I Will Gladly Pay You Tuesday…
Inflation, trade wars, a growing fiscal debt burden, and geopolitical conflicts are serious concerns that have impacted investors this year. However, in spite of all the hand-wringing about inflation and tariffs, consumers around the world have continued to spend throughout the first half of this year, driving global GDP growth. Since GDP growth is driven mostly by consumer spending, consumer actions and intentions certainly matter, although patterns of spending have shifted away from big ticket items and toward more service-related outlays. The pre-buying splurge on goods ahead of tariffs earlier in the year appears to have dissipated as well. While consumers are buying less homes and cars, they are also eating less Cheerios, granola bars and soup.
The top 10% of earners continue to propel the U.S. economy, though the mix of consumption is changing somewhat. Rather than purchase a new home that has become less affordable, a week on a cruise ship may garner your spending dollars. In fact, cruise ship operators recently reported strong bookings growth amid record pricing dynamics. Meanwhile, in-store and online purchases for 18- to 24-year-olds fell 13% year-over-year between January and April while spending by older groups was still on the rise. “Buy-now-pay-later” (BNPL) continues to gain in popularity, except it is now being used for DoorDash deliveries and everyday groceries that are paid off over time. Paying for a burrito over four installments is becoming more commonplace. However, delinquencies in the BNPL space have been rising to the point that overdue payments will now be reported to credit agencies. If you are delinquent on your big salad, better pay up!
That’s All I Can Stands…
While a number of recent economic data points are backward-looking, consumer confidence indicators have started to decline, which can be a warning sign regarding future spending trends. Consumer confidence weakened in June, erasing almost half of May’s sharp gains. The decline was broad-based, with consumers’ assessments of their present situation and expectations for the future both contributing. Buying plans for electronics were down while dining out remained high among spending intentions in services. Vacation intentions were unchanged overall in June, though more consumers planned to travel abroad and less domestically. If unemployment ticks up, then confidence will worsen further and could portend a slowing economy.
On the home front, US purchases of new homes fell in May by the most in almost three years as sales incentives fell short of alleviating affordability constraints. Sales of new single-family homes decreased 13.7% to a 623,000 annualized rate last month, a seven-month low. The latest results and earnings reports show homebuilders are struggling to maintain their order books amid mortgage rates stuck near 7%, higher materials costs due to tariffs and a slowing labor market. It does not help that the median sales price for a new home increased 3% from a year ago to $426,600.
Strong to the Finish
The European economy has continued on a growth path, with GDP expanding at a steady rate, employment reaching a record-high, unemployment and labor market slack remaining low, and job vacancies decreasing. Inflation has continued to decline in Europe, while economic sentiment has improved. Industrial production did decrease recently, interrupting a period of stability, though retail sales and services demand have climbed. In April, the EU unemployment rate held steady at 5.9% for the fifth consecutive month, reflecting a persistently stable labor market. In the world’s second largest economy, China’s Premier Li Qiang said yesterday that he was confident the country could maintain a “relatively rapid” growth rate as it transitions from a manufacturing-led model to a consumer-driven one. China’s economy showed steady improvement in Q2 after 5.4% growth in Q1, although slower growth is expected ahead due to the ongoing trade battles with the U.S.
Federal Reserve Chair Powell told lawmakers this week that recent economic data would have likely justified continuing to lower interest rates if not for concerns that higher tariffs might derail the central bank’s yearslong fight to defeat inflation. Powell said little to tee up a rate cut next month, but did not rule one out. It seems more likely that officials will wait until September to see if tariff-driven price increases are milder than expected before resuming rate cuts. Futures markets indicate only a 25% probability of a rate cut at the July Fed meeting, while the odds of a September rate cut have risen to 70%. Across the pond, the European Central Bank and Swiss National Bank have both been in interest rate easing mode recently. Meanwhile, U.S. equity markets are positive so far this year and near all-time highs. Against a tumultuous backdrop, the 10-year yield has fallen from 4.6% over the past month toward 4.3%. The Fed will continue to serve up spinach most likely through September in the hopes of keeping the economy on a strong, low-inflation path through these stormy seas. Chairman Powell’s term ends next May and he will likely be replaced, so winning the inflation battle as his legacy is most likely top of mind.
Derek Jeter turns 51 today while Singer Ariana Grande turns 32 and Aubrey Plaza turns 41.
Christopher Crooks, CFA®, CFP® 610-260-2219