The consumer isn't tapped out (yet)
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Inflation is proving to be stickier than many anticipated, and the unflappable American consumer is a key reason why.
Why it matters: At the heart of the Federal Reserve's campaign to contain price pressures is voracious demand, driven by equally voracious consumers.
- In spite of omnipresent recession vibes, an impossibly strong jobs market and rising wages are encouraging people to keep their wallets open.
- It means that, at least for now, 2023 recession calls are being steadily revisited and pushed back.
The latest: January's eye-popping 3% surge in retail sales unsettled investors already reeling over stronger-than-expected price and labor data, and underscored how consumers aren't tapped out yet.
- One force multiplier: People are getting a second wind from lower energy costs. Just as pricey oil and gas acted as a stealth tax last year, the drop in prices at the pump (well below the 2022 high of $5 per gallon) is putting more money in wallets — which is clearly getting put to good use.
What they're saying: Bank of America data in January showed consumers splurging with credit and debit cards, still benefiting from elevated levels of disposable income.
- "The data suggests that while lower income consumers are pressured, they still have solid cash buffers and borrowing capacity," BofA analysts wrote.
Meanwhile, supply chain pressures that jammed up the global economy last year have all but evaporated. That normalization, plus the retreat in energy and food costs, is helping inflation to ease (even if high shelter costs aren't yet cooperating).
- Motive, a logistics technology firm that tracks a wide range of data, notes an 11% jump in truck utilization compared to January 2022, with diesel prices tumbling by 15% since November 2022.
- "A healthier supply chain and reduced transportation costs will continue to support this disinflationary trend," the group wrote.
Yes, but: DataTrek co-founder Nicholas Colas, citing U.S. Energy Information Agency data, noted this week that gas consumption is petering out, even as crude prices are lower than last year. It could be a sign that a slowdown is still in the offing.
- And Dave Donabedian, CIO of CIBC Private Wealth Management, tells Axios that "versus a year ago, retail sales are essentially flat after adjustment for inflation. The consumer is doing fine for now, but I wouldn’t say spending is 'taking off.'"
What we're watching: "We could avoid a recession — it's possible. But it is a big 'this time is different' forecast, and those are usually wrong," Donabedian added in an email.
This story has been corrected to reflect that Dave Donabedian is CIO of CIBC Private Wealth Management, not CIBC.
