Clock Is Ticking on Consumer Spending, Credit Market
How can it take 20 minutes for my tea water to boil when I stand and wait, and just 90 seconds when I walk away, ‘all other things being equal’? Perception drives many important facets of our economy; in fact, the indispensable component is a largely subjective phenomenon. How are changing financial conditions certain to eventually swing the pendulum of consumer sentiment, and, therefore, consumer spending, and, therefore, the state of the corporate credit market, and, therefore, the direction of the economy and financial markets? What should you do about it?
The U.S. government judges the growth rate of the domestic economy primarily by Gross Domestic Product, two-thirds of which is consumer spending.¹ One wouldn’t be far off saying, “Consumer spending IS the U.S. economy”. This is the real reason President George W. Bush, following the Trade Center bombing, pleaded with Americans to do their part by going shopping. What drives consumer spending, and how are those conditions changing?
Present drivers of consumer spending are:
Following the massive handout by the Treasury Department during, and following the Covid 19 lockdown, consumers paid down debt, banked savings, and are today comparatively cash rich.
The highest inflation in 40 years, coupled with supply constraints, is causing consumers to buy future necessities now, borrowing consumption from the future.
There is a shortage of willing workers and an abundance of jobs.
The “Illusion of Wealth” effect has consumers feeling wealthier than they are, and this is invigorating voluntary spending.
Credit is artificially cheap, and loans are artificially easy to obtain.
Changing conditions which drive consumer spending include:
The handouts have decreased, and rising costs from high inflation has begun to nibble at consumer savings.
Loan costs are rising. By my count, the rate on a 30 year fixed mortgage has increased from 2.85% in late 2021, to 4.58% today, and increase of 61%!²
Only so much consumption can be borrowed from the future before a spending lag ensues.
Supply constraints will alleviate as new distribution channels are forged, and as domestic production increases for many products.
The Fed just promised to increase a key interest rate at every meeting this year, a driver of most other rates.
The conditions are changing which drive consumer spending, the rudder on America’s economic ship. Take cover now for what follows by:
Tightening your financial household via strict budgeting.
Building cash savings, and carrying a higher cash position in your investment accounts.
Diversifying income sources.
Focusing on investments with a present income stream, and that possess pricing power.
Becoming handy around the house. You Tube helps!
Be part of a closely knit group of like-minded people who practically help each other. In short, secure your supply lines!
Think about it, be creative, and enjoy the process. Shaun.
“Everyone also to whom God has given wealth and possessions and power to enjoy them, and to accept his lot and rejoice in his toil-this is the gift of God.” ~Ecclesiastes 5:19
1 FRED, Economic Research, March 18, 2022
https://fred.stlouisfed.org/series/DPCERE1Q156NBEA
2 Nerdwallet, “Current Mortgage and Refi Rates”, March 18, 2022
https://www.nerdwallet.com/mortgages/mortgage-rates
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
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