Speaker 1: This is Bloomberg Opinion Deeper Conversations on the week's most
Speaker 1: significant developments. I'm Vonnie Quinn. Consumers in the US have
Speaker 1: been resilient faced with persistently high inflation. This much we
Speaker 1: know that behavior, though, is showing signs of shifting. I
Speaker 1: spoke with Bloomberg Opinion columnist Jonathan Levin, who has been
Speaker 1: examining the data. So, Jonathan, what consumers say they'll do
Speaker 1: and what they actually do are often very different. That's
Speaker 1: an established behavior, but now it seems like we're seeing
Speaker 1: what they're doing shift. You've been examining the data, what
Speaker 1: is it telling you? Yeah, more or less. I looked
Speaker 1: at a fascinating series that Morning Console does, and every
Speaker 1: month they interview hundred US adults, and one of the
Speaker 1: things that they've been asking them for the past six
Speaker 1: months is like, when you go to the store, do
Speaker 1: you experience sticker shock? And when people say you say, yes,
Speaker 1: I'm experiencing sticker shock, Morning Console then ask them, Okay,
Speaker 1: so how do you deal with sticker shock? Do you
Speaker 1: just walk out the door and go home empty handed?
Speaker 1: Or are you trading down or are you just sort
Speaker 1: of sucking it up and paying those higher prices, and
Speaker 1: what Morning Console is increasingly seeing, especially for their very
Speaker 1: latest round of this data, is that people are just
Speaker 1: opting not to buy the thing. Still a lot of
Speaker 1: trading down as well, but some people are just turning around,
Speaker 1: doing a one A D and walking out the door.
Speaker 1: And it had been kind of a mystery, right, how
Speaker 1: the consumer was being so resilient in the face of
Speaker 1: so much inflation. I guess the mystery is now being solved.
Speaker 1: The consumer is starting to not be so resilient. Yeah, exactly.
Speaker 1: And to be clear, you know, I see these developments
Speaker 1: with the US consumer is a very very slow burn, right,
Speaker 1: So what the Morning Console data seems to be predicting
Speaker 1: if you sort of run the time series against real
Speaker 1: personal consumption and real retail sales and things like that,
Speaker 1: seems to be suggesting that we are going to see
Speaker 1: real declines in spending in the months ahead, of course,
Speaker 1: and not coominal terms. You might interpret that as continued resiliency.
Speaker 1: That does not mean like a crash incorporate earnings. That
Speaker 1: doesn't mean that retail sales automatically fall off the cliff,
Speaker 1: but it does put the U S consumer in sort
Speaker 1: of a precarious position, whereby if we are hit by
Speaker 1: another shock, and there's a lot of scary stuff out
Speaker 1: there that could deliver such a shock, the US consumer
Speaker 1: is in a very perilous position. Sticker shock, Jonathan, define
Speaker 1: it for us a little more. Is it about actual
Speaker 1: spending power or more like elevated inflation expectations or fear
Speaker 1: of recession? Yeah, I think it's mostly just the consumer's
Speaker 1: response to inflation. In other words, sticker shock is defined
Speaker 1: here is you know, you go to the store, You're
Speaker 1: expecting to pay one thing, and the store is charging
Speaker 1: something else. Of course, you combine that with the fact
Speaker 1: that in real terms, people's purchasing power has been going
Speaker 1: down for the better part of wages have indeed been
Speaker 1: increasing at meaningful clip, but they're losing their purchasing power
Speaker 1: after adjusting for inflation. So that's another thing I want
Speaker 1: to ask. When consumers retrench and it looks like they're
Speaker 1: beginning to just start retrenching, do they start sticking more
Speaker 1: closely to their jobs. Will we see it in the
Speaker 1: quits rate, for example, or the Jewels survey. Yeah, that's
Speaker 1: a very interesting point, you know, and when you think
Speaker 1: about how all these dynamics work, together is potentially going
Speaker 1: to be as weird as it sounds, maybe even a
Speaker 1: net positive in the short run as far as monetary
Speaker 1: policy goes. You know, there's some interesting trade offs there.
Speaker 1: The FED, of course, would love to see people quitting
Speaker 1: at lower rates and be able to get the trend
Speaker 1: rate of wage increases down from somewhere in the five
Speaker 1: percent range to something that they think is more sustainable,
Speaker 1: like a three point five Now. Bank of American CEO
Speaker 1: Boyan moynihan told us that consumers are showing resilience. Are
Speaker 1: we talking about the same consumers or does it just
Speaker 1: take longer if we're to percolate through the banking system.
Speaker 1: I think what moynahan is saying is very much consistent
Speaker 1: with what we have seen in the data. Essentially, you know,
Speaker 1: three Q was a pretty decent quarter, and that's consistent
Speaker 1: with this sort of slow burned thesis. Right. We have
Speaker 1: to remember that the consumer went into two with an
Speaker 1: extraordinarily strong balance sheet, large cash balances, and a tremendous
Speaker 1: capacity to borrow more. They paid down a lot of
Speaker 1: their deaths during the pandemic, They refinanced their mortgages at
Speaker 1: very attractive rates, and so they had a long, long
Speaker 1: runway then as much as the psychology, you know, starts
Speaker 1: to weigh on them. And I think that the psychology
Speaker 1: started to weigh on the months and months ago, you know,
Speaker 1: even when we first got hit with the gasoline shock.
Speaker 1: But they were able to take a step back and say, well,
Speaker 1: you know, this is tough, but I can deal with
Speaker 1: this for a few months, six months and twelve months
Speaker 1: because my bank account is flushed, So I'm going to
Speaker 1: suck it up and I'm not going to change the
Speaker 1: way that I live. What the morning Console data is
Speaker 1: flagging for us is that that runway is getting a
Speaker 1: little bit shorter, right, and people are finally starting to say,
Speaker 1: you know what, this is maybe not crisis mode for
Speaker 1: me yet, but I really need to start to make
Speaker 1: some lifestyle adjustments to make sure that I'm going to
Speaker 1: be okay if things get dicey going forward. Well, it's
Speaker 1: a little chilling when you see has Row saying that
Speaker 1: people are buying fewer toys, because the last people you
Speaker 1: want to punish in an environment is where you're experiencing
Speaker 1: a little bit of tightening. Our children, right, the people
Speaker 1: you buy toys for. Yeah, and you know you bring
Speaker 1: up toys. I think the holiday season is another important
Speaker 1: part of this if you want, you know, a little
Speaker 1: bit of a bowl case to temper some of my
Speaker 1: my personal negativity on this. My my colleague Andrew Feldstad
Speaker 1: wrote a great column recently where she really focuses on
Speaker 1: this is going to be the first holiday seas in
Speaker 1: with out really any sort of restrictions on movement from COVID. So,
Speaker 1: you know, as much as some of these factors are
Speaker 1: starting to weigh, it could be that consumers at least
Speaker 1: in many parts of the world reach for one last
Speaker 1: hurrah in this fourth quarter and that you know, the
Speaker 1: slover and that I keep talking about, gets pushed back
Speaker 1: yet another quarter here. But it is so fascinating just
Speaker 1: talking about inflation, isn't it, Because as you point out,
Speaker 1: at the beginning, it was gasoline used car prices. Then
Speaker 1: most of the inflation was being blamed on commodity costs
Speaker 1: after the invasion of Ukraine. But now it seems to
Speaker 1: be not just about things like shelter or used cars.
Speaker 1: It's broad and deep, as you point out. Yeah, absolutely,
Speaker 1: I think it's been pretty clear to anybody who has
Speaker 1: come to this debate with an open mind that inflation
Speaker 1: has been everywhere for at least the past six to
Speaker 1: nine months. It's a broad based adjustment in the price level.
Speaker 1: It's not about idiosyncratic factors. And you know, frankly, it
Speaker 1: began to six six to nine months ago. The team
Speaker 1: Transitory just kept on looking for new excuses for this thing,
Speaker 1: you know, after each and every previous excuse had failed.
Speaker 1: So the latest, the latest excuse seems to be, well,
Speaker 1: you know, let's focus on the lags in the housing data.
Speaker 1: And what I've been trying to say is just, yes,
Speaker 1: of course there are major lags in the housing data.
Speaker 1: Everybody is aware of that at this point. There have
Speaker 1: been many, many economist papers written about this. The FED
Speaker 1: absolutely accounts for that when they conduct monetary policy. But
Speaker 1: you have, you know, plenty of market participants and commentators
Speaker 1: out there saying, well, look, inflation is actually not that bad.
Speaker 1: Look how much of an influence housing is having right now?
Speaker 1: And actually no, you know, every month I do the
Speaker 1: exercise of let's strip housing out of this completely, because yeah,
Speaker 1: they're right, it could distort your ability to see an
Speaker 1: inflection point. But that inflection point is just not there. Period.
Speaker 1: You you do the exercise, you strip it out, and
Speaker 1: core inflation is still very high. It's in many categories
Speaker 1: that have absolutely nothing to do with housing. Big gainers
Speaker 1: in the past month, including pet services. I'm not sure
Speaker 1: where they are impacted by mortgages, you know, automobile insurance. Right,
Speaker 1: it's just sort of pick your poison. And the problem
Speaker 1: here is broad based structural inflation. You just can't make
Speaker 1: excuses for it. And you point out that it could
Speaker 1: actually make a resurgence, that it doesn't mean that it's
Speaker 1: plateaued at this point, Jonathan, how long does it take
Speaker 1: for consumers slowdown? And I know you're calling it a
Speaker 1: slow burn, but how long does it take for it
Speaker 1: to eventually be reflected in prices, in other words, to
Speaker 1: shift to the supply side of the economy. And how
Speaker 1: does that even happen Our companies forced to oro their
Speaker 1: margins eventually, or how does it work? Yeah, that's what
Speaker 1: you would expect, right, You know, it depends on what
Speaker 1: industry you're talking about, right, So, if you're talking about
Speaker 1: a services industry where they're facing very sticky wage pressure,
Speaker 1: for instance, from that tight labor market, but all of
Speaker 1: a sudden they're waking up to the fact that they
Speaker 1: can no longer pass on their higher input costs to
Speaker 1: the folks that are dining at their establishments, you might
Speaker 1: start to see if those margin pressures come up as
Speaker 1: soon as now. Um, you know, I think the consumer
Speaker 1: sector is an important place to remember the famous long
Speaker 1: and variable lags, and they are variously estimated to be
Speaker 1: in the twelve to eighteen months range. But basically, like
Speaker 1: I say, it's going to take some time for this
Speaker 1: to show up in the corporate numbers. You know, it
Speaker 1: seems reasonable to say, you know, maybe Q four is
Speaker 1: is the inflection point. But if things keep going the
Speaker 1: way they have been going, which is the say, little
Speaker 1: by little the consumer adjust their behavior each month, you're
Speaker 1: still not going to see any shocking shifts in the
Speaker 1: nominal numbers, maybe for many quarters to come well, which
Speaker 1: means it's on for the FED. Right. Another stunt of
Speaker 1: five basis point hike in November most likely does that
Speaker 1: punish the consumer instantaneously or even quicker than six to
Speaker 1: eighteen months. You know, it really doesn't seem like it.
Speaker 1: Until now the consumer sector has really been able to
Speaker 1: take these hikes. I think everybody is concerned that, you know,
Speaker 1: one day we're going to wake up to the true
Speaker 1: impact of these long and variable legs. And I think
Speaker 1: the Deves would say that the FED maybe has no
Speaker 1: idea what it's getting into, that it could be ugly
Speaker 1: when we finally get there. But you know, the real
Speaker 1: question just comes down to are you going to see
Speaker 1: an outside shock? You know, are we going to wake
Speaker 1: up one day and see that the housing market is
Speaker 1: crashing and so people are looking at their home equity
Speaker 1: and they're saying, oh, my goodness, I need to dramatically
Speaker 1: change my consumer behaviors. That would certainly be a breaking point.
Speaker 1: Any number of things that could happen with the war
Speaker 1: and the energy markets could be a breaking point. Any
Speaker 1: have number of things that could happen with European and
Speaker 1: Asian economies could do the trick. So it's impossible and
Speaker 1: probably imprudent to guess what such a shock could actually be.
Speaker 1: But there are so many things out there, Jonathan. How
Speaker 1: much is the bond market reflecting this as opposed to say,
Speaker 1: you know, a whole bunch of things, including expectations for
Speaker 1: FED policy. Yeah, I think the bond market seems to
Speaker 1: be in a fairly rational place, right, You've got the
Speaker 1: two year trading essentially call it thirty forty basis points
Speaker 1: below where the Fed Funds futures would imply. You know,
Speaker 1: we think the terminal rate is heading. That makes a
Speaker 1: degree of sense, right, because the bond market is pricing
Speaker 1: in this possibility that they may well not get there,
Speaker 1: that they may have to stop, sure because one of
Speaker 1: this series of unfortunate events could play out and they'll
Speaker 1: have to stop sooner. Bloomberg Opinions Jonathan Livin. Catch Bloomberg
Speaker 1: Opinion with me Bonnie Quinn on Bloomberg Radio weekends and
Speaker 1: every Friday as a podcast on Apple, Spotify or your
Speaker 1: favorite podcast platform, and do join in. Comments and opinions
Speaker 1: always welcome. I'm at Bonny Quinn on Twitter or email
Speaker 1: v Quinn at Bloomberg dot net. Until next time on
Speaker 1: Bloomberg Opinion