Americans plan to spend more on holiday shopping this year than last year.
That is the conclusion of almost every consumer survey conducted in recent weeks. Below are some highlights (emphasis added):
We’ll have to wait and see whether consumers get through this year and actually spend more.
If they do, it would be consistent with the longstanding narrative of record consumer spending. Last Friday we learned that retail sales rose to a record $718.9 billion in October.
All this spending was supported by healthy household balance sheets and real income growth.
Certainly, households are not as good as they were earlier in the economic recovery – but they remain strong compared to history.
This is best reflected in the debt-to-income ratio, which remains at historically low levels even as total debt has risen.
“Although household balances continue to rise in nominal terms, income growth is outpacing debt burden,” wrote Donghoon Lee, economic research adviser at the New York Fed.
It’s a reminder to use headlines like “US Household Debt Rises to $17.94 Trillion: NY Fed” and “Credit Card Debt Reaches Record $1.17 Trillion” with caution, as they lack the context you need to avoid draws the wrong conclusions. Better headlines read like “Household debt has risen, but Americans are in a better position to pay it” and “NY Fed says household debt will rise in 3rd quarter as rising incomes lift debt burden enlighten.”
And in case you’re wondering, households still have a long way to go before they get the most out of their credit cards.
Yes, the number of delinquent debts has increased. It’s an economic warning sign to keep an eye on. But for now they can be characterized as normalizing.
“Total defaults increased slightly from the previous quarter, with 3.5% of outstanding debt in some stage of default,” New York Fed researchers noted. This is significantly lower than the level of the fourth quarter of 2019.
It is also notable that wage growth has exceeded inflation for 18 months.
“This is how most Americans will ultimately be able to get ahead,” wrote Heather Long of The Washington Post. “Prices will not fall, but wages will rise enough to offset the higher prices.”
We are also in a 46-month period of net job creation in America. If more people have a job, more people have money to spend.
With a new political party entering the White House next year, we can expect a sea change in consumer confidence.
But as we’ve learned in recent years, people won’t put their lives on hold just because sentiment is bad. If they have money, they will spend it.
There were a few notable data points and macroeconomic developments from the past week to keep in mind:
Shopping soars to a new record level. Retail sales rose 0.4% in October to a record $718.9 billion.
The strength was broad, with growth in electronics, autos and parts, restaurants and bars, building materials and online shopping.
Card spending data is holding up. From JPMorgan: “As of November 8, 2024, our Chase Consumer Card spending data (unadjusted) was 0.8% higher than the same day last year. Based on Chase Consumer Card data through November 8, 2024, our estimate of the U.S. Census November retail sales control measure is m/m 0.35%.”
Unemployment claims tick lower. Initial jobless claims fell to 217,000 in the week ending Nov. 9, down from 221,000 the week before. This measure is still at a level historically associated with economic growth.
Inflation remains cool. The consumer price index (CPI) was 2.6% higher in October than a year ago, compared to 2.4% in September. This remains near the lows seen in February 2021. Adjusted for food and energy prices, the core CPI rose 3.3%, unchanged from the previous month’s level.
On a monthly basis, the CPI increased by 0.2%. The core CPI rose 0.3%.
Comparing the six-month trend in the monthly figures on an annual basis – a reflection of the short-term trend in prices – the core CPI rose by 2.6%.
Inflation expectations remain cool. From the New York Fed’s October Survey of Consumer Expectations: “Average inflation expectations fell in October at all three horizons. One-year inflation expectations fell 0.1 percentage point to 2.9%, three-year inflation expectations fell 0.2 percentage point to 2.5%, and five-year inflation expectations fell 0.1 percentage point to 2.8 %.”
However, the introduction of tariffs as proposed by newly elected President Donald Trump would be inflationary. To learn more, read: Wall Street Agrees: Tariffs Are Bad
Gas prices are ticking lower. From AAA: “The national average for a gallon of gas is now less than a dime away from dipping below $3 for the first time since May 2021. But the possible formation of another hurricane in the Gulf of Mexico could slow or even be temporary. to reverse the decline in pump prices. Since last week, the national average has fallen two cents to $3.08.”
Mortgage interest rates are going lower. According to Freddie Mac, the average 30-year mortgage rate fell to 6.78%, down from 6.79% last week. From Freddie Mac: “After a six-week increase, interest rates have stabilized, but overall affordability remains an issue for potential homebuyers. The latest Freddie Mac research shows that mortgage payments compared to rents for the same homes are higher than they have been for most of the past thirty years.”
There are 147 million homes in the US, of which 86.6 million are owner-occupied and 34 million are mortgage-free. Of those who have mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates rose from their 2021 lows. All of which is to say: Most homeowners aren’t particularly sensitive for movements in house prices or mortgage interest rates.
Importantly, the more tangible ‘hard’ components of the index are holding up much better than the more sentiment-oriented ‘soft’ components.
Industrial activity is ticking lower. Industrial production activity fell by 0.3% in October compared to the previous month. Industrial production fell by 0.5%. From the Federal Reserve: “A strike at a major civilian aircraft manufacturer held back total IP growth by an estimated 0.3 percentage point in September and 0.2 percentage point in October. Hurricane Milton and the lingering effects of Hurricane Helene reduced IP growth by 0.1 percentage points in October.”
These are the things that professionals worry about. According to BofA’s November Global Fund Manager Survey: “On tail risks… 32% of FMS investors see higher inflation as the biggest ‘tail risk’ in November (vs. 26% in October). Concerns about geopolitical conflict came second this month at 21% (up from 33% last month).
Offices remain relatively empty. From Kastle Systems: “Tuesday office occupancy fell more than five full points from the previous week to 57% as many employees headed to the polls on Election Day. The occupancy rate also fell on Wednesday compared to the previous week, falling 3.6 points to 57.8%. Washington, D.C. saw the biggest drop, with peak occupancy day falling more than nine points to 50% on Thursday. The average low was 32.6% on Friday, six-tenths of a point lower than last week.”
Short-term GDP growth estimates remain positive. According to the Atlanta Fed’s GDPNow model, real GDP growth will rise 2.5% in the fourth quarter.
Everything at a glance
The long-term outlook for the stock market remains favorable, supported by expectations for years of earnings growth. And profits are the main driver of stock prices.
The demand for goods and services is positive and the economy continues to grow. At the same time, economic growth has normalized from much warmer levels earlier in the cycle. The economy is less “rolled up” today as major tailwinds, such as excess job openings, have faded.
To be clear, the economy remains very healthy, supported by strong consumer and corporate balance sheets. Job creation remains positive. And the Federal Reserve – after solving the inflation crisis – has shifted its focus to supporting the labor market.
We are in a strange period as the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and is at record levels. From an investor’s perspective, what matters is that the hard economic figures continue to hold up.
Analysts expect that the US stock market could outperform the US economy, largely due to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This has been accompanied by strategic layoffs and investments in new equipment, including hardware powered by AI. These moves result in positive operating leverage, meaning that modest revenue growth – in the cooling economy – translates into robust earnings growth.
Of course, this does not mean that we should become complacent. There will always be risks to worry about – such as political uncertainty in the US, geopolitical unrest, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks could flare up and cause short-term market volatility.
There is also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect when building wealth in the markets. Always keep your seat belts fastened at the fair.
For now, there is no reason to believe that there will be a challenge that the economy and markets will not be able to overcome in the long term. The long game remains unbeaten, and it’s a streak that long-term investors can expect to continue.
A version of this story first appeared on TKer.co
