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By

Rank Dawson, CFA, FDP

Consumer spending levels have slowed, and inflation adjusted spending is already in-line with prior recessionary periods.

We have been noting a deceleration in consumer spending (June 15, 2022; May 25, 2022) and the negative impact this has been having on economic activity (Q1 and Q2 GDP decelerated to start 2022).  Other sources have been noting that consumer spending is still positive and that this could be suggesting that the economy is...
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Consumer debt has been rising as savings and incomes declined, and credit conditions are starting to tighten alongside rising delinquency rates, which can be a sign that the economic cycle has more downside.

We have written about the slowdown in consumer related economic data multiple times, (May 25, 2022; June 15, 2022; April 6, 2022) driven by a deceleration in real earnings (combination of higher consumer prices and the expiration of fiscal support), leading to a decline in savings rates and an acceleration in consumer credit to try...
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Real GDP contracted for the second consecutive quarter in Q2 leading to a debate over whether or not the economy is in a recession. Historical analysis shows that mild recessions can still have a large impact on corporate profitability and the labor market.

The most recent U.S. real GDP release has created a debate over whether or not the U.S. economy is in a recession and the implications this has on future outcomes.  There have been similar periods that were considered shallow or technical recessions that still experienced sizeable negative outcomes for corporate profits which contributed to weaker...
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Discretionary spending is slowing while inventories are building and costs are increasing, causing margins to decline, which could lead to increased layoffs

Throughout the year, we have been noting that consumer incomes were likely going to slow as a result of the fiscal support from 2021 not being repeated in 2022, and more recently, price increases in areas like gasoline and food reducing purchasing power for discretionary items.  Last week, the retail team at research firm Hedgeye...
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The shelter component of the Consumer Price Index tends to track home prices, and housing related data suggest home prices are facing several headwinds.

The Consumer Price Index (CPI) made a new cycle high in May, increasing at 8.6%.  Shelter is the largest overall category in the CPI (32%) and Owners’ Equivalent Rent (OER) is the largest component of the shelter category (24%).  OER is an attempt to capture homeowners’ housing consumption by calculating what they think they could...
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Consumer spending plays a large role in the U.S. economy and current data suggests the health of the consumer is deteriorating, which is a negative headwind for the overall economy.

Consumer spending has been equal to 65-70% of U.S. GDP since the mid-1990s. Source: Macrobond. This means that the health of the consumer, and their ability to continue spending, has a large impact on the growth of the overall economy.  Many consumer related indicators are heading in a negative direction. Consumer incomes on a real...
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Labor market data is starting to show signs of weakening which often occurs towards the end of an economic cycle when the corporate sector has to readjust their cost structure to reflect the new economic environment.

Labor market data is often one of the last economic indicators to decline as companies often wait to determine if the environment requires that they reduce their costs.  This often involves reducing the number of people they employ.  There are early indicators of this forming, as well as a few other indicators, that we can...
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The comparison data and the market-based indicators suggest that the rate of change for inflation in the U.S. should stop accelerating in the coming months and start to decelerate into the end of the year.

Inflation has become a major focus, impacting economic activity, consumer data, and market prices.  While it is not possible to predict the exact level of future price growth, we can examine prior and current inflation data to determine the likelihood that the current growth rate is sustainable.  We can also look at market-based indicators to...
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Consumer spending has moved from a driver of economic growth in 2021 to a negative contributor in 2022, which has negative implications for consumer companies and overall economic growth.

Consumer spending accelerated at a record pace in 2021, aided by a sizeable increase in fiscal support (direct payments, enhanced and expanded unemployment, and deferred consumer debt payments).  That support has gone away in 2022, the acceleration in 2021 activity is now a headwind to 2022 growth comparisons, and the acceleration in prices is having...
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Interest rates have been increasing and high yield credit spreads have been widening, which is impacting the cost of capital and slowing down new issuance.

One of the ways that we track investor expectations for economic growth is by looking at the high yield or below investment grade market.  Issuers in that part of the credit market have fewer funding options than investment grade issuers and are sensitive to changes in investors willingness to provide new capital at affordable rates. ...
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