All Those Thumping Fed Hikes May Finally Be Hitting Consumers

All Those Thumping Fed Hikes May Finally Be Hitting Consumers
Stéphane Renevier, CFA

about 1 year ago2 mins

What happened?

The holiday shopping season hasn’t started out the way retailers were hoping. Data this week shows that US retail sales fell by 0.6% in November. That’s worse than the 0.2% fall economists expected, and marks the steepest slide since December last year. Weaknesses were broad-based too, with nine of the 13 retail categories doing worse than the year-earlier period.

What does it mean?

Consumer demand seems to finally be slowing. We’ll have to wait for a few more releases (including the possible revisions to this data) to confirm the trend, but after the slowdown in other economic indicators like manufacturing activity and housing, it seems that the Federal Reserve’s (the Fed’s) aggressive interest rate hikes are finally biting US consumers.

That could be good news for inflation (slowing demand would tend to push it lower) but it’s certainly not good news for the economy. Consumer spending is a huge driver of growth in the US (it accounts for about 70% of the economy) and a sharp drop could tip the country into a recession.

And there’s some worry that the slowdown in consumer demand could even accelerate next year, with households rapidly depleting the record savings they built up during the pandemic. Some might use credit card debt to keep up their spending in the near term, but a deteriorating labor market and a more significant slowdown in the economy are likely only to squeeze consumer spending further.

Why should you care?

2022 was all about inflation and rate hikes. 2023 will likely be all about the economic slowdown and the hit to companies’ earnings. This change in narrative is likely to favor bonds over stocks. And, sure, there’s still a chance that the economy will achieve the dream soft landing scenario, where it slows just enough to bring down inflation without crumbling into a recession. But the odds of that have always been long, and the downside risks are looking more and more significant in my view. So stay cautious out there.

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