The State of the Consumer

– by New Deal democrat

In addition to my system of long and short leading indicators, and the weekly high frequency data, the third system I use to mark to market my views of the economy is what i call “the consumer nowcast.”

Introduction

I have various systems for tracking the economy — including high-frequency weekly indicators, an array of short leading indicators, as well as long leading indicators.

Most of those systems rely on a cycle of long-leading, then short-leading indicators, followed by coincident, short-lagging, long-lagging, and finally mid-cycle indicators — and then around to long leading indicators again. But I also have a fundamentals-based system, which I call “the consumer nowcast.” That is the subject of this post.

The consumer nowcast looks at the ability of consumers — 70% of the economy — to spend. Historically, when that ability is temporarily tapped out, and consumers pull back, a recession quickly follows. I have been writing about this “consumer nowcast” system for almost 20 years, when it did not signal a problem in 2005-06, but did signal trouble in 2007.

In a nutshell, here’s how the consumer nowcast works: to spend, consumers have to be making more money in real, inflation-adjusted terms. If they can’t do that, they can refinance debt at lower interest rates, thus freeing up additional cash to spend. If they can’t do that, they can cash in appreciating assets like houses and stocks. But if all of those avenues are closed off, consumers have no choice but to pull back; and when they spend less, manufacturers and suppliers quickly notice, cutting back production and supply; and a recession ensues.

So how does the consumer nowcast stand now?

To begin with, real consumer earnings, whether measured as real average hourly earnings, or real aggregate payrolls, after increasing substantially since their temporary bottom in June 2022 when gas was $5/gallon, have slowed down since March of this year:

In the past five months, the former are up 0.4% and the latter up only 0.3%; while on a YoY% basis, both remain higher, by 1.0% and 2.0% respectively, the YoY comparisons are at the bottom of their 12 month range.

AB: I am going to leap to the end of this commentary by New Deal democrat as itis long. You can catch a more complete post on his site; The Bonddad Blog. NDd prediction does not bode well for for consumers

Consumers are 70% of the economy. Their sources of new spending include wages and salaries, refinancing existing debt at lower rates, and cashing in or borrowing against appreciating assents. When the spigots for all of these are turned off, and consumers start getting more cautious, a recession ensues.

Yesterday and today, for the first time in many months, I updated that tool, and it is posted over at Seeking Alpha. While it isn’t negative, the situation of consumers is more precarious than it might appear on the surface.

The Bonddad Blog

The State of the Consumer: the nowcast recession forecasting tool, The Bonddad Blog