Markets with Megan

In the latest episode, we dive deep into the current state of consumer spending and its potential implications for the second quarter GDP. As the May retail sales report indicates a significant slowdown in consumer activity, this episode offers an analysis of how high prices and inflation have impacted various sectors, including furniture, building materials, and restaurants. These trends are critical as they could signal broader economic turbulence.

One of the most alarming findings from the May retail sales report is the decline in consumer spending. Consumer spending is a vital component of the GDP, making up the majority of it. The report showed weaker-than-expected numbers across different levels of retail sales, along with downward revisions to April's figures. This two-month trend of weak readings for consumer spending in the second quarter could weigh heavily on GDP estimates.

High prices and inflation are hitting several consumer sectors hard. The furniture sector, for instance, saw a notable drop, likely due to Memorial Day sales that didn’t meet expectations. Similarly, building materials and gasoline stations reported weak numbers, with gasoline prices being particularly soft. Restaurant spending also declined, highlighting the strain on discretionary spending. These developments underscore the broader challenges consumers face amid rising costs.

Another significant factor affecting consumers is service inflation. While wages and jobs are relatively stable, they are not keeping pace with the rise in service costs. This discrepancy is squeezing consumers, making it harder for them to maintain their standard of living. The increasing credit card debt adds another layer of complexity, creating a double whammy for consumers already grappling with high prices.

Despite these concerning trends, the Federal Reserve might not react drastically to this single report. However, they will be vigilant, especially given the recent dip in consumer confidence. The Fed's cautious approach suggests that while they are aware of the challenges, they are not yet ready to make any hasty decisions based on this report alone.

We've been talking about this for a long time everybody, the consumer and how. We were concerned that these high prices would eventually strain the consumer and we'd start to see some slowdown in spending. And we got that. Today it is Tuesday, June 18th, and this is your regular segment of Markets with Megan. We had the retail sales report for May and this was a soft report. Not only did all of the different levels that we look at retail sales come in a bit weaker than expected, but we also saw downward revisions to the prior month. So why does that matter? First of all, the last month was April's numbers, so that was the first read we got on retail sales for the second quarter and these are the numbers. Remember, the consumer makes up the majority of GDP, so now we've got two-week readings in a row for consumer spending for the second quarter. So this is going to weigh on the GDP estimates.

But let's break down what we saw. So when you look at where there was some spending declines, Furniture saw a pretty big drop and that was probably attributed to some Memorial Day sales that were out Building materials, gasoline stations we know that Gasoline prices have been weak in all of the reports and then we did see a decline when you look at restaurant spending. So these are some of the discretionary items that we look at. Now what does this mean for second quarter GDP? The three-month average annualized number now is about 1.9% for personal consumption and I'm looking at that true core number where you strip out all the noisy items like food, energy, building materials. If you look back at the past few quarters from personal consumption, first quarter was about 2% and then that was down from a high of about 3.8% in the first quarter of 2023. So the current consumer is slowing. This is going to weigh on growth for the remainder of the year.

The problems the consumer is having right now is that wages are OK, jobs are OK, but we're not keeping pace with the rise we're seeing in certain areas of inflation, like service inflation. So this is squeezing consumers. And then you combine that with very high credit card debt and this is problematic for the consumers problematic for the consumers. Now we think that the Fed isn't going to take too much into this one particular report, because GDP estimates for second quarter are still trending in the positive, are still looking to be positive, but the Fed will be keeping an eye on this and the fact that the consumer is starting to show signs of strain. This kind of goes along with the report we got last week on the consumer confidence, where we saw that deteriorate quite a bit. That's all we have today. Tomorrow, the 19th, is a holiday and it's a very light economic data calendar. So we'll be back on Thursday with some data on housing and then we will also be back next week when the calendar picks up. If you have any questions or comments, please feel free to reach out to podcast@verdence. com. Thank you.