“It’s all over but the shouting.” The expression’s first use in print was in 1842, by Welsh sportswriter Charles James Apperley when reporting a late score in a sporting event. As so it is with the election, but as I have said many times before, election outcomes have near-zero impact on our businesses, and life goes on.
Even before the election results were in earlier than expected, and with the possibility of an extremely tight race being reported, the consumer continued on unfazed by the possible outcomes.
Personal spending in September rose a half of one percent. While enterprise spending and the demand for AI is certainly a propulsive force for the economy, remember that consumer spending accounts for two-thirds of GDP. To be exact, it accounted for 67.9% in the third quarter. As I travel the country making presentations at industry conferences, I always point out America’s biggest industry by far: the American consumer pushing his or her shopping cart through Walmart.
Besides the headline data on spending from the Bureau of Economic Analysis, there are plenty of data points that economists like to explore to figure out where spending is going next. That includes a host of metrics on consumer credit. In examining data that included total credit card debt outstanding, delinquencies and the percentage of accounts that are past due, for most metrics, trends are in line with the pre-pandemic period.
This marks a return to economic normalcy that continues to encourage the sentiment of the typical consumer. But of all the data, it is the number of people paying off their full credit card balances that stood out; that number was 34.6% in the second quarter of 2024, the most recent quarter for which data was available, down from a peak of 35.7% in Q1 2021. Pre-pandemic levels were consistently below 32%.
The ability to pay off a credit card balance each month and avoid paying interest, especially at current levels, is a marker of financial freedom and stability, and it provides yet another piece of evidence that the consumer is not yet stretched to the limit on spending.
Double-Edged Sword. Of course, in this economic environment, spending is a double-edged sword. On the one hand, it’s supportive of economic growth. On the other, it can perpetuate inflation.
As we all look toward a policy of falling interest rates from the Fed, the only thing that could derail plans for lowering rates would be inflationary-inducing consumer spending that heats up demand, increasing prices and the attendant inflation along the way. As of right now, it appears core inflation may be accelerating, which may have the effect of derailing the Federal Reserve’s plans to cut interest rates deeply in the months ahead.
Surveys of consumers support their spending, although economists have found they are buying on promotion, trading down, and going to lower-priced stores, sending messages to businesses that their pricing power is limited. That message confirms the belief that we’re not seeing the kind of inflation we’ve seen in the past, given that as we get through the first quarter of next year, those numbers should come down.
The Reality. But the reality is that October inflation readings show little progress toward that goal, calling into question how deeply the Fed will cut interest rates in 2025. Based on the most recent CPI and other data, the Fed’s preferred gauge of inflation known as the core Personal Consumption Expenditures (PCE) index, rose 2.8% for the month of October.
That would mark a tick up from 2.7% in September and August. As a result, Fed watchers are showing less confidence that the central bank could cut rates in December following the warmer inflation data and a solid retail sales report that may show the economy is strong and doesn’t need rate cuts. So in contrast to my earlier reports, I think interest rate cuts will be slow coming in 2025 unless inflation is tamed further.