- Where are consumers spending less heading into the spring and summer months?
- Discover where people are spending their tax refunds. I never thought I’d see this…
- Do economists see a recession in the next 12 months?
Dear Reader,
Retail inventories have climbed back to a record high (see the blue line below), while auto inventories are still climbing back towards 2019 levels (see the orange line below).
The wholesale side of the equation doesn’t look any better with a steady rise in total inventory levels.
February wholesale inventories (blue) +0.2% m/m vs. -0.1% est. & -0.5% in prior month.
Retail inventories (orange) +0.8%, which are the strongest since August, vs. +0.2% est. & +0.1% prior.
When we put it all together, inventories still remain well above normal, as sales have slowed down and inventories continue to build up at the wholesale and retail level.
U.S. Spending Slowdown
We are also concerned over demand growth expectations heading into spring and summer based on the health of the consumer, according to credit backdrops and surveys.
The March Consumer Confidence Index asked some interesting questions regarding spending over the next six months, and it should come as no surprise that consumers plan to spend less on highly discretionary categories.
Some of these categories are normally purchased during the summer months, including personal lodging and amusement parks.
The above chart is a point of consumers for vacation season, and the level of spending we can expect for core “summer demand.”
It should come as no surprise, when people are adjusting their grocery store purchases because of price. It’s difficult to rationalize a vacation when you are adjusting what you buy at the grocery store. There are more and more people adjusting their food purchases driven by the underlying costs.
The Shocking Change In How People Are Spending Their Tax Refunds
There is also a clear change in the way people are spending their refunds. The focus has shifted to paying off debt or putting the cash back into savings. It’s a broader shift on how money is being consumed at the consumer level.
It used to be that people would see their refunds as “free money” and indulge in vacations, personal items, or entertainment. However, in today’s economic climate, that simply isn’t the case.
Another Round of Fed Rate Hikes
The most recent data also supports another round of Fed rate hikes following an increase in the PCE – especially on the core front. We have said from the very beginning that core inflation was going to be very difficult to combat and result in a very prolonged cycle of rate hikes without a pivot in 2023.
No matter how you break it down, you are seeing inflationary pressures “level off” and not fall off a cliff like many of the estimates predicted as far back as 2020.
The expectation that this was “Transitory” was always a lie or at least an incorrect view of stimulus. This is something we have been VERY consistent on over the last few years.
Here is an excerpt from the Cleveland Fed:
“Inflation measures that exclude outliers, such as median PCE, are better able to capture the underlying trend in inflation.
Monthly median PCE inflation was 0.4% in February, above the reading of 0.3% for headline and core PCE inflation.”
Do Economists See a Recession in the Next 12 Months?
This stickiness and pressure on core is going to keep the consumer on the sidelines, which is a problem as their expectations are already at very low levels- and levels that normally signify a recession.
It’s why there is no surprise to see economists increasing their estimates for a recession in the next 12 months.
The latest Bloomberg survey of economists (conducted after SVB and other closures), shows the probability of a recession in the next 12 months has risen to 65%, up from 60% in February.
