Consumer Behavior Amid Economic Uncertainty | Episode 064 | 10-27-23

Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, discusses recent economic information, particularly focusing on inflation and consumer data. She mentions that the Fed's preferred inflation indicator, core PCE, rose on a month-over-month basis, in line with expectations. Consumer spending data is also highlighted, showing a 0.7% increase, exceeding personal income. She mentions the final reading on consumer confidence, which saw a dip in future expectations for the economy but a significant rise in one-year ahead inflation expectations. Megan also talks about how the Fed is likely to appreciate the PCE numbers showing some deceleration in inflation, but they might be concerned about the persistent consumer spending. Megan also points out that company earnings and data from discretionary items suggest softening demand. This could indicate challenges for the consumer sector in future quarters.

Hello, this is Megan Hornemann, the Chief Investment Officer for Verdin's Capital Advisors, coming to you today with our regular segment of Markets, with Megan talking some more about economic information that we received this morning, specifically on the inflation environment as well as the consumer. So the Fed's preferred inflation indicator, corepce this came out this morning. The Fed will welcome this report. It did rise on a month-over-month basis about three-tenths of a percent. That was higher than August, but it was in line with expectations. And when you look on a year-over-year basis, this CorePCE which excludes a lot of the volatile items like autos, gasoline and food this rose about 3.7 percent and that was a tenth down from last month. So the Fed will like this. It was basically in line with the expectations.

We also got, though, some really solid data on the consumer, and it still boggles me on how this consumer continues to spend. Consumer spending came in seven-tenths of a percent Aside from July of this month. That was the best we've seen since the beginning of this year in January, and spending actually exceeded personal income by a decent amount. So we're looking at the savings rate. That actually dipped down to a year-to-date low. When you look at the savings rate, it's 3.4 percent right now and that is still well below the historical average we've seen over the past 30 years, which is about 5.8 percent. Also, from the consumer standpoint, we got the final reading on confidence, and this for the month of September, and really no change there. We did see that the expectation component of this, the future expectations that look on the economy did dip down to about a five-month low. But the Fed's going to look at is the one-year ahead. Inflation expectations from the consumer actually jumped basically almost a full percentage point to 4.2 percent and that is the highest that we've seen in five months. So what are we taking all of this out of this report and what's the Fed going to take out of this? The Fed's going to like the PCE numbers. That's good that we're seeing some deceleration there, but they're not going to like the fact that the consumer just will not stop. This is something that the Fed's going to watch because, as we've said over and over again, it's very easy to reignite inflation.

Now, from the consumer standpoint, the data we're seeing doesn't really mesh with some of the things we're seeing from the actual companies. Let me just give you an idea of some companies that have been reporting earnings that are really truly discretionary items. So Whirlpool, which makes washers and dryers. They are back to the pre-COVID types of promotional environment. They're not seeing any demand, except for people that absolutely have to replace their appliances.

There's other things like Invisalign They've been reporting softening demand. Harley-davidson their sales are big down significantly. The Marine Products Corporation, which is personal boats these are down significantly. And then anybody looking for any discounts on Botox may find this comforting, because Abvy has said that their demand for Botox is actually declining. So when we take into consideration what companies are saying and what we see in the underlying data, as I mentioned, the personal savings rate significantly low right now. This doesn't bode well for the consumer in the future quarters. So we're still concerned about the fourth quarter. We think GDP was a pretty big increase in third quarter, but we just don't see that sustainable into the fourth quarter of this year. That's all we have today. If you have any questions or comments, please feel free to reach out to podcastvernscom. Thank you.