Cracks in Consumption Have Started To Appear

Chief Economist Eugenio J. Alemán discusses current economic conditions.

From a very weak retail sales report for January 2024 to stronger inflation readings as well as increases in credit card and auto loan delinquency rates during the last quarter of 2023, the picture for consumer demand has weakened considerably. However, this doesn’t mean that the economy is going to enter a recession during the first quarter, just that economic growth compared to the previous quarter has probably weakened.

Wednesday’s release of the Federal Reserve (Fed) minutes from the January Federal Open Market Committee (FOMC) indicated that “some participants noted signs that the finances of some households – especially those in the low- and moderate-income categories – were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption. In particular, they pointed to increased usage of credit card revolving balances and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”

Percent of Balance

Other than some concerns regarding lower- and middle-income households, the minutes from the January FOMC meeting were pretty positive for the overall economy, however, they indicated that consumer demand may weaken during this year compared to the strong pace seen during 2023. Interestingly, this is happening at a time when measures of consumer sentiment as well as consumer confidence have finally started to move higher after lagging behind during the last several years.

However, the minutes also pointed out the high levels of uncertainty on the path forward for inflation as well as for economic growth while supporting Fed Chairman Powell’s comments regarding the continuing lack of convincing evidence that the disinflationary process will continue to move forward. The Fed, once again, reminded markets that there are plenty of risks lurking around the issue of supply chain normalization and that it is going to take a careful look at the incoming data in order to make its interest rates decisions going forward.