Ah, the economy. Just when you think you’ve got your footing, another gust of wind sends you scrambling. Despite a few positive signs, our beloved economy remains fraught with challenges. Unemployment rates are climbing, interest rates are sky-high, and consumers are spending cautiously. But hey, let’s dive into the details and figure out what’s really going on.
But hey, let’s dive into the nitty-gritty details and figure out what’s really going on.
KEYPOINTS:
- Consumer confidence is not looking good, especially for the lower end. High inflation rates, high interest rates, high unemployment claims giving a huge blow
- But! Foot traffic is proving otherwise. Just shows that yes, customers are still spending, just more wisely.
- Unemployment is rising in service sectors, but still doing good in tech sectors. This means that people are looking for more stable, higher paying jobs.
- Stay at home bubble burst – industries that boomed during the pandemic is now declining.
Consumer Confidence: Dreary as Ever
Let’s face it, consumer confidence is as cheerful as a cat in a bathtub. High inflation rates, soaring interest rates, and a steady stream of unemployment claims have left lower-end consumers feeling the pinch. But wait, foot traffic tells a different story. It seems like people are still out and about, spending their money—just more wisely. The pandemic gave everyone a crash course in smart shopping. Consumers are spending, just more, (if not, extremely) cautiously.
This behaviour is well reflected in the data of real retail sales. And, what does it seem to show? It’s as flat as a pancake. Core retail sales, excluding autos, have been stuck in neutral for seven months. This stagnation is now spilling over to restaurant sales, indicating broader consumer weakness. When both retail and restaurant sales start to falter, it’s a sign that people are tightening their belts—perhaps literally, thanks to those post-pandemic health kicks.
Businesses and policymakers are walking a tightrope, trying to sustain industrial production without robust consumer spending. High prices are deterring purchases, and any price cuts to boost sales might shrink profit margins unless costs are slashed simultaneously
💡 Why this cautious spending, you’re asking? High prices from previous inflation surges, economic uncertainty, and a shift in spending towards experiences and services rather than goods. Add rising consumer interest payments and depleted savings, and you’ve got a recipe for frugality.
May’s Industrial Snapshot
With all that being said, the month of May saw a jump in industrial production (+0.9% month-over-month), driven by manufacturing, utilities, and mining. With high-tech production being a mixed bag, and robust production buoyed by fiscal policies, consumer demand, however, remains a wild card.
Industrial production saw a surprising boost in May with a +0.9% increase, thanks to the manufacturing, utilities, and mining sectors. It’s like watching an underdog team make a comeback, but let’s not pop the champagne just yet. High-tech production is giving mixed signals, and while defense production is strong due to government spending, consumer demand is acting like a fickle friend.
Vehicle production is up, but overall demand hasn’t bounced back to pre-COVID levels, leaving lots of shiny new cars gathering dust. With high borrowing costs and consumers pinching pennies, this uptick might only be temporary.
Rising interest payments and depleted savings mean people are less likely to spend, especially on large purchases, yeap, we’re talking about cars and houses, which is crucial for keeping the economy afloat. Weak retail sales show that high prices and economic uncertainty are making consumers tighten their belts. It’s a tightrope walk, and one slip could send us back to square one.
The housing market’s “double dip” is now affecting jobs in residential construction, causing a significant slowdown in the sector. Just when we thought the market was stabilizing, it’s taken another nosedive. This second round of decline is hitting construction workers hard, leading to job losses and fewer new projects breaking ground. Heck, even non-residential construction industries are feeling the pinch. Commercial buildings, office spaces, and infrastructure projects are all slowing down as businesses cut back on spending and delay expansions. The ripple effects are clear: fewer jobs, slower economic growth, and a construction sector that’s struggling to keep its head above water. It’s a tough time for the industry, with uncertainty hanging over future projects like a dark cloud.
💡 High borrowing costs and financially stretched consumers suggest the uptick of large purchases, such as cars, may not last. We’re thinking there might be a slight recession some time soon, but it’s not doomsday, or not any time soon at the very least. You know what they say, sometimes you need to fall to get back stronger! Maybe this is just what the market needs, a fresh reset.
Questionable Employment and Labor Market
If you’re thinking what we’re thinking, yeap, all this weakening in spending is all due to a weak job market, simple math. Unemployment and initial claims are up, while prices are still high, and excess savings are gone. So it’s no wonder that consumers are keeping an extra eye on opening their coin purse! Foot traffic may be strong, but the actual spending per visit is lower. When dining out, consumers are opting for cheaper menu items or, simply dining out less frequently, impacting overall revenue and this eventually leads to hiring decisions.
When retail and restaurant sales weaken, it’s often a sign that people are being cautious with their money, possibly due to economic uncertainty or financial strain. And due to this, employment has hit its weakest point in 16 months. But this decline is primarily seen in the services sector. Jobs in restaurants, retail stores, and other service-oriented businesses are the main victims.
However, it’s not all doom and gloom; sectors like technology and manufacturing are still holding steady, providing a glimmer of hope. People seem to be seeking out more stable, higher-paying jobs, which bodes well for the economy in the long run. As the service sector contracts, these more resilient industries could pave the way for a stronger, more balanced economic recovery.
💡 Life goes on. No job? That debt still needs to be paid, which means, unemployment won’t stay high for long. People are looking for better paying jobs to adapt in this high maintenance society. With glue like inflation, interest rates competing with the Empire State building, and the struggle to even put food on the table? Yeap, exactly why we’re thinking the analysts have it right this time. Regardless of this drop, the next half of the year is full of optimism. People will have better jobs, which means it would be a better outlook for the economy.
Death to the Couch Potato Era
Now, it has been almost 2 years since life has slowly, but surely creeped back in to whatever was deemed normal pre pandemic. In other words, the stay-at-home economic boom is fading. The bubble has popped! Consumers are shifting their spending back to travel, dining out, and other pre-pandemic activities. This shift is reshaping spending patterns, affecting businesses that thrived during the pandemic and forcing them to adapt to the new normal.
For example, Signet, known for its jewelry brands like Kay and Zales, benefited from increased disposable income and home-bound consumers treating themselves. The current decline suggests a reduction in discretionary spending on luxury items.
RH (Restoration Hardware) specializes in upscale home furnishings. The downturn indicates that the hype in home remodeling and furniture upgrades is tapering off as consumers shift focus away from home-centric spending.
Brown-Forman, a major player in the alcohol industry with brands like Jack Daniel’s is seeing a significant drop in earnings which could be attributed to a decrease in at-home alcohol consumption as people return to bars and restaurants.
With all this happening, it could also mean that inflation will start to take a halt, which is good news for the Fed—they can avoid further aggressive rate hikes, giving them more flexibility to balance economic growth and stability.
But, there’s also the risk of deflation, where prices start to fall, hurting businesses reliant on higher prices. Even fast-food chains like McDonald’s are starting to offer cheaper meal deals to lure customers back. People were ordering in like crazy at the time of the pandemic. Now? With everyone eating healthily, and more economically, things will start to take a different turn. To add salt to the wound, let’s not even get started on the Middle East conflict, which could throw another wrench into the works.
💡 This is naturally not a bad thing, because consumers are shifting their preference back to where its normal. It only means no more alcohol at home because they are visiting pubs and bars, less home improvement projects because they no longer work at home but are back in the office. It only goes to show that consumer preference will change over time according to circumstances. People are moving on from the pandemic and moving on, living their lives as best as they could. That itself is a huge hurrah!
Volatile Economy: Same Old, Same Old
So, where does that leave us? One thing for sure, the economy is like a delicate balancing act—improving, but still, a rather bit shaky. Businesses must navigate these choppy waters carefully, navigating growth with sustainability, and adapting to changing consumer behaviors and economic conditions. Despite some hopeful indicators, the overall stability remains uncertain due to the triple threat of high interest rates, weak employment, and cautious consumer spending.
But fear not! Six-month ahead expectations have jumped to their highest in two years. However, rising consumer interest payments and exhausted savings suggest that consumers might be cautious about increasing their spending, which is critical for sustaining economic growth. The weak retail sales figures indicate that consumers are feeling the pinch of high prices and economic uncertainty, despite the optimistic future expectations.
In the end, that’s just how the economy is—volatile, unpredictable, and requiring constant vigilance and adaptability from businesses and consumers alike. So, hang on tight, keep your eyes on the horizon, and remember: adaptability is the key to survival!
