Consumer Engine Still Strong

Last week, the Bureau of Economic Analysis released its Consumer Spending report for July, and the result is the consumer engine is strong and building momentum. For the month of July, consumer spending increased year over year (YoY) by 0.8% and above the expected 0.7% for the month. July was the largest YoY monthly increase since January and the seventh consecutive monthly increase.

In 2022, consumers seemed to be hot or cold with their spending compared to the prior year, 2021, with several monthly increases larger than most monthly increases in 2023. However, going into the 2022 holiday season, consumers got very miserly and actually spent less during the 2022 holiday season than the year before. This year, consumer spending has been more consistent and has steadily increased from March’s slowest year-over-year increase. It is an encouragement to the state of the economy that consumer spending remains strong after eleven consecutive rate hikes by the Federal Reserve. 

For the past year, the Federal Reserve has been aggressively raising interest rates not seen since former Fed Chairman Paul Volcker’s 1979 – 1981 rate hike campaign. Both Fed Chairman’s raised interest rates for the same reason to slow inflation, and both were successful. However, Paul Volcker had a much more challenging situation of a downward spiraling economy of double-digit rising inflation and unemployment while sentiment was at near lows for both business owners and consumers. Jerome Powell and the Federal Open Market Committee (FOMC) have a stronger economy to work with that has been mildly impacted by rising interests. Last year, Jerome Powell and the committee indicated their confidence in the U.S. economy, whose remarks seemed to fall on deaf ears or, worse, denial as evidenced by Gregg Becker, former Silicon Valley Bank President.  

July’s consumer spending report is an affirmation of the bandwidth reference by Jerome Powell. As we have indicated in previous Weekly Briefs, consumer spending represents 66% of the US GDP, and economic strength is dependent on how much consumers are willing to spend. Now, after eleven consecutive federal funds discount rate increases from 0.25% to 5.25%, consumers are not only spending a greater amount than before the Federal Reserve began its rate hike campaign. Admittedly, some of the increase in spending is due to inflation.

Speaking of inflation, the Consumer Price Index (CPI) and a focus of the Federal Reserve is declining from 2022 near double-digit annualized increases. The Bureau of Labor Statistics reported for July,

“The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in July on a seasonally adjusted basis, the same increase as in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment.”

It appears the Fed rate increase campaign has slowed the CPI annual increases while not driving the economy into a recession, as many predicted in 2022. The Fed’s other objective with their rate hike campaign is to slow wage growth that accelerated due to a shortage of eligible workers. The Fed’s objective is to have unemployment over 4% from last year’s low of 3.5% to increase the labor pool and balance the ratio of job openings to eligible workers. CNBC reported yesterday that...

“The unemployment rate jumped from 3.5% last month to 3.8%, the highest since February 2022. Average hourly earnings increased 4.3% year on year, below the forecast of 4.4%. Combined with the downwardly revised figures for June and July, those are clear signs the U.S. jobs market is slowing.”

WHAT DOES IT MEAN TO ME?

Despite the growing dissent on the health of the U.S. economy, the key benchmarks of consumer spending, unemployment, and inflation appear to be within the standard ranges for a healthy economy. The market appears to be accepting another Fed rate increase during the next FOMC meeting on September 19 -20. If the Fed does increase its discount rate, it may be by 0.25% as they have the last four sessions, and analysts are projecting it may be the last rate increase for 2023.

The major stock indices had their first monthly decline in August since the rally started in October 2022. The pause was mild, with the indices reaching the lowest level on August 17 of -3.24% (DJIA) to -6.77% (NASDAQ). By August 31, the indices recovered about 50% of the decline but still ended the month in the red.

The major indices started the first day of trading after the Labor Day holiday slightly in the red. The S&P 500 remains above its 20 Day Moving Average (DMA), 50 DMA, and 200 DMA.

This is also true for the tech-heavy NASDAQ index.

We maintain our favorable view of the US economy and stock market.  Give us a call if you have any questions about this Weekly Brief or about your personal financial planning.  We welcome the opportunity to assist you and your family in achieving your goals.