Quarterly Conversations – Third Quarter Consumer Health

Featuring: Shane

In this video, AGW Principal & Co-Founder P.J. Gardner, CFA®, CFP® discusses the Fed’s efforts to tame inflation and the risks of a recession. This conversation was recorded on August 7, 2023, and reflects information available at that time.

Audio Only


  • The strength of the consumer
  • The labor market
  • Commodity prices
  • The political climate

Full Transcript

So it’s interesting economic and finance principles hold true over time, over countries over industries. And again, it’s a little bit of a conundrum that the Fed is moving so aggressively, and yet, what would be the usual consequence has not yet happened: a recession and rising unemployment. And so why is that? While these principles hold true, on each occasion, there’s usually something that’s a little bit different, it is not different, and that the principles remain time-tested. But there’s always a unique variable.

I think this time, you’ve got to look to the consumer, and if you look further into the consumer, why is consumption so high, as Abby Joseph Cohen recently said, “All you got to do is look at hotels, airlines, restaurants, and the price of Taylor Swift tickets and you can clearly see the consumer is really strong.”
The San Francisco Fed recently published a paper on this, trying to get a sense of excess savings.

You’ve heard different bankers talk about that, whether it’s Jamie Dimon or others; they talk about the amount of excess savings that was accumulating during COVID, in part because people couldn’t go spend money. You’ll see two notable spikes in the rise of this excess consumption estimate when the checks came out for COVID.

What you’ve seen since then is that the same excess spending power has moved into the red. They’re burning through cash or certainly seem to be at a level that we have actually never seen. So what concerns us is, does the Fed reach that point where all of a sudden they get traction using their blunt instruments of money supply and increasing interest rates at the same time that the consumer finally runs out of excess purchasing power? That’s our primary concern.

Maybe they skirt by? Why? Look at the labor market. We’re at three and a half percent, and we’re at one of the lowest unemployment rates that we’ve seen; gosh, I don’t even think we saw three and a half in the 70s. You gotta go back into the 50s to get something lower than that. So, the labor market is incredibly tight, and it’s pushing upward pressure on wages.

For the first time, if you look at headline CPI, wages are actually outstripping inflation. So they’re actually getting a little bit of a net pay increase. Will that continue? I’m not so sure.

Inflation does look like it’s moving down. What’s helping is commodity prices. And so commodities have rolled over. What’s interesting is if you look at core inflation, which is the less volatile basket, excluding food and energy in the light, it’s still solidly above four actually, almost 5%. So, something tells us that the Fed is going to remain hawkish. And yes, the consumer is buying this time right now. But unless you see some radical bailout yet again, and who knows? We’ve seen some crazy things already happen and I think that there is going to be some interesting political pressure this time, because of what happened with Silicon Valley Bank and other banks.

We bailed out banks once again. Are you going to bail out Main Street along with that? So interesting to tell, but again, it looks like the money’s run out.

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