Reports of the Consumer's Demise Are Mostly Exaggerated

DEWITT, Mich. - Aug. 22, 2022 - PRLog -- Last week brought a host of data shedding fresh light onto the state of the consumer. While recession worries have been stoked by high inflation, supply bottlenecks and Fed rate hikes, household finances have been a source of optimism. The economy is slowing, and plenty of challenges remain, but the outlook is not as bleak as headlines might suggest. And with personal consumption accounting for 70% of GDP, the broader economic path forward is in the hands of the consumer. Here are three things the latest data tell us about consumers' prospects:

1. Retail sales indicate the consumer is not going into hibernation.
• The July retail sales report showed that overall spending was flat with June; however, a look under the hood reveals a more encouraging trend. The headline figure was suppressed by a material decline in gas station sales, a welcome trend resulting from the pullback in oil prices. On a positive note, underlying retail sales, excluding auto and gasoline sales, rose by a healthy 0.7% month-over-month.  Online sales were up sharply, while restaurant sales also ticked higher, indicating a balance between goods and leisure spending. We already knew that price increases slowed in July versus June, which means the strong 0.7% jump in spending reflects an increase in nominal sales volumes. This tells us that consumers appear willing to redirect the benefits of lower food and gasoline costs toward other discretionary spending, as opposed to reducing overall spending.  This suggests household consumption growth can remain a positive force in supporting economic output.
2. Initial claims confirm the labor market is healthy, but likely to show some fatigue ahead.
• Initial jobless claims came in at 250,000 last week, a number that tells two stories. On one hand, this was a downtick from the prior week's reading, breaking the three-week uptrend in new claims. Moreover, this is still historically healthy, as 250,000 is lower than 91% of all weekly jobless claims readings over the last 42 years. On the other hand, initial jobless claims are 50% above the lows in March, reflecting some deterioration in employment conditions. It should not be lost, however, that March claims were an all-time low, so this increase comes off a historically healthy base.
3. Consumer Sentiment Has Plummeted, but Lower Inflation Should Improve Consumers' – and the Market's – Mood.
   • Consumer sentiment is depressed, reflecting the pain from high prices at the pump and grocery store, along with higher borrowing costs from rising interest rates.  However, historically low consumer confidence has not been accompanied by historically low consumer spending, which we'd attribute to a still-healthy employment environment, along with the abnormal and outsized impact of inflation on consumers' current mood.