This Week’s Developments in the US Economy

The State of the Consumer Entering the Holiday Shopping Season

Reinforcing the base case for an extended pause in interest rates, this week’s cooler-than-expected CPI print and decelerating growth in consumer spending highlight trends that a soft landing may be more likely than not. Coinciding with these releases, earnings reports from major retailers such as Home Depot, Target, and Walmart provide color to consumer activity, which appears to be focusing more on value and essentials while moving away from more interest-rate sensitive, big-ticket purchases. Overall, consumer activity continues to show growth on a year-over-year basis, and retailers see signs of potential disinflationary pressures. This is likely in alignment with Fed members’ ideal trajectory in slowly reining in inflation while avoiding overtightening—at least with respect to consumer activity. In our view, the case for higher-for-longer has not changed meaningfully, and the case for near-term interest rate cuts is not yet in plain sight. 

Despite Headwinds Retail Sales Continue to Grow

US retail sales continue to grow, recording a 2.5% increase in October year-over-year. Growth remains in positive territory, with e-commerce, essentials, and dining continuing to experience demand. But the pullback in large-ticket categories such as furniture purchases and disinflationary prices in gas prices appear to be pulling growth below the previous cycle's average annualized growth rate of 3.9%. Our take is that consumer activity, while moderating in some areas, is not declining uniformly across categories and should not be misinterpreted as an economic slowdown.

Major US retailers reporting this week reinforce this view to a degree, as earnings calls underscored two continued consumption trends from the previous quarter. Home Depot, for instance, reported a 3.1% decrease in same-store sales year-over-year, highlighting the decline for items priced over $1,000. In addition, the downshift in value-oriented spending from both Target and Walmart’s earnings, which emphasized consumers prioritizing necessities over discretionary items. Notably, Walmart highlighted the potential to lower prices to induce consumer spending, which could potentially accelerate the decline in inflation data over the next several months.

Rising Consumer Debt is a Risk to the Outlook

While robust wage growth and savings have helped primarily propel the economy, we have also seen the role of credit grow in the meantime. To fund consumption, many have turned to credit to a greater degree than observed pre-pandemic. The Federal Reserve Bank of New York's recent report reveals a 1.3% increase in household debt in Q3 2023, a rise from 0.9% in Q1 and 0.1% in Q2. In particular, the credit card balance has continued to rise and in the most recent quarter it rose by 4.7%, reaching $1.08 trillion.

A potential caution light is the rising credit card delinquency rate for your adults. Despite observing a headline 90+ day delinquency rate below the previous cycle’s average, new 90+ day credit card delinquencies rose by 5.78% in Q3 and are concentrated for younger adults in the 18-29 and 30-39 age cohorts. In our view, this is a caution sign for consumption growth expectations going forward.

Potential Saving (Grace)

Providing a potential cushion for consumers, there may be more excess savings than previously estimated. Based on updates to household disposable income and spending, the Fed’s San Francisco Branch (“SF Fed”) revised their estimated amount of available excess household savings. The SF Fed previously estimated in August that there was less than $190 billion aggregate excess savings available, which they anticipated at the time would be expended by Q3 of this year. A potential saving grace, the SF Fed revised the aggregate upward with an estimated $430 billion aggregate excess savings were available as of September 2023. Further, the SF Fed estimated the savings drawdown to be slower with an average monthly estimate of $75 billion per month instead of $100 billion per month. With the amount of aggregate excess savings available and the rate at which households are drawing down, projections suggest that excess savings will now last through mid-2024. At a time when consumers are becoming more cost-conscious and focused on their spending, excess savings are likely to help prop up consumption over the next few quarters, reinforcing the base case for a soft landing.