Our US Consumer Economist Sarah Wolfe lays out the impact of the
Federal Reserve’s rate cut on labor market and consumers,
including which goods could see a rise in spending over the next
year.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Sarah Wolfe, from the
Morgan Stanley US Economics Team.
Today, a look at what the Fed cut means for US consumers.
It’s Thursday, September 26, at 2 PM in Slovenia.
Earlier this week, you heard Mike Wilson and Seth Carpenter talk
about the Fed cut and its impact on markets and central banks
around the world. But what does it actually mean for US consumers
and their wallets? Will it make it easier to pay off credit card
debt and secure mortgages? We explore these questions in this
episode.
Looking back to last week, the FOMC cut rates by a larger chunk
than many anticipated as risks from inflation have come down
significantly while labor market risks have risen. Now, with
inflation wrangled in, it’s time to start reducing the
restrictiveness of policy to prevent a rise in the unemployment
rate and a slump in economic growth. In fact, my colleague Mike
Wilson believes the US labor data will be the most important
factor driving US equities for the next three to six
months.
Despite potential risks, the current state of the U.S. labor
market is still solid and that’s where the Fed wants it to stay.
The health of the labor market, in my opinion, is best reflected
in the health of consumer spending. If we look at this quarter,
we’re tracking over 3 per cent growth in real consumption, which
is a strong run rate for consumption by all measures. And if we
look at how the whole year has been tracking, we’ve only seen a
very modest slowdown in real consumer spending from 2.7 per cent
last year to 2.5 per cent today.
For a bit of perspective, if we go back to 2018 and 2019, when
rates were much lower than they are today, and we had a tight
labor market, consumption was running closer to 2 to 2.3 per
cent. So we can definitively say, consumption is pretty solid
today.
What is most notable, however, is the slowdown in nominal
consumption which takes into account unit growth and pricing.
This has slowed much more notably this year from 5.6 per cent
last year to 4.9 per cent today. It’s reflected by the
significant progress we’ve seen in inflation this year across
goods and services, despite solid unit growth – as reflected by
stronger real consumer spending.
Our US Economics team has been stressing that the fundamentals
that drive consumption – which are labor income, wealth, and
credit – would be cooler this year but still support healthy
spending. When it comes to consumption, in my opinion, I think
what matters most is labor income. A slowdown in job growth has
stoked fears of slower consumer spending, but if you look at
aggregate labor income growth and household wealth, across both
equities and real estate, those factors remain solid. So, then we
ask ourselves, what has driven more of the slowdown in consumer
spending this past year?
And with that, let’s go back to interest rates.
Rates have been high, and credit conditions have been tight –
undeniably restraining consumer spending. Elevated interest rates
have pushed banks to pull back on lending and have curbed
household demand for credit. As a result, if you look at consumer
loan growth from banks, it’s fallen from about 12 per cent in
2022 to 7 per cent last year, and just 3 per cent in the first
half of this year.
Tight credit is dampening consumption. When interest rates are
high, people buy less -- especially on credit. And this is a key
principle of monetary policy and it's used to lower inflation.
But it can have adverse effects. The brunt of the pain has been
borne by the lowest-income households which rely heavily on
revolving credit for basic spending needs and more easily max out
on their credit limits and fall delinquent.
As such, as the Fed begins to lower interest rates, the rates
charged on consumer loan products have started to moderate. And
with a lag, we expect credit conditions to ease up as well,
allowing households across the income distribution to begin to
access more credit. We should first see a rebound in durable
goods spending – like home furnishing, electronics, appliances,
and autos. And then that should all be further supported by more
activity in the housing market.
While interest rates are on their way down, they are still
relatively elevated, which means the rebound in consumption will
take time. The good news, however, is that we do think we are
moving through the bottom for durable goods consumption – with
pricing for goods likely to stabilize next year and unit growth
to pick back up.
Thank you for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.