At the midpoint of the year, we like to take stock of the six months that have been and use that context to reassess the back half.  2023 started with consumers on a tear.  Spending was growing more than personal income, and the Federal Reserve was still confidently raising interest rates to try to combat rampant inflation.  Mortgage rates were way up from the previous year (between 6% and 7% now vs. 2.5-3.25% a year earlier), and yet, spending, even on large items like autos and white goods, were still elevated.  Fast forward six months, and quite a lot has changed.  Obviously, the Federal Reserve has taken a pause.  Normally, this would happen because the consumer slowed their spending, and the economy showed signs of weakness.  But in this case, the Fed is taking a pause because they are worried about the health of banks rather than the consumer.  The Fed’s favorite indicator (Core PCE) was up 3.8% from a year ago, still much higher than the 2% target.  Food continues to lead prices higher at a 5.8% clip while energy prices dipped more than 13%.  Meanwhile, the stock market digested all of this information and despite narrow leadership, the S&P 500 is up nearly 17% YTD and the NASDAQ just had its best start since 1983, up more than 30%.  

So where does this leave the consumer, and what can we realistically expect for the back half of 2023?  

With Core PCE starting to lap tougher comps and the Fed’s rapid increases in Fed Funds also taking effect, we can likely expect the Fed to approach each hike with a bit more caution.  Expectations are for 2 more 25 bps raises before year end; this is one of those times that the market may have it right.  The Fed’s data dependency has a lag factor that will largely reflect strong summer numbers ahead of what could be a difficult fall.  

Now that the Biden Administration’s most recent efforts to forgive student Loans has failed, student loan payments will resume in October for the first time since the pandemic began.  This will obviously put a dent in some consumer’s discretionary income and will likely put a dent in Core PCE.  Furthermore, the average age of automobiles is creeping higher.  While this can continue for some time, there is likely going to be a period when the consumer has to spend more on transportation.  When a new car payment becomes a non-discretionary item, it will be difficult to spend on other things.  This would obviously result in some puts and takes as pertains to the numbers that make up the index, but the positive part of that will be experienced by very few.  Perhaps, more importantly, some of the debts resulting from pandemic related “revenge spending” are coming due.  As noted by the Federal Reserve Bank of New York, through the first quarter, household debt loads are now $2.9 trillion higher than they were at the end of 2019.  That’s more than 20% for those that like math.  

The stock market does not necessarily have to fall in this scenario, as slowing inflation will be viewed favorably by market participants.  That is, as long as last week’s jobs numbers don’t derail that train.  In either case, it will be difficult to expect the top performers of the first half (big tech) to continue at the same pace at which they started 2023. 

Sources: CoStar, Federal Reserve Bank of New York, CNN, PitchBook


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