How Much More Can Consumers Spend?

Dr. Jeffrey Roach | Chief Economist

Key Takeaways

  • Firms expect demand for luxury goods to be stable in 2024.
  • Overall, future buying plans for large-ticket items declined in January.
  • The job market is key for both growth trajectory and Federal Reserve (Fed) policy this year.
  • So far, businesses and households have not felt much pain, eerily predicted by Fed Chairman Jerome Powell.

Who Holds the Keys?

Just like the job market holds the keys for future Fed policy, it seems the luxury consumer will be key for future consumer spending. According to the CEO of Saks, the demand for luxury goods is here to stay. However, recent data could be telling us another story.

The Conference Board’s Consumer Confidence report released yesterday is important for investors as it revealed some interesting trends in consumer behavior. Perhaps the “vibecession” is over since both components of the consumer confidence index rose in January. The aggregate index rose to its highest since December 2021, reflecting the exuberance that the Fed has finished hiking rates and will soon cut rates throughout 2024. But is there anything else to take away from the latest report?

Buying Plans Slowed in January

Consumer plans to buy big-ticket items in the next six months fell across the board as consumers prepared to cut spending. The economy is likely at an inflection point as consumer spending on services is finally back to trend and consumers could be finished with the strong demand they had for goods, as noted in the chart below.

Services Spending Back to Pre-pandemic Trend

And Goods Spending Will Likely Revert Down to Trend

Line graph depicting real services and real goods spending from 2017-2024 in trillions of dollars back to pre-pandemic trend as described in preceding paragraph.

Source: LPL Research, Bureau of Economic Analysis 01/30/24

What About that Job Market?

Solid consumer demand drove firms to increase job openings in December on the back of solid holiday demand.

Based on yesterday’s Job Openings and Labor Turnover Survey (JOLTS) for December, quit rates, an indicator of employee confidence, are down to pre-pandemic levels. Quit rates often fall when workers expect a lower probability of easily getting rehired.

Looking ahead, growth in 2024 will likely slow further as the economy settles back into trend growth. And in the near term, the labor market will be key to consumer spending. As long as the job market holds up and disposable incomes stay healthy, the economy will avoid recession. Disinflation continues and validates the Fed’s decision to implement the patient pause. A rate cut in March seems less likely, but investors will still have several key reports ahead of them in the next several weeks. The recent winter storms that swept across the country could distort the upcoming payroll report, so investors should keep an eye on that potential drama.