Things are expensive, and you probably didn’t need me to tell you. However, the incredible part is…the American consumer seems to be hanging on.
Interest rates are the highest they’ve been in more than 20 years. Credit card debt hit a record $1 trillion dollars. Car loan balances continue to increase. Not to mention, student loan repayments resume in October. Inflation came in at 3.2 percent year over year. Well below the 9 percent seen in June of 2022, but still above the (made-up) Fed target of 2 percent.1 Mortgage rates remain high (relative to the past decade) at just below 7 percent. Looking at these statistics only, you’d think things look gloomy for the US economy.
That couldn’t be further from the truth. All-told, this economy is bumping (like a house party). GDP increased 2.4 percent in the second quarter, while Atlanta’s GDPNow estimates a four-handle for next quarter’s GDP (four-handle refers to 4 percent growth estimate).2 Four percent growth is like… Electric Forest/Coachella Music Festival loud growth. Jobs came in lower than expected for July, but we’ve seen a number of job estimate blowouts over the past year where the economy added way more jobs than expected. International travel has grown tremendously, showing little signs of slowing any time soon.3
Consumer sentiment is increasing, with the University of Michigan’s Consumer Sentiment study showing an increase of 42 percent above the all-time historic low morale of June 2022. The gauge isn’t quite at the historical average of 86, but perhaps we’re getting there.
Taylor Swift and Beyonce continue to sell out concerts, with even the cheapest tickets for a Taylor Swift concert sitting at over $1,000 with the priciest tickets reaching prices above $15,000 (man, I’m glad I am not a Taylor fan—it’s just not my fancy). Swift’s tour is projected to rake in more than $1 billion, with Swift herself grossing $13 million per performance. That amount alone—$13 million—is equal to 130 years of work for an individual making $100,000 per year, and that’s just one night for Taylor. I can’t make this up. Clearly, people are spending and not just on the essentials.
Stocks are showing enthusiasm too, though mostly in the tech sector that was hard hit last year. The S&P 500 is up 16.39 percent this year, while the tech heavy Nasdaq increased 31.26 percent. I sure hope you’ve invested some money in either of those indexes in the past 7 months—if you didn’t you truly missed out.
The question though, is when does this all end? The Fed will most likely leave interest rates unchanged at the next meeting, yet it is clear both consumers and companies have gas left in the tank. Monetary policy works with a lag, meaning it takes time for consumers and companies to “face the music” of higher rates. However, a large number of consumers are insulated from interest rate increases thanks to locking in low interest rate mortgages and car payments before the run up in rates. Shelter costs are currently the strongest contributor to inflation. In fact, a recent Bank of America report found that renters (who do not have stable shelter/home costs) saw their spending decrease, while America’s homeowners continue to increase their spending. Homeowners’ continued spending could be due to the fact that homeowners are generally a more affluent group, but perhaps price increases are reaching renters.
What are my thoughts? Patience, we will know more by the New Year. While that seems far away, I think we need to see a couple things playout. First, we need to see how student loan payments impact consumers. If people’s student loans prove to be a large detriment, than we could see a noticeable decline in spending. In addition, the holiday season often gives us a read on how well the consumer is doing. Are they spending large amounts on Black Friday and around Christmas? Once we receive those numbers (typically in early January for Christmas spending) we’ll have a better read on if the music continues. But for right now, the economy is louder than a Beyonce concert.
Disclaimer: This is not professional and/or financial advice. This content is for informational purposes only. Before making any financial decisions you should do your own research, evaluate your financial situation, and/or consult a financial professional.
The 2 percent target is literally a number made up by the Fed. I really don’t understand why we can pick an arbitrary number. Especially when the number was below 2% for much of the 2010s and we didn’t panic.
3-handle, 4-handle, etc. is a cool (but not really) economist/Wall Street way to say we expect the first number to be 3 point something (3.xx%) or 4.xx%).
Domestic travel is not rebounding though, remaining depressed since the pandemic