The Declining Health of the American Consumer
The FOMC meeting concluded Wednesday afternoon. The Federal Reserve left monetary policy unchanged with any potential future rate cuts on hold until the central bank sees concrete signs that inflation is abating, something that has been rare in recent months. Chairman Powell did throw investors a bone in announcing a lower cap on monthly QT activities as the Fed slows the work off around its massive balance sheet.
Thursday provided a poor initial reading of Q1 productivity that came in lower than expected. This just reinforced the growing potential scenario of Stagflation settling in across the economy. Another negative trend that is emerging is the declining health of the American consumer. Investors have been given increasing signs of this deterioration over the past week.
Yum Brands (YUM) had a rare same-store sales decline when it reported Q1 results this week. The consensus was calling for a 1% gain, the company delivered a 3% fall. McDonald’s (MCD) CEO mentioned that the consumer was being more ‘discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending’ during its earnings conference call this week, which is one of the best ways I have heard to describe the economic environment most American households are facing right now.
Finally, the stock of Starbucks (SBUX) sold off over 15% on Thursday after the company posted a dismal quarterly earnings report that included a 3% decline in same store sales in the U.S and North America. If people are cutting back on coffee, it is a very good sign that economic growth is slowing down which we have also seen in the recent preliminary estimate of first quarter GDP growth.
It is little wonder then that the April Consumer Confidence reading just slipped to its lowest level since the summer of 2022, coinciding with the recent rebound in inflation.
Another worry for consumers has to be the deteriorating jobs market. The March JOLTs report showed job openings fell to their lowest levels in three years in March. The 'Quits' rate also declined to levels not seen since August 2020. Higher interest rates continue to plague the residential and commercial real estate sectors and job openings in construction plunged by some 182,000 to reflect those headwinds.
Meanwhile state, federal and local government were one of the few strengths in the jobs report, adding some 68,000 jobs. Not exactly a recipe for improved productivity.
With personal savings rates near historical lows and less than half of what they were prior to the pandemic, and credit card debt at record highs, the consumer is likely to be forced to pull back fuller in coming months. Especially among lower- and middle-income consumers that have not benefited nearly to the same extent from their more fortunate peers when it comes to the large amount of asset inflation that has swept across the nation over the past few years.
Given consumer spending is responsible for almost 70% of U.S. economic activity, it is hard to have a positive view on the economy given the deteriorating health of the American consumer.
At the time of publication, Bret Jensen had no position in the securities mentioned.