Navigating Economic Trends: Consumer Confidence, Spending, and Financial Resilience

Welcome to the Herbein Conversation podcast, where we explore the issues that matter most to your business.

In this episode, Matt Kline, an Investment Advisor Representative at Herbein Financial Group joins us to discuss the latest consumer spending habits and trends, diving into key indicators like the Consumer Confidence Index (CCI), Consumer Price Index (CPI), and Personal Consumption Expenditure (PCE). Key topics include how inflation and rising costs impact consumer behavior, the implications of falling personal savings rates, and the significance of increasing credit card delinquencies. Tune in to understand how to navigate the complex economic landscape and make informed financial decisions.

Transcript

Disclaimer: This podcast is for information purposes only and is not intended to be representative of any specific investment strategy or products. Opinions expressed herein are solely those of Herbein Financial Group and our editorial staff.

Hannah Kubik: Hello and welcome to an episode of the Herbein Conversation Podcast, where we Dive deep into the trending topics that impact your business.
I'm your host, Hannah Kubik, with us today is Matt Kline, an investment advisor within Herbein Financial Group with over 10 years’ experience helping clients implement wealth and risk management strategies.

Thank you for joining us, Matt.

Matthew C. Kline: Thank you for having me. It's great to be here.

Hannah Kubik: Today we're discussing consumer spending habits and trends. To start off, we're going to talk about the consumer confidence Index or CCI, which is a critical indicator of consumer sentiment. Matt, can you explain what the CCI measures and why it's important for understanding consumer spending habits?

Matthew C. Kline: Absolutely. So, consumer confidence index measures how optimistic or pessimistic consumers are about their financial situation and the economy at large. It assesses current economic conditions and expectations for the next six months, so a high level of competence confidence typically leads to increased spending, which fuels economic growth, while low confidence can cause spending to tighten over time.

Hannah Kubik: Understandable that higher confidence in the economy would lead to increased spending and vice versa. And recently we saw an increase in the CCI in May after three months of decline, rising almost 4% from April's numbers. What do you think is driving this rise despite ongoing concerns about inflation and interest rates?

Matthew C. Kline: Sure, there might be several factors at play here.
For one, improved job market conditions as unemployment has been at record lows for some time now. Fiscal spending which is helping ease temporary pressures in the economy. And also market optimism as it can play a role here where when the market is up, confidence is up leading to recency bias. While confidence is out on the rise, there are underlying concerns about inflation and interest rates that affect consumer behavior.

Hannah Kubik: Very interesting dichotomy going on it seems. Regarding inflation, the consumer price Index or CPI, which measures the average change in prices over time for a basket of goods and services, has seen a significant uptick recently, particularly in food, gasoline and housing costs.  How are these rising prices impacting consumer spending and behavior?

Matthew C. Kline: For sure. So current CPI came in lower than expected recently at 3.27% year over year, but we are still seeing inflation on a regular basis which leads to more expensive to maintain the consumer standard of living. A lot of times this leads to cutbacks on discretionary spending and nonessential expenses which can slow down economic growth.

For instance, according to Forbes Magazine, food costs have increased 25% since January 2020 and gasoline is near 15% higher this just this year alone.
As a result, many households are prioritizing essentials over non-essential purchases.

Hannah Kubik: Makes sense, and speaking of essential versus non essential purchases, I'd like to ask about retail sales. According to Y charts, the latest data shows retail and food services sales increasing 2.2% year over year. How do you think this reflects consumer behavior and economic recovery trends?

Matthew C. Kline: Sure. So the increase in retail sales is a positive for consumer behavior and confidence. This growth likely indicates that consumers are failing more financially secure and are willing to spend more on both essential and non essential items. But one thing I would I believe is worth mentioning, even though we are seeing retail sales rising on an annual basis, if you adjust for inflation, retail sales has actually decreased 3.5% since 2021. This means wild nominal increases suggests positive consumer spending. The adjusted figures highlight the impact of inflation on purchasing power and consumer current spending habits.

Hannah Kubik: I'd like to talk a little bit about economic uncertainty and the impact on inflation and interest rates. The personal consumption, expenditure, or PCE, measures the spending on goods and services by U.S. Citizens and is the federal reserves preferred measure of inflation. With the new PCE data released on May 31st of this year, what should we be looking for in terms of how the feds will act?

Matthew C. Kline: So the main thing I want to highlight is the Fed their main focus on is PCE due to the wider scope of data it represents, as opposed to strictly CPI or consumer price index that highlights specifically what consumers are purchasing. So current PC data came in lower than expected at 2.65%. This is definitely something that the Federal Reserve will focus on potentially cutting interest rates in the back half of the year. But then again, only time will tell for this key piece of economic data to see what the Federal Reserve does in their next meeting.

Another go to resource worth mentioning is the Michigan Consumer Sentiment Index, which gauges consumer confidence levels in the US with regards to the economy, personal finance, consumer conditions and buying conditions.

Their recent findings show that consumer sentiment is actually falling, so the drop in consumer sentiment down over 10% in May can be attributed to various factors, including economic uncertainty, inflationary pressures and stock market volatility.

But just to note and highlight here, lower sentiment typically results in reduced consumer spending. So as people become more cautious with their finances, they will be spending less on nondiscretionary needs.

Hannah Kubik: Makes sense and another trend worth mentioning surround savings. According to MarketWatch, the personal savings rate fell to 3.6% in February, the lowest in over a year. How is this affecting consumer behavior and financial planning?

Matthew C. Kline: So this is why this market is extremely volatile and crazy right now. As mentioned above, you know we are seeing consumer sentiment declining, but then personal saving rates are at all time lows. And MarketWatch actually had a good term for this, they're calling it a “Vibcession” for Americans, but lower saving rates indicate that households are spending a larger portion of their disposable income now.

Granted, is that on discretionary needs, right? Is that on groceries and gas and housing and things like that? Probably, but at the same time, you know these trends might be due to a combination of reduced pandemic related savings and increased spending as the economy has continued to reopen. While it can boost short term economic activity, it also raises concerns about long term financial resilience for many households that you know, on average, US household is saving only 3.6%.

Hannah Kubik: “Vibecession”, what a great name to describe where we currently are with the economy and finally, one final topic to talk about is credit card delinquencies.
They’re on the rise, surpassing pre pandemic levels according to YCharts.
What does this mean for consumers and the broader economy?

Matthew C. Kline: Yeah. So this is something that a lot of analysts are keeping eyes on. Rising credit card delinquencies suggest that more consumers are struggling to maintain their debt. This trend, if it continues, could lead to tighter credit conditions through the credit card companies and reduced spending capacity.

So the amount that people can spend even on their credit card, right, which all of this could have broader implications on economic stability as a whole, if our entire consumer cannot pay their debts.

Hannah Kubik: So, given all that we've covered today, how should consumers navigate this complex economic landscape?

Matthew C. Kline: I think the main focus is staying informed and being adaptable with your own current financial needs and spending habits. So, working with a team of team of advisors is always helpful during these volatile times. Something to focus on, monthly spending for housing and utilities is continuing to increase. We've all seen what the housing market looks like, but this is leading to heightened cost pressures in other areas of spending. However, in contrast of the trend of housing and utilities, increasing sentiment around leisure travel remains exceptionally strong, indicating a robust interest in vacation and recreational activities despite the economic challenges. We are actually seeing statistics show 60% of households say that they are going on a vacation this summer.
 
So again, as we navigate this contrasting up and down landscape, staying informed and adaptable will be more crucial than ever.

Hannah Kubik: Agreed because it truly does seem like up and down, and as you said, communicating with advisors or a team of advisors really seems to be paramount. 

And with that, we will close today's episode. Thank you so much Matt for sharing your insights with us today on consumer spending trends.

Matthew C. Kline: My pleasure, Hannah. Thank you for having me.

Hannah Kubik: And thank you to our listeners for tuning into another episode of Herbein Conversation.
 
Don't forget to sign up to receive instant alerts for our latest insights and news at herbein.com/blog and follow us on social. Until next time!

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