If I were in the Biden Administration, I would be pretty confused by the disconnect between the economic data and the general public’s perception of it. After all, the stock market has been rocking along nicely. The recent Gross Domestic Product (GDP) reports have been surprisingly strong. However, the hoi polloi seems decidedly unimpressed.
To that end, according to realclearpolitics.com, the President’s approval ratings remain stubbornly low, and the general perception is the country is ‘headed in the wrong direction.’ While polls are notorious for being inaccurate, they are directionally mostly so, in general.
For instance, if one poll says, say, Trump is leading Biden by 2% nationwide, it is best to take it with a lump of salt. That size lead is probably within the so-called margin of error. On the flipside, if one suggests 70% of the public thinks the economy is in rough shape, it is safe to say people aren’t as sanguine as the powers that be think they should be.
This week, the Bureau of Economic Analysis (BEA) reported the US economy (GDP) grew at a solid 3.2% annualized rate during the 4th Quarter of 2023. Personal Consumption, the largest variable in the GDP equation, increased by a very healthy 3.0% rate. All told, the report suggested economic activity was pretty robust at the end of last year.
Conversely, again this week, the same BEA announced ‘real’ personal spending actually decreased 0.1% during January. Trust me, negative signs in front of economic data are almost never a good thing. To top that off, the University of Michigan Consumer Sentiment Index (Michigan) closed the week lower than expectations and lower than the previous month.
To be sure, the Michigan reading of 76.9 was higher than it was several months ago, and one of the better ones over the last 24 months. Regardless, the index stood at 80.7 in December 2020. Further, the current observation is comfortably less than the historical (40-year) average of 86.7. If you don’t like four decades worth of data, the 20-year number (which includes a financial system meltdown and a global pandemic) is 81.1.
So what gives?
Consumer Spending Patterns
As I wrote about in my ‘cheesecake article’ a couple of weeks ago, we are probably seeing a slight shift in consumer spending patterns. This is largely due to actual prices aren’t going down, even if the inflation gauges are. After all, it is hard to be real happy when $100 worth of groceries fits comfortably in two of those whisper-thin plastic bags from the checkout line. Also, recent corporate earnings announcements have had a prevailing theme: expense containment.
Now, this can take many different forms. Company A might consider 5% expense growth, as opposed to the previous year’s 10%, to be parsimonious. Company B could have plans to rein in several years of free spending with a 5-10% reduction. Finally, Company C many start passing out pink slips to boost profitability.
Regardless of the individual company’s definitions or plans, the message to employees/associates is pretty clear. Time to start tightening the old belt, as it were. Further, it is time to start cranking it out a little bit more, after everyone is done complaining that is.
The thing is, when people start watching their nickels and dimes at the office, guess what? Whether intentional or not, they start doing so at the house as well. The subscriptions you signed up for during COVID and have forgotten about? You start remembering those. Perhaps you take your lunch a little more frequently. Cut the proverbial cable cord and switch to a streaming service like YouTube TV.
The list could be endless depending on your situation.
Still, there are some things we simply won’t do without, and I am not talking about rent, the mortgage, utilities, and all of that other inelastic stuff. There will be those goods and services for which we will find some way to keep using, regardless of our economic circumstances. Essentially, it is the very last economically elastic thing to go.
For some, it might be the hair or nail salon. Others couldn’t imagine living without having, for example, a steak once a week. There are plenty who would hold out until the bitter end before doing without wine, beer or booze. The morning trip to Starbucks might be hard to forego. Or it could be something as simple as the Blizzard from the DQ you get with your kids every Wednesday night.
Since everyone is different, there is no right or wrong answer.
During our podcast, Trading Perspectives, this week, I asked Sam Clement what would be the very last thing he would axe from his budget. Somewhat surprisingly, at least to me, he said it would be travel. If push came to shove, he would take 1 nice trip instead of 2 slightly lesser ones. Instead of going to Europe, he would visit someplace in the United States he hadn’t seen previously. That sort of thing.
As for me, I actually had to think about it for more than a second. What would be the last little luxury I would be willing to forego? Hmm.
There are so many possibilities, aren’t there? Also, my decision could change from day to day. I like really nice soap, borderline pretentious stuff, but I could make do with less, no sweat. I also really enjoy Tim Horton’s K-cups, so good, but there are plenty of reasonable alternatives. Steak? I am more than fine with chicken. Apple Music? That could be difficult, but I could probably do without it. Cheetos? Those things are inelastic.
Now, what about books? That could present a problem. You see, I love the whole ceremony of an actual, physical book. Holding it. Dog-earing pages. Burying my nose in it. Staying up after everyone else has gone to bed because I can’t put it down. Recommending a good one to someone else. Looking forward to it coming to the house or going to pick it up from the store. Or even throwing it across the room, assuming the situation calls for it and my wife is out of the house.
Then, there is the simple truth. If my financial situation ever became so desperate where I am cutting my favorite soap, coffee and music out of my budget, I will need a way to figuratively escape. To suspend reality for a little bit, and let my mind wander. Even if it is for only 15-20 minutes per day.
That is frustratingly pragmatic, isn’t it?
Now, what about you? What would be the last thing you would give up in a faltering economy? The last luxury, even if it isn’t what others might call luxurious? Trust me, it isn’t as easy to come up with an answer as it would seem.
Please don’t take any of this to suggest I think the U.S. consumer is going to fall apart this year. I don’t think people will be dining on ‘potted meat’ instead of their usual ribeye. The U.S. economy isn’t standing on the precipice, even if it seems our society might be.
Yes, some of the economic data has been weaker than we would like. However, little of it has been calamitous, and there have been enough ‘silver lining’ reports to keep the markets humming. The official Unemployment Rate is around 3.7%, and Personal Income is up. Where the rubber meets the road, things are decent. Yet, the polls suggest folks believe otherwise, and certain newsletters are asking their readers what they would be willing to give up in an economic Armageddon.
Yes, that has to be very frustrating for the Administration.
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.