Checking in on Consumers and Businesses

This article is provided by ITR Economics in partnership with Sheet Metal & Roofing.


Leading indicators, high interest rates, and the sustained inversion of the US Treasury yield curve all signal that macroeconomic weakness is coming. We are expecting decline in the US macroeconomy, as measured by US Real Gross Domestic Product (GDP), for a portion of 2024. With the downturn approaching, it is time for a closer look at how consumers and businesses are faring and a review of our expectations for both consumer and business-to-business spending.



Real Income Is Rising as Inflation Eases

Inflation is easing, providing some relief to consumers. US Consumer Price Index inflation was at 4.0% in April, down from a June 2022 high of 9.1%. It is important to note that Consumer Prices are still rising, just at a slowing pace. Wages are also rising, in part due to the tightness of the labor market. As a result of retreating inflation and rising wages, US Real Personal Income (excluding transfer receipts), an inflation-adjusted metric, is in record-high territory and rising.

Savings Are a Concern

Consumers are prioritizing consumption over saving. Savings as a percentage of income spiked into the double-digits in 2020 and early 2021 as consumers shifted their spending patterns amid the pandemic lockdowns while simultaneously receiving stimulus from the government. Savings rates trended back into the single digits as the lockdowns were lifted and inflation ate into purchasing power. The savings rate has so far this year been trending in the 4% range, which is relatively low compared to the 7.3% that was the average for the decade preceding the pandemic. While the low savings rates could be attributed to the earlier boost to savings, our analysis shows that savings balances, when adjusted for inflation, are declining.

Delinquencies Are Still Low; Overall Evidence Points to Mild Recession

US Credit Card Delinquency Rates, which reached record lows in 2021, have risen sharply in recent months. However, they are well below the levels that were prevalent leading up to the Great Recession. Given relatively low delinquencies on “bad” debt, rising real incomes, and labor market tightness (driven by demographics), we are not expecting that the upcoming downturn will be a repeat of the Great Recession. Overall, we anticipate annual US Total Retail Sales will rise into late this year, then decline mildly into the latter half of 2024.

If your business is consumer-facing, keep in mind that performances will vary among the individual retail segments during the downturn. Markets associated with discretionary goods, as well as those that saw excess growth in recent years due to pandemic trends or stimulus spending, are likely to face sharper decline. Consumer staples will be more insulated from the downturn, though there will likely be a shift toward lower-cost alternatives. Make sure to research the trajectory of your target market, as well as regional trends, when making business decisions.



Profits and Cash Are Declining but Still Elevated Relative to Pre-Pandemic

From a financial perspective, businesses are in decent shape − generally stronger than before the pandemic but not as strong as in 2021 and much of 2022. US Domestic Corporate Profits (with capital consumption adjustments) have declined for two consecutive quarters and are now in Phase D, Recession. Annual US Corporate Cash Holdings have retreated from the record highs of 2021 but are also still elevated relative to pre-pandemic levels. In March (the latest available data), annual Cash Holdings came in at nearly double what they averaged the decade that preceded the pandemic. If at all possible, keeping a larger cash buffer on the back side of the business cycle will help you weather the downturn and potentially take advantage of any good deals on capital goods or acquisitions that may arise. Cash is especially important given tightening credit standards and elevated interest rates.

Confidence Is Waning, and B2B Spending Is Likely to Transition to Decline

The US Business Confidence Index is generally declining and below the long-term average. Interest rates are high, and lending conditions are tightening. As businesses’ financials soften and the macroeconomy wanes, we expect to see annual business-to-business spending decline; this trend will commence in the near term and extend through the end of 2024.

Producer Prices Mildly Declining, but Labor Costs Will Rise Further

Quarterly US Producer Prices are generally declining, a trend we expect to persist into 2024. Reevaluate your pricing contracts for your inputs in light of this change, if applicable. Also, reinforce your competitive advantages to your clients to help buffer your margins on the back side of the business cycle. Remember that the tight labor market will likely continue to put upward pressure on wages.


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