The unhappiness of American consumers despite rapid job and economic growth in the past few years is a hotly debated topic. Is it inflation? High borrowing costs for homes and automobiles? Crowded airports and packed airplanes?
For better or worse, unmistakable signs of an economic slowdown will now give us the opportunity to test how consumers feel in a different environment. For the time being, there are reasons to believe consumers will welcome a slower-growth environment and some of the benefits that come with it. In Goldilocks parlance, perhaps the economy in 2022 and most of 2023 was too hot and 2024 will be “just right.”
The slowdown is most prominent at the level of gross domestic product: Trackers such as the Federal Reserve Bank of Atlanta’s have real GDP expanding at about a 2% annualized pace in the fourth quarter, slowing from 5.2% in the previous three months. Retail sales in October were sluggish and homebuilder confidence slumped in response to mortgage rates briefly hitting 8%. It’s reasonable to argue that the economy remains resilient, but it’s getting harder to find signs of overheating.
The flip side of that story has been cooler inflation that’s showing up in a tangible way for consumers. Gasoline prices fell every day for two consecutive months through Tuesday. New and used vehicle prices have declined for five consecutive months. Thanksgiving dinner was cheaper this year than in 2022.
There’s finally reason to believe that interest rates too have peaked, and consumers should be looking at cheaper borrowing costs in the future. Markets are pricing a roughly 40% chance of an interest rate cut from the Fed by March and expect the policy benchmark to be about a percentage point lower by year end. That’s helped drive 10-year Treasury yields down by more than 70 basis points since peaking near 5% in October; with the 30-year mortgage rate seeing a similar decline to 7.30% on Tuesday, the lowest level in more than two months.
And those rate-cut odds no longer seem theoretical. Fed Governor Christopher Waller, an influential voice on the direction of monetary policy, said on Tuesday that if the lower inflation readings we’ve been getting continue for three to five months, it would be a reason to start lowering interest rates. That opens the door to a cut as soon as March.
With some amount of autos and shelter disinflation still in the pipeline and the labor market cooler than it’s been since inflation became an issue, there’s every reason to think we’ll continue to see price pressures subside.
So even though the pace of economic growth appears to be slower heading into December than it was in the third quarter, it shouldn’t be a surprise that consumer confidence rose this month for the first time in four months. Consumers want to see lower gas prices, inflation, and interest rates more than they want to see strong growth at the moment.
That dynamic is interesting as we look ahead to 2024. With most of the pent-up hiring demand from the pandemic recovery behind us, we might see decent job growth next year, but we’re unlikely to see the kind of blockbuster gains we’ve gotten over the past three years. Balancing that will be moderating price pressures, easier borrowing costs and better access to credit than we’ve seen this year.
Of course, it’s a question of degrees — it’s unlikely that consumers would welcome lower prices if it meant significant job losses. For now, markets have a reasonable amount of confidence that the economy and labor market will continue to hold up with the S&P 500 not far from its all-time highs. Arguably, most downside risks to the economy stem from higher interest rates, which means the Fed is in a good position to prevent a recession.
So-so economic growth more in line with the pace we had in the 2010s might seem like a letdown to macroeconomists who have been wowed by the millions of jobs created over the past few years, but it could end up being just the relief that consumers have been waiting for.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our most recent white papers.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Conor Sen
