WEBVTT - Consumer Cracking

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<v Speaker 1>This is Bloomberg Opinion Deeper Conversations on the week's most

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<v Speaker 1>significant developments. I'm Vonnie Quinn. Consumers in the US have

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<v Speaker 1>been resilient faced with persistently high inflation. This much we

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<v Speaker 1>know that behavior, though, is showing signs of shifting. I

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<v Speaker 1>spoke with Bloomberg Opinion columnist Jonathan Levin, who has been

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<v Speaker 1>examining the data. So, Jonathan, what consumers say they'll do

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<v Speaker 1>and what they actually do are often very different. That's

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<v Speaker 1>an established behavior, but now it seems like we're seeing

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<v Speaker 1>what they're doing shift. You've been examining the data, what

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<v Speaker 1>is it telling you? Yeah, more or less. I looked

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<v Speaker 1>at a fascinating series that Morning Console does, and every

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<v Speaker 1>month they interview hundred US adults, and one of the

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<v Speaker 1>things that they've been asking them for the past six

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<v Speaker 1>months is like, when you go to the store, do

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<v Speaker 1>you experience sticker shock? And when people say you say, yes,

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<v Speaker 1>I'm experiencing sticker shock, Morning Console then ask them, Okay,

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<v Speaker 1>so how do you deal with sticker shock? Do you

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<v Speaker 1>just walk out the door and go home empty handed?

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<v Speaker 1>Or are you trading down or are you just sort

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<v Speaker 1>of sucking it up and paying those higher prices, and

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<v Speaker 1>what Morning Console is increasingly seeing, especially for their very

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<v Speaker 1>latest round of this data, is that people are just

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<v Speaker 1>opting not to buy the thing. Still a lot of

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<v Speaker 1>trading down as well, but some people are just turning around,

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<v Speaker 1>doing a one A D and walking out the door.

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<v Speaker 1>And it had been kind of a mystery, right, how

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<v Speaker 1>the consumer was being so resilient in the face of

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<v Speaker 1>so much inflation. I guess the mystery is now being solved.

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<v Speaker 1>The consumer is starting to not be so resilient. Yeah, exactly.

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<v Speaker 1>And to be clear, you know, I see these developments

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<v Speaker 1>with the US consumer is a very very slow burn, right,

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<v Speaker 1>So what the Morning Console data seems to be predicting

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<v Speaker 1>if you sort of run the time series against real

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<v Speaker 1>personal consumption and real retail sales and things like that,

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<v Speaker 1>seems to be suggesting that we are going to see

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<v Speaker 1>real declines in spending in the months ahead, of course,

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<v Speaker 1>and not coominal terms. You might interpret that as continued resiliency.

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<v Speaker 1>That does not mean like a crash incorporate earnings. That

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<v Speaker 1>doesn't mean that retail sales automatically fall off the cliff,

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<v Speaker 1>but it does put the U S consumer in sort

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<v Speaker 1>of a precarious position, whereby if we are hit by

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<v Speaker 1>another shock, and there's a lot of scary stuff out

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<v Speaker 1>there that could deliver such a shock, the US consumer

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<v Speaker 1>is in a very perilous position. Sticker shock, Jonathan, define

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<v Speaker 1>it for us a little more. Is it about actual

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<v Speaker 1>spending power or more like elevated inflation expectations or fear

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<v Speaker 1>of recession? Yeah, I think it's mostly just the consumer's

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<v Speaker 1>response to inflation. In other words, sticker shock is defined

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<v Speaker 1>here is you know, you go to the store, You're

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<v Speaker 1>expecting to pay one thing, and the store is charging

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<v Speaker 1>something else. Of course, you combine that with the fact

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<v Speaker 1>that in real terms, people's purchasing power has been going

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<v Speaker 1>down for the better part of wages have indeed been

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<v Speaker 1>increasing at meaningful clip, but they're losing their purchasing power

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<v Speaker 1>after adjusting for inflation. So that's another thing I want

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<v Speaker 1>to ask. When consumers retrench and it looks like they're

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<v Speaker 1>beginning to just start retrenching, do they start sticking more

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<v Speaker 1>closely to their jobs. Will we see it in the

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<v Speaker 1>quits rate, for example, or the Jewels survey. Yeah, that's

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<v Speaker 1>a very interesting point, you know, and when you think

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<v Speaker 1>about how all these dynamics work, together is potentially going

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<v Speaker 1>to be as weird as it sounds, maybe even a

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<v Speaker 1>net positive in the short run as far as monetary

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<v Speaker 1>policy goes. You know, there's some interesting trade offs there.

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<v Speaker 1>The FED, of course, would love to see people quitting

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<v Speaker 1>at lower rates and be able to get the trend

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<v Speaker 1>rate of wage increases down from somewhere in the five

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<v Speaker 1>percent range to something that they think is more sustainable,

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<v Speaker 1>like a three point five Now. Bank of American CEO

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<v Speaker 1>Boyan moynihan told us that consumers are showing resilience. Are

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<v Speaker 1>we talking about the same consumers or does it just

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<v Speaker 1>take longer if we're to percolate through the banking system.

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<v Speaker 1>I think what moynahan is saying is very much consistent

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<v Speaker 1>with what we have seen in the data. Essentially, you know,

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<v Speaker 1>three Q was a pretty decent quarter, and that's consistent

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<v Speaker 1>with this sort of slow burned thesis. Right. We have

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<v Speaker 1>to remember that the consumer went into two with an

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<v Speaker 1>extraordinarily strong balance sheet, large cash balances, and a tremendous

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<v Speaker 1>capacity to borrow more. They paid down a lot of

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<v Speaker 1>their deaths during the pandemic, They refinanced their mortgages at

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<v Speaker 1>very attractive rates, and so they had a long, long

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<v Speaker 1>runway then as much as the psychology, you know, starts

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<v Speaker 1>to weigh on them. And I think that the psychology

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<v Speaker 1>started to weigh on the months and months ago, you know,

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<v Speaker 1>even when we first got hit with the gasoline shock.

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<v Speaker 1>But they were able to take a step back and say, well,

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<v Speaker 1>you know, this is tough, but I can deal with

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<v Speaker 1>this for a few months, six months and twelve months

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<v Speaker 1>because my bank account is flushed, So I'm going to

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<v Speaker 1>suck it up and I'm not going to change the

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<v Speaker 1>way that I live. What the morning Console data is

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<v Speaker 1>flagging for us is that that runway is getting a

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<v Speaker 1>little bit shorter, right, and people are finally starting to say,

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<v Speaker 1>you know what, this is maybe not crisis mode for

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<v Speaker 1>me yet, but I really need to start to make

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<v Speaker 1>some lifestyle adjustments to make sure that I'm going to

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<v Speaker 1>be okay if things get dicey going forward. Well, it's

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<v Speaker 1>a little chilling when you see has Row saying that

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<v Speaker 1>people are buying fewer toys, because the last people you

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<v Speaker 1>want to punish in an environment is where you're experiencing

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<v Speaker 1>a little bit of tightening. Our children, right, the people

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<v Speaker 1>you buy toys for. Yeah, and you know you bring

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<v Speaker 1>up toys. I think the holiday season is another important

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<v Speaker 1>part of this if you want, you know, a little

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<v Speaker 1>bit of a bowl case to temper some of my

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<v Speaker 1>my personal negativity on this. My my colleague Andrew Feldstad

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<v Speaker 1>wrote a great column recently where she really focuses on

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<v Speaker 1>this is going to be the first holiday seas in

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<v Speaker 1>with out really any sort of restrictions on movement from COVID. So,

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<v Speaker 1>you know, as much as some of these factors are

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<v Speaker 1>starting to weigh, it could be that consumers at least

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<v Speaker 1>in many parts of the world reach for one last

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<v Speaker 1>hurrah in this fourth quarter and that you know, the

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<v Speaker 1>slover and that I keep talking about, gets pushed back

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<v Speaker 1>yet another quarter here. But it is so fascinating just

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<v Speaker 1>talking about inflation, isn't it, Because as you point out,

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<v Speaker 1>at the beginning, it was gasoline used car prices. Then

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<v Speaker 1>most of the inflation was being blamed on commodity costs

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<v Speaker 1>after the invasion of Ukraine. But now it seems to

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<v Speaker 1>be not just about things like shelter or used cars.

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<v Speaker 1>It's broad and deep, as you point out. Yeah, absolutely,

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<v Speaker 1>I think it's been pretty clear to anybody who has

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<v Speaker 1>come to this debate with an open mind that inflation

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<v Speaker 1>has been everywhere for at least the past six to

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<v Speaker 1>nine months. It's a broad based adjustment in the price level.

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<v Speaker 1>It's not about idiosyncratic factors. And you know, frankly, it

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<v Speaker 1>began to six six to nine months ago. The team

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<v Speaker 1>Transitory just kept on looking for new excuses for this thing,

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<v Speaker 1>you know, after each and every previous excuse had failed.

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<v Speaker 1>So the latest, the latest excuse seems to be, well,

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<v Speaker 1>you know, let's focus on the lags in the housing data.

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<v Speaker 1>And what I've been trying to say is just, yes,

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<v Speaker 1>of course there are major lags in the housing data.

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<v Speaker 1>Everybody is aware of that at this point. There have

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<v Speaker 1>been many, many economist papers written about this. The FED

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<v Speaker 1>absolutely accounts for that when they conduct monetary policy. But

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<v Speaker 1>you have, you know, plenty of market participants and commentators

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<v Speaker 1>out there saying, well, look, inflation is actually not that bad.

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<v Speaker 1>Look how much of an influence housing is having right now?

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<v Speaker 1>And actually no, you know, every month I do the

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<v Speaker 1>exercise of let's strip housing out of this completely, because yeah,

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<v Speaker 1>they're right, it could distort your ability to see an

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<v Speaker 1>inflection point. But that inflection point is just not there. Period.

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<v Speaker 1>You you do the exercise, you strip it out, and

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<v Speaker 1>core inflation is still very high. It's in many categories

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<v Speaker 1>that have absolutely nothing to do with housing. Big gainers

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<v Speaker 1>in the past month, including pet services. I'm not sure

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<v Speaker 1>where they are impacted by mortgages, you know, automobile insurance. Right,

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<v Speaker 1>it's just sort of pick your poison. And the problem

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<v Speaker 1>here is broad based structural inflation. You just can't make

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<v Speaker 1>excuses for it. And you point out that it could

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<v Speaker 1>actually make a resurgence, that it doesn't mean that it's

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<v Speaker 1>plateaued at this point, Jonathan, how long does it take

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<v Speaker 1>for consumers slowdown? And I know you're calling it a

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<v Speaker 1>slow burn, but how long does it take for it

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<v Speaker 1>to eventually be reflected in prices, in other words, to

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<v Speaker 1>shift to the supply side of the economy. And how

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<v Speaker 1>does that even happen Our companies forced to oro their

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<v Speaker 1>margins eventually, or how does it work? Yeah, that's what

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<v Speaker 1>you would expect, right, You know, it depends on what

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<v Speaker 1>industry you're talking about, right, So, if you're talking about

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<v Speaker 1>a services industry where they're facing very sticky wage pressure,

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<v Speaker 1>for instance, from that tight labor market, but all of

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<v Speaker 1>a sudden they're waking up to the fact that they

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<v Speaker 1>can no longer pass on their higher input costs to

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<v Speaker 1>the folks that are dining at their establishments, you might

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<v Speaker 1>start to see if those margin pressures come up as

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<v Speaker 1>soon as now. Um, you know, I think the consumer

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<v Speaker 1>sector is an important place to remember the famous long

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<v Speaker 1>and variable lags, and they are variously estimated to be

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<v Speaker 1>in the twelve to eighteen months range. But basically, like

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<v Speaker 1>I say, it's going to take some time for this

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<v Speaker 1>to show up in the corporate numbers. You know, it

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<v Speaker 1>seems reasonable to say, you know, maybe Q four is

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<v Speaker 1>is the inflection point. But if things keep going the

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<v Speaker 1>way they have been going, which is the say, little

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<v Speaker 1>by little the consumer adjust their behavior each month, you're

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<v Speaker 1>still not going to see any shocking shifts in the

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<v Speaker 1>nominal numbers, maybe for many quarters to come well, which

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<v Speaker 1>means it's on for the FED. Right. Another stunt of

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<v Speaker 1>five basis point hike in November most likely does that

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<v Speaker 1>punish the consumer instantaneously or even quicker than six to

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<v Speaker 1>eighteen months. You know, it really doesn't seem like it.

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<v Speaker 1>Until now the consumer sector has really been able to

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<v Speaker 1>take these hikes. I think everybody is concerned that, you know,

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<v Speaker 1>one day we're going to wake up to the true

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<v Speaker 1>impact of these long and variable legs. And I think

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<v Speaker 1>the Deves would say that the FED maybe has no

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<v Speaker 1>idea what it's getting into, that it could be ugly

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<v Speaker 1>when we finally get there. But you know, the real

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<v Speaker 1>question just comes down to are you going to see

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<v Speaker 1>an outside shock? You know, are we going to wake

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<v Speaker 1>up one day and see that the housing market is

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<v Speaker 1>crashing and so people are looking at their home equity

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<v Speaker 1>and they're saying, oh, my goodness, I need to dramatically

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<v Speaker 1>change my consumer behaviors. That would certainly be a breaking point.

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<v Speaker 1>Any number of things that could happen with the war

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<v Speaker 1>and the energy markets could be a breaking point. Any

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<v Speaker 1>have number of things that could happen with European and

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<v Speaker 1>Asian economies could do the trick. So it's impossible and

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<v Speaker 1>probably imprudent to guess what such a shock could actually be.

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<v Speaker 1>But there are so many things out there, Jonathan. How

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<v Speaker 1>much is the bond market reflecting this as opposed to say,

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<v Speaker 1>you know, a whole bunch of things, including expectations for

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<v Speaker 1>FED policy. Yeah, I think the bond market seems to

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<v Speaker 1>be in a fairly rational place, right, You've got the

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<v Speaker 1>two year trading essentially call it thirty forty basis points

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<v Speaker 1>below where the Fed Funds futures would imply. You know,

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<v Speaker 1>we think the terminal rate is heading. That makes a

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<v Speaker 1>degree of sense, right, because the bond market is pricing

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<v Speaker 1>in this possibility that they may well not get there,

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<v Speaker 1>that they may have to stop, sure because one of

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<v Speaker 1>this series of unfortunate events could play out and they'll

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<v Speaker 1>have to stop sooner. Bloomberg Opinions Jonathan Livin. Catch Bloomberg

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<v Speaker 1>Opinion with me Bonnie Quinn on Bloomberg Radio weekends and

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<v Speaker 1>every Friday as a podcast on Apple, Spotify or your

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<v Speaker 1>favorite podcast platform, and do join in. Comments and opinions

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<v Speaker 1>always welcome. I'm at Bonny Quinn on Twitter or email

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<v Speaker 1>v Quinn at Bloomberg dot net. Until next time on

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<v Speaker 1>Bloomberg Opinion