Slower economic growth could pave the way for interest rate cuts beginning in the first quarter of 2024.
Rate cuts could be good news for retailers and fashion firms, depending on when they time the hunt for new financing. What that could mean for retail and the holiday shopping season remains debatable. Early deliveries begin flowing in during August, and sources said retailers have remained cautious in their upcoming orders.
While consumers are expected to spend for holiday presents, just how much likely will depend on personal household income. That will depend on jobs and income growth. Consumer spending has shifted from goods to services. As pent-up demand becomes satisfied, even spending on services could begin to decelerate at some point in the year ahead.
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On Tuesday, The Conference Board’s Consumer Confidence Index fell in May to 102.3, a decrease from an upwardly revised 103.7 in April. The Present Situations Index declined to 148.6 from 151.8 last month, mostly due to respondents’ deteriorating assessment of current employment conditions. Those who said jobs are “plentiful” fell 4 percentage points to 43.5 from 47.5 in April. And those those said jobs were “hard to get” rose to 12.5 percent from 10.6 percent last month. The Expectations Index, a look six months out, slipped slightly to 71.5 from 71.7 and has remained below 80—an indication of a recession within the next year—every month since February 2022 except for a brief uptick in December 2022.
“While consumer confidence has fallen across all age and income categories over the past three months, May’s decline reflects a particularly notable worsening in the outlook among consumers over 55 years of age,” Ataman Ozyildirim, The Conference Board’s senior director, economics, said.
He added that consumers’ inflation expectations in May of 6.1 percent over the next 12 months remains elevated, essentially unchanged from April’s 6.2 percent but down substantially from the 7.9 percent peak reached in 2022.
Economists at Wells Fargo said that while weakening consumer confidence may reflect short-term worries about the U.S. debt ceiling, they the impact of other developments could be more telling about future spending patterns. “Worries about the labor market are growing as buying plans dry up,” Wells Fargo economists Tim Quinlan and Shannon Seery concluded.
They explained that consumer spending has been propped up by excess saving, access to credit and steady gains in real income. With excess savings getting smaller each month and credit standards tightening, that leaves real income growth—which has been trending lower—as the last underpinning for consumer spending. And with consumer spending relatively strong, that keeps the possibility of one more rate hike in play. But as the labor market cools, that will keep a lid on wage growth, and ultimately on consumer spending power.
“Income in April was only sufficient to match inflation,” the Wells Fargo economists noted.
Quinlan and Seery expect consumer spending to moderate over the course of the year, and have previously estimated that, when factoring in inflation, “real retail sales slid 0.2 percent in April, marking the third consecutive decline and fifth in six months.”
Economists at Bank of America Securities also noted that should negotiators fail to reach an agreement to raise the debt ceiling deal before the June 13-14 Federal Open Market Committee meeting, the Fed would likely take a pause on any rate hike as “prudent risk management.” As of Tuesday, President Biden and House Speaker Kevin McCarthy agreed to suspend the debt ceiling to avoid a default, pending congressional approval.
For now, the global economies are still in growth mode, although at a slower pace than before—and that paves the way for an incremental interest rate hike by some central banks for at least for another month or two. The one exception appears to be Germany, which has slipped into a recession following two consecutive quarters of negative growth that began in the fourth quarter of 2022
Wells Fargo’s international economist Nick Bennenbroek expects there could be one more hike in June from the European Central Bank. He expects the same from Sweden’s central bank, followed by a cautious approach to further rate hikes due to weak economic activity. The Bank of England could raise rates at both its June and August meetings as “elevated wage growth should keep underlying inflation trends elevated in the near term,” Bennenbroek said. He doesn’t expect the Bank of England to begin lowering rates until the second quarter of 2024, while the U.S., Canadian and Mexican central banks are likely to begin rate cuts in the first quarter of 2024.
JD Sports chairman Andrew Higginson this month warned that the “general global macro-economic backdrop and geopolitical situation” present immediate headwinds. Boohoo recently noted that steep air freight expenses are keeping distribution costs high. The company recently came under fire for asking suppliers to take a 10 percent discount on old and new orders to help it cut supply chain costs.
After the global economy expanded by 3.1 percent last year, it’s on track for just 2.3 percent growth this year, according to an S&P Global Market Intelligence report which said the next two years could bring stronger growth.
Improving supply chain constraints should mitigate inflation, which would allow central banks to ease monetary policies in 2024 and 2025.
