All posts by : beckye@1si.org

submitted by
Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast

The consumer is responsible for almost 70% of the U.S. economy and has been one of the biggest surprises of the post-pandemic economy. Last year, we wrote about the resilience of the consumer, in the face of high inflation, and most recently about a potential pullback of the consumer in 2024.     Any economic slowdown will either be led by the consumer or adversely impact the consumer.  The ideal slowdown for the Fed is one that does not derail the consumer altogether, or significantly trip up the labor market.  Accomplishing this would fit the soft-landing scenario. 

Last week, we learned that the economy accelerated in the second quarter, growing by 2.8% compared to 1.4% in the first quarter. The largest contribution to this acceleration in GDP was once again, the consumer. The consumer contributions of services spending to GDP growth exceeded goods by almost twice the level.  On the goods side, durable goods were the greatest contribution, primarily through auto sales.  On the services side, healthcare spending dominated and was the leading contributor to growth. 

While this news was encouraging, we also must remember that the GDP report is backward-looking. GDP does not reflect current economic conditions, or even the near term ahead.   It is a picture of the economy in the rear-view mirror. Even so, the report still came as another surprise, built on the resilience of the consumer. 

Our last consumer-related column did raise the possibility of an overall pullback of the consumer. Despite the positive GDP report, this is still in the cards.   Goods are cold, and some services remain hot. A slowing consumer will provide additional validation that a cut is now warranted.  Recent reports show that inflation continues to head in the direction that will support a cut in interest rates, now most likely in September.    

High interest rates have had a noticeable impact on durable goods, longer-lasting items that often require financing.  Take automobiles, for example.  Domestic auto unit sales last month were at 1.96 million (seasonally adjusted annual rate).   Just prior to the pandemic, domestic auto unit sales were running just over 3 million.    This pre-pandemic level of 3 million was also a bottom compared to ten years ago when domestic unit sales were close to 6 million.  During the Great Recession, when household finances were devastated from both a housing crash and elevated unemployment rates, domestic unit auto sales hit a bottom of 2.8 million. The current level of new auto sales is at a historic low, and lower than the depths of even the Great Recession. However, foot traffic data by Placer.ai show that visits to car dealerships are about flat compared to last year, but now moving above trend for this time of the year.  Incentives and lower rates may be having an impact and luring buyers back.  Auto sales should see some appreciation from here.

One durable good important to Indiana is the RV, with Indiana holding the place as the largest RV  manufacturing state.  RV purchases are also sensitive to interest rates, and we can see the impact of higher rates on RV shipments coming out of RV manufacturers. During June, RV shipments hit 25,000, and this was up slightly from 2023.    Back in June 2021, RV shipments were double, hitting levels of 50,000 in a month.   Employers rushed to hire more people to keep up with demand. Since then, Indiana’s employment in transportation equipment manufacturing, which includes RV manufacturing, is down by about 10,000. A review of foot traffic of random RV retail establishments across Indiana shows a noticeable decline in customer visits, declining by an average of 19%  from a year ago.  

Retail sales for furniture, furnishings, household equipment, electronics, and appliances are down since the beginning of 2023, and down about 10% compared to the surge of 2021. Government stimulus and mortgage rates below 3% drove significant demand, but higher interest rates have softened sales since. Foot traffic for furniture and home furnishings is down about 10% across Indiana compared to the prior year. Electronic store visits are only down 5%, but this is 25% below the baseline trend.

While interest-sensitive industries have experienced challenges, others, specifically food and drinking establishments, are at an all-time high. Retail sales are expressed in nominal terms, which means that some revenue gains will be due to inflation. Since the start of 2022, food and drinking establishments sales are up about 30%, while overall price levels by 10%. While there is variability within the industry, some of these gains in food and drinking establishments are real increases when compared to early 2022.  Sales are also up by about 4.5% since last year,  higher than the current inflation rate.   As a comparison, food and drinking establishment sales were flat during the Great Recession and it took 7 years to realize the same percentage change in industry sales since 2020.   Challenges do remain, such as labor and food costs, but having enough customers is not the primary concern. Following the pandemic, consumers have gravitated toward valuing experiences over goods, and food and drinking sales are reflective of this.

With inflation now heading in the right direction, the other piece to the soft landing lies in the labor market.   Payroll growth remains strong, but signs continue to emerge of a softening labor market.  Unemployment claims have been edging upward, and continuing claims are the highest since late 2021.   The unemployment rate has been inching upward, exceeding an increase of ½% in some locales. Average hourly wage growth is now under 4%, compared to 5% last year, and almost 7% two years ago.  The July employment report is expected to show additional cooling, and that should be the final validation for a September rate cut, along with increasing headwinds for consumers.