them are even below where they were before the Fed started raising rates several years ago. The examples and anecdotes are virtually endless, at least in certain industries.
…and they don’t suggest consumer vibrancy, do they?
In truth, with the exception of high-end brands and merchandise, most things seem to be on some sort of sale. This isn’t terribly surprising. After all, as I have written in these pages numerous times, businesses compete on either price or product/service. Firms which don’t do either are “stuck in the middle,” and will have to make significant adjustments, normally to prices, when consumer consumption patterns change.
Put in plain English, when retailers start feeling concrete signs of consumer weaknesses, they start slashing prices. All the more so when they are financing their inventory at rates in excess of 7-8%. It is a proverbial no-brainer.
I suspect this is currently happening.
As I have told several larger groups over the past couple of weeks, it is difficult to determine what the U.S. consumer is going to be able to do for an encore in 2025. The official “savings rate” is currently 4.6%. That certainly isn’t an all-time low. However, the 50-year average is 7.4%. Further, non-mortgage consumer credit is at a historical high at roughly $5.1 trillion. When you tack on the $18 trillion in residential real estate debt, the U.S. consumer is awash in over $23 trillion in debt.
Make no bones about it. Wallets are stretched. However, a strong labor market has been an enormous tailwind. After all, you create new consumers when you create new jobs in the economy. Therefore, it is hard to imagine “personal consumption expenditures” falling through the floor when the BLS is telling us the Unemployment Rate is 4.1% AND the economy has created over 2 million payroll jobs over the last 12-months.
What if something happens to the labor market? What if job growth has stalled? What fuel will the U.S. consumer then have, in aggregate?
Great questions, and here is the low-hanging fruit best answer: the Unemployment Rate will likely tick up some at the start of next year. This will mostly be due to more people looking for work than employers taking a scythe to their workforces. The current “labor force participation rate” is a relatively paltry 62.6%. This is important, because if you aren’t looking for work, participating in the labor markets, the government doesn’t count you as unemployed.
Given the relatively stretched budgets that most Americans are facing, as I have established, it is highly likely that more people will attempt to enter the workforce to maintain their household purchasing power moving forward. This isn’t rocket science. Even so, the participation rate officially dipped in October to 62.564833% from 62.69474% in September. HAD it remained constant in October, the unemployment rate would have climbed to 4.34%, and would not have been the 4.14% the BLS announced.
Now, what would happen IF the participation rate were to increase to 63.0% in March 2025? The “civilian noninstitutional population” grew to 270,143,000 (basically the same growth rate as June to October 2024), and the economy created 297K new jobs (the difference between June and October 2024 in the most recent Household Data of the Employment Situation report)? What would the unemployment rate be then?
How does 4.93% strike you? Shoot, even a relatively slight increase to 62.8% would result in an increase in the rate to 4.63%.
Make no bones about it. In order for the unemployment rate to not go up next year, either more people will have to drop out of the workforce OR employment will have to significantly accelerate from here.
Since neither seem terribly likely, at least as I type, expect the number of officially unemployed to go up over the next 12-months. Again, this isn’t rocket science, and, also again, I will let either Janet or Jim hit me in the face with a pie if this doesn’t come to pass.
This will give the Federal Reserve greater latitude to cut the overnight rate more aggressively than the futures market currently anticipates. Right now, investors think the Fed has 3 more 25 basis point (0.25%) cuts left in this cycle. This would take the rate to 4.00%.
IF the year unfolds as I think it might, the Fed will have enough wiggle room for 2 additions 0.25% cuts, which would take the overnight rate to 3.50%.
As a result, I would set the over/under line at 3.75%, and likely take the under.
None of this portends economic Armageddon. Not at all. It simple means we have arrived at a point in the cycle where the U.S. consumer needs to take a short pause to repair its collective balance sheet, even if only by a little and only for a short period of time. Basically, the more we consume today, the less we should consume tomorrow. That sort of makes sense, doesn’t it?
It might not surprise you I was thinking about this stuff as I pulled away from the Winn-Dixie last night. It’s weird how an unexpectedly awesome trip to the grocery will get my mind churning on such things. That and patting myself on the back.
Of course.
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 and 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.