Xinhua Finance and Economics, Shanghai, May 11 (Ge Jiaming) Due to the sticky inflation that has led to the repeated postponement of the Federal Reserve's interest rate cuts, the U.S. consumer market has been under pressure recently, and the consumer confidence index unexpectedly plummeted in May, while consumer expectations for inflation have risen significantly, and the U.S. economy is facing a rising risk of stagflation.
On May 10, local time, the University of Michigan Consumer Survey report was released, and the U.S. consumer confidence index unexpectedly plummeted to 67.4 in May, hitting a new low in six months.
At the same time, consumer inflation expectations that the Fed is concerned about have moved higher, with inflation expectations for the year ahead climbing to 3.5% from 3.2% in April, the highest level since November 2023.
The picture shows the consumer sentiment data of the University of Michigan (Source: Xinhua Finance)
Jeffrey Roach, chief economist at LPL Finance, said uncertainty about the trajectory of inflation could continue to dampen consumer spending in the coming months, and that the Fed's balance between price stability and economic growth was "like walking a tightrope."
Roach believes that the risk of stagflation in the U.S. economy is rising, and it is necessary for the market to think about the possibility of "stagflation".
"Stagflation" is considered the worst nightmare facing the Fed, more difficult to deal with than a recession. JPMorgan Chase CEO Jamie Dimon pointed out in April that while the US economy still looks strong at this stage, the situation is similar to that of the 70s, and the "stagflation" of the 70s could happen again.
The "threat of stagflation" put pressure on U.S. stocks overnight, with U.S. Treasury yields accelerating their recovery, two-year U.S. Treasury yields hitting a one-week high, the U.S. dollar index jumping intraday, London copper weighing $10,000, and gold closing at a three-week high.
Next week, the United States will release April CPI data, and analysts generally expect that due to the downward trend in housing inflation, the U.S. CPI will begin to "cool down" after three consecutive months of higher-than-expected rise, which will have an important impact on the Fed's future policy path and market trends.
The momentum of consumer spending is being tested
Consumer sentiment is often seen as a barometer of the U.S. economy, with consumer spending being a key driver of U.S. economic growth.
But high inflation, high borrowing costs, and a cooling labor market have fueled pessimism about the labor market and economic outlook. As the U.S. household savings rate continues to decline, debt pressure is accumulating, and there is a risk that the momentum of consumption will be further weakened.
San Francisco Fed economist Hamza Abdelrahman recently published an article saying that excess savings, the key to driving consumption, have been depleted, and if residents want to maintain their previous spending habits, their debt burden will increase.
The picture shows the estimation of excess savings of U.S. residents (Source: San Francisco Fed official website)
Chicago Fed President Austan Goolsbee expressed similar concerns last month, noting that while consumer debt has not reached particularly high levels, the Fed is concerned about the rate of delinquency or late payments on expenses such as consumer loans, credit card bills and rent.
Goolsbee argues that if delinquencies on consumer loans start to rise, this is usually a major indicator that "things are about to get worse".
According to data released by the Philadelphia Fed in April, the credit card delinquency rate of U.S. consumers reached a record high in the fourth quarter of last year, with nearly 3.5% of credit cards overdue for 30 days, an increase of about 30 basis points from the previous quarter and the highest on record. In addition, the proportion of debt overdue for 60 days and 90 days has also increased.
The real spending power of U.S. consumers has declined
Inflation in the United States has been slow to cool and prices remain high, and many consumer companies have said that American consumers are becoming increasingly cautious and have to trade "price reduction strategies" for market share.
According to a report released by marketing data analytics platform Adobe Analytics, online retail sales in the United States increased by about 7% from January to April this year, with more consumers gravitating towards "buy now, pay later (BNPL)" platforms, while the demand for cheaper alternatives has further increased.
In the first four months of this year, spending on BNPL platforms reached a record $25.9 billion, up 11.8% from the same period last year, as shoppers "adopt more flexible ways to manage their budgets," and BNPL is expected to drive electronic consumer spending to $84.8 billion in 2024, up about 13% from last year, according to the report.
Vivek Pandya, chief insights analyst at Adobe, said that consumers' choice to spend on cheaper goods has helped drive resilience in spending across all types of goods, but it also shows the pressure of inflation on consumer spending.
For example, the proportion of consumers choosing the cheapest products in daily necessities has risen from 36% in January 2019 to 48% in April 2024.
In fact, the pursuit of "low-cost products" by American consumers is not only reflected in online consumption, but also directly reflected in the performance of offline food and catering industries and retail brands.
Fast food chains, including McDonald's and Wingstop, have repeatedly warned in recent days that consumers are spending less, especially on low-income earners. Major U.S. retailers, including Walmart and Target, have also made conservative estimates for this year's performance, and have announced price cuts and promotions, continuing to launch affordable private label food products priced below $5.
McDonald's CEO Chris Kempczinski said on the earnings call that consumers are more cautious about every $1 they spend as they face rising prices in their daily spending, which puts pressure on the fast-food industry.
Starbucks, the "coffee giant," saw same-store sales in the U.S. fall 3 percent and foot traffic down 7 percent, the biggest quarterly decline since 2010. Pizza Hut and KFC also reported a slowdown in quarterly sales in their latest earnings reports.
Data from market research firm Revenue Management Solutions shows that footfall at fast-food restaurants in the U.S. fell 3.5% in the first three months of the year compared to the same period in 2023. According to the U.S. Department of Labor, fast food prices rose 33% in March compared to 2019.
U.S. consumption is a "K-shaped" differentiation
While consumer goods companies are pessimistic about the future, sales of products aimed at more affluent consumers remain strong.
Brewer Molson Coors reported in its earnings report that "affluent consumers are willing to pay for expensive craft beer", and the company's revenue growth in the first quarter was relatively strong, thanks to this part of consumer demand.
Citigroup CEO Jane Fraser recently said that consumer behavior has diverged as inflation in the prices of goods and services has made life more difficult for many Americans. She said the "K-shaped" divergence in consumption is more pronounced, with the wealthy continuing to consume while low-income earners are becoming more cautious in their spending.
"Over the past few quarters, the growth in consumer spending has actually been in more affluent consumers," Fraser said, adding that low-income consumers are more cautious, and while they have jobs, they have higher levels of debt to pay off than before. They are more aware of the pressure on the cost of living, for whom the high cost of living is rising further, the delinquency rate of credit cards is growing among low-income customers, and spending behaviour is becoming more cautious.
The macro research team of Zheshang Securities concluded that the sky-high liquidity investment in overseas developed economies has exacerbated the gap between the rich and the poor, and the emergence of a "K-shaped differentiation" of income has led to the coexistence of consumption upgrading and consumption downgrading, the former reflecting the positive growth and price increase of luxury consumption, and the latter driving consumers to prefer more "cost-effective" goods.
Editor: Tan Rui
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