Is It Turning?
This morning, Friday June 14, the U.S. Consumer Sentiment Index was released and was at a seven-month low. The primary reason for the decline in the index is the impact that high prices are having on consumers and their finances. The Consumer Sentiment Index fell to 65.6 in June from 69.1[1]. As you peel away at the details of the index release, one sees that consumer expectations for inflation are 3.1% over the next five to ten years, which is a slight acceleration from an inflation expectation of 3.0% last month1. Further details in the report showed that assessment of personal financial position fell by 12 points, and consumers have the lowest opinion of current economic conditions since the end of 2022.
As the mood of the consumer darkens, we are also seeing a slight acceleration in unemployment as we now stand at 4.0% unemployment1. It has been several years since the U.S. experienced unemployment of greater than 4.0%. Over the last several months, economists had been commenting about how lower income workers were seeing the greater wage gains. However, continued price pressures have either dampened their moods or absorbed the wage gains experienced by this cohort.
Given that consumer spending represents about 70% of U.S. economic activity, this report does not paint a rosy picture for near term economic conditions. In a certain sense, the Fed is getting their desired outcome because inflation is showing signs of improving. Although, much of the research I have read over the last few days has indicated that the Fed is reticent to act too quickly to cut rates. Remember, this is the same crew that said inflation was “transitory” just a few years ago. One article I read attempted to make the point that the tight monetary policy has helped the Fed regain their credibility and they do not want to risk their reputation by being too early on cutting rates. I am not sure the Fed has actually repaired their reputation given that the current inflation was allowed to build while they waited for the transitory inflation to dissipate.
If inflation has dampened consumer moods, and spending and inflation are beginning to subside, we need to see how high unemployment rises before the Fed takes action. If inflation slides during the next three months, it increases the probability that the Fed starts cutting rates in order to defend the employment market. Given that the economy is more of an offensive lineman than running back, consumer sentiment will likely require several months of “proof” before we see consumer spending increase. I continue to believe that the Fed is trying to thread a very difficult needle, and there is a greater probability of breakage than a smooth landing and transition to the next growth phase.
The election season is now in full swing. We need to see what sentencing is handed down to Donald Trump and how this impacts the Republican strategy. At the same time, it is hard to say there is brimming enthusiasm for Joe Biden, so this election will prove to be close and also likely to contribute to market volatility.