This Week’s Developments in the US Economy

All Eyes on Jackson Hole for What’s Next

At the start of the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, Fed Chair Powell’s opening remarks will be closely watched for a few key points. First, anchoring expectations about the FOMC’s first interest rate cut with the “vast majority” of members considering the upcoming September meeting as the appropriate point in time according to the minutes from the July FOMC meeting. Second, provide (potentially) market observers with a sense of what is to come: how far and how fast will future cuts occur, and what are FOMC members looking for to accelerate or decelerate the pace of cuts. Third, as suggested by this year’s theme, “Reassessing the Effectiveness and Transmission of Monetary Policy,” there appears to be some appetite to communicate what the FOMC has learned in trying to rein in the highest rate of inflation observed in several decades.

The challenge facing Chair Powell and FOMC members is how to navigate communicating the expected path forward given trends in the following areas:

• Consumer confidence in employment is weakening, with the labor market appearing softer than expected.
• The BLS preliminary annual revisions showing a downward adjustment of 818,000 jobs for the twelve months ending March 2024.
• Total annual employment growth revised down to 2.1 million from 2.9 million, though still higher than the previous cycle's average.
• The unemployment rate increasing to 4.3%, exceeding the Fed’s June SEP projection of 4.0% by year-end 2024.
• The Conference Board’s Leading Economic Index declining for over two years, driven by non-financial factors like new business orders and consumer expectations.
• Mixed results from recent consumer-focused earnings calls—spending on consumers goods appears to be resilient, but home improvement-related firms are experiencing sluggish results related to a slowdown in home sales throughout the US. 
• Consumers are prioritizing value and convenience, continuing to spend on essentials and online grocery services.

Despite inflationary pressures and tight lending standards, we see pockets of resilient consumer spending, which is crucial for sustained economic growth as it typically comprises about two-thirds of GDP. We anticipate that this is where the Fed is most likely concerned and could potentially see policy as being too restrictive should there emerge any indications of faltering consumer activity. A second topic that we believe is likely to emerge throughout the symposium is FOMC members’ perspectives on the ancillary effects of restrictive monetary policy and the health of both consumers and businesses. While this is not considered a “live meeting” in Fed parlance, all eyes are on Jackson Hole for what is next. 

Retailer Earning Calls & the Health of the Consumer
In past quarters, we have focused on earnings from Target, Walmart, and Home Depot as they represent a meaningful concentration of consumer spending in key sectors from a range of demographic characteristics. Each has recently released their second quarter fiscal earnings, which highlight key observations on the health of the consumer. 

Target, which experienced sluggish sales over the past several quarters as consumers shifted their focus from discretionary categories to essentials, saw improved sales this past fiscal quarter. In May, the retailer announced the price reduction of about 5,000 frequently purchased items to attract more customers—and the desired response provides some evidence that consumers are becoming more attuned to economic conditions. This strategy contributed to a 2% rise in comparable sales—the first increase in five quarters—largely driven by a surge in e-commerce from digital sales, curbside pickup, and home delivery. Yet despite this past quarter’s beat on expectations, Target remains cautious, projecting comparable sales growth for the full year at the lower end of the 0%-2% range previously estimated.

Like Target, Walmart's recent earnings report underscores the trend of consumers favoring value and shifting towards lower-priced retailers. However, it also suggests that consumer health may be stronger than anticipated as Walmart sees a stronger consumer than many peers and projects higher sales figures going forward. Like Target, the retailer observed higher spending on premium e-commerce services such as online order pickup and delivery as well as a rebound in discretionary item sales after an 11-quarter decline.

In contrast to Target and Walmart, Home Depot reported negative comparable sales for the seventh consecutive quarter, with consumer transactions dropping nearly 2%. The company anticipates further declines in the latter half of the year, now projecting a 3%-4% decrease in full-year comparable sales, a downward revision from the previously expected 1% drop. It is noteworthy that these results, however, not only reflect current consumer behavior and a shift away from big-ticket items but also highlight the state of the housing market, with slow home sales further contributing to the downturn. 
While overall retail spending has shown signs of softening since the first quarter of 2024, it remains robust. Consumer spending may, however, weaken going forward, influenced by consumer sentiments on the labor market. The July NY Fed survey highlights growing concerns: the percentage of workers expecting to change employers increased to 11.6%, while those fearing layoffs in the next four months reached a record high of 4.4%. These factors suggest that diminished confidence in the labor market may lead to more cautious consumer behavior moving forward.

Consumer Debt Levels & Lending Standards
Another potential focal point for the Fed is rising household debt levels. Consumer spending, which previously had been supported by pandemic savings, is now driven by revolving debt and other forms of credit. Total outstanding household debt has surged to $17.8 trillion, marking a 4% year-over-year increase. Among these forms of debt, credit card balances have grown the fastest in recent quarters, although their growth rate of 10.8% has recently been surpassed by the rise in home equity revolving loans. While the rise in serious delinquency rates is also a cause for concern, it is noteworthy that the current total delinquency balance levels remain below averages observed between 2014 and 2019.

As household debt levels rise, the latest Senior Loan Officer Opinion Survey (“SLOOS”) provides insight into shifts in broader lending practices. Overall, household lending standards remained stable in the second quarter of 2024, but credit card lending standards on balance tightened further amid rising balances and delinquencies. Business loan demand held steady, but lending conditions on balance tightened. While lending standards across most categories have generally tightened, there has been a slight decrease in the net share of banks reporting stricter standards compared to the first quarter of 2024, suggesting a potential, albeit modest, easing in lending conditions.

We believe that Chair Powell and FOMC members will unpack this weekend’s theme of “Reassessing the Effectiveness and Transmission of Monetary Policy” in juxtaposing the desired outcomes of restrictive monetary policy versus the lagged, long, and variable effects on the US economic engine, the consumer. While the base case is a slow-and-steady approach to rate cuts, we believe that the Fed will outline the beginnings of a new policy framework, which the Fed has stated previously would be revisited every five years. As the Fed previously revised its framework in the second half of 2020, this weekend appears to be a timely opportunity to identify some of the signposts going forward.