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The Weekend Edition # 159 - The State of the US Consumer
Macro Recap: A Very Long Week; Macro Update: The State of the US Consumer; Closing Thoughts: Eventful Weekends, Ugly Monday Mornings
Ayesha Tariq
February 02, 2025
Welcome to another issue of the Weekend Edition!
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Here's what we cover
Market Recap - A very long week
27 Jan - 31 Jan, 2025
Source: Koyfin
It feels like we just experienced one of the longest weeks! The markets saw quite a bit of volatility this week not just because of the Fed, macro data, and earnings, but also because of unforeseen events. While we saw a spike in the Vix, it certainly was far more muted than previous episodes, possibly because only parts of the market were affected.
On Monday, most of us were caught completely off guard when we were faced by the market selling off because of China’s DeepSeek AI model. The rumor was that the model cost only $ 6m to train on old Nvidia chips, and that called into question all the Capex spend being done by the rest of Big Tech, and the need for higher compute power with more advanced Nvidia chips.
We’ve see a few of the AI peripheral stocks recover substantially since then, but Nvidia continues to remain under pressure.
To make matters worse, we got a Fed that came out far more hawkish than everyone expected. Not only did they not cut rates (which was expected), they changed their statement to remove wording that said progress was being made on inflation (which was not expected). Fed Chair Powell later tried to walk this back saying it was language clean-up, but I don’t think anyone’s buying that.
Three takeaways from the Fed:
They are in “no hurry to cut”. Rates are not going to be cut until substantial progress is made on inflation. The bar to cut is much higher now, and unless we see severe deterioration in the labor market, the next cut may come around mid-year.
Rates are sufficiently restrictive, which means we’re not getting hike, at least.
The 2% inflation target is not going to be changed, and the Fed will continue to maintain its independence on rate cuts, refraining from commenting on political matters.
Commodities
Source: Koyfin
The past week has also been quite volatile for commodities. Natural Gas took a severe beating, down -23% on the week. Oil also pulled back, but down only -2% on the week.
Agriculture saw a mixed picture, but Coffee prices continue to rally. Coffee prices have now surpassed their 1977 peak.
This is astonishing and is definitely creating a problem for traders. A few weeks ago, I cited an article that said that coffee traders are going belly-up because of margin calls. It’s definitely something to keep an eye on.
Finally, we come to what everyone is talking about - Gold and Silver. Now, Gold has been spiking for the past few days. There have even been several news stories citing the rush to buy physical gold. Gold is acting as a safe haven commodity.
With the threat of tariffs, the US federal deficit, and the Fed’s slowdown in easing, we’ve seen longer-term Treasury Yields move up and the Yield Curve steepen. Counterparties may be worried about buying bonds under these circumstances. Not to mention, the US Dollar also remains volatile, so the place to hide has been Gold. Bitcoin is still considered a risky asset to a large extent, but even then when you look at the US Dollars performance in comparison, Bitcoin wins. So we’re seeing somewhat of a bid there as well on occasion.
The chart above shows the price of gold in the top panel, with the volatility of gold in the bottom panel. As the volatility recedes, we’re likely to see the price increase, in general.
Silver, is the same to a certain extent, but it’s also seeing upward pressure on prices because of the threat tariffs on Mexico.
“As of 2023, Mexico is the world’s largest silver producer, contributing approximately 6,400 metric tons annually, accounting for about 24.8% of global production. Following Mexico, China and Peru are the next leading silver producers, with outputs of 3,400 and 3,100 metric tons respectively.” - Wikipedia
Macro - The State of the US Consumer
This week we received quite a few important macro data pieces that give us important clues about the strength of the US consumer. We look at 4 factors that tell us how strong the US consumer may be:
Spending Patterns
Wages and Labor Stats
Cash Balances
Distribution
1. Consumer Spending continues to remain robust
Starting off with the US Real GDP Growth number. While we saw overall GDP growth slow QoQ, from 3.1% to 2.3%, Real Personal Spending growth actually increased significantly from 3.7% to 4.2%.
Next up we got the monthly and yearly PCE Inflation numbers. MoM PCE increased by from 0.1% to 0.3% and YoY PCE increased from 2.4% to 2.6% in December. Now we know that PCE or Personal Consumption Expenditure is a measure of how much US households spend on goods and services. So, it stands to reason that US spending patterns remain robust.
We can also look at retail sales numbers. In December, overall Retail Sales YoY dropped marginally from 4.1% to 3.9%. The biggest contributor to the drop was Building Materials, followed by Non-store Retailers and Departmental Stores. However, we did see increases around staples (Grocery & Healthcare) and some of the bigger discretionary items such as Autos, Furniture, Electronics & Appliances, and Sporting Goods and Hobbies. So there is a balance of spending patterns here, and if we look at a slightly longer term trend, what we see is that Retail Sales have been seeing somewhat of a more stable trend.
2. Wages, Income, and Savings are starting to decline
It’s no secret that the labor market continues to remain resilient. The Unemployment Rate has increased over the past two years but at a very gradual rate. Part of the increase in the unemployment rate is attributed to the labor market actually coming into better balance. During Covid, companies had laid off too many workers and then there was a period when people didn’t want to go back to work, so demand was far higher than supply. Then there was a period of over-hiring and now we’re finally seeing some of those supply and demand issues balance out.
As for wages, after a period of initial stagnation after Covid, we’ve seen wages increase substantially. A major part of that was trying to entice people back to the workforce, while a more minor part was coping with inflation.
The best way to look at this is through the Quarterly Employment Cost Index (ECI).
On a YoY basis, the December quarter showed the ECI at 3.8% down from the peak of 5.1% in late 2021. While we have come far down from the peak on a YoY basis, we still remain far above pre-pandemic levels. This suggests that wages also remain sufficiently supportive of the US consumer and the resulting spending patterns that we are seeing.
However, when we look at the change in Real Disposable Personal Income and the Personal Savings Rate, we see a slightly different picture. Both have been gradually reducing in the past two years.
Real Disposable Personal Income
Personal Savings Rate
When coupled with the reduction in the Employment Cost Index, this does give us some troubling indications of how strong the consumer may remain, if this pattern continues.
3. But US Households are Wealthy and remain cash rich!
While regular earnings are decreasing, the reason we still see the US Consumer as fairly resilient is the household balance sheet. US Households had $190T in Assets, with only $20.9T in liabilities as of Q3, 2024, resulting in a net worth of $169T.
The amount has increased significantly in the past 15 years and the largest changes we’ve seen stems from Corporate Equity Holdings. So the stock market plays a big part in the wealth of the consumer.
We can then look at the actual cash balances of US households. As of Q3, 2024, the US Household had a whopping $18.2T in cash balances!
Checking Accounts = $4.3T
Savings Accounts = $9.8T
Money Market Funds = $4.1T
TOTAL = $18.2T
This gives US Households a sizable cushion even if earnings are gradually normalizing.
4. The Distribution of Wealth continues to remain uneven
But, let’s also acknowledge that all of this wealth and cash balances are not evenly distributed. If we look at the distribution of wealth, it’s clear that the US still continues to have a K-shaped economy where the distribution of wealth is becoming even more uneven in relative terms.
The bottom 50% of Households account for only 2.4% of the overall wealth. It’s disheartening by many measures!
Bottom line:
The US Consumer is still cash rich with an estimated balance of USD 18.2T, and that largely supports the 4.2% quarterly increase in spending that we saw in the December. US Households had $190T in Assets, with only $20.9T in liabilities as of Q3, 2024, resulting in a net worth of $169T.
However, it’s important to also acknowledge that wages and income are decreasing in relative terms. The Employment Cost Index has declined to 3.8% during Q4, 2024 down from a peak of 5.1% in late 2021. Therefore, these robust spending patterns may not continue unless we see prices stabilize.
It’s also important to acknowledge that the US still has a K-shaped economy where the top 25% is largely skewing the “cash richness” of the data, while the bottom 50% account for very little of Household Wealth and continue to struggle with increasing prices.
Closing Thoughts - Eventful Weekends, Ugly Monday Mornings
“Headline risk” - a term I haven’t had in a while is making a big comeback. With President Trump’s tweets, and flurry of executive decisions, we’re in quite uncertain times. Most importantly, the weekends seem to have become very busy. There’s always something going on.
This weekend, it’s the tariffs. Keeping his word, President Trump levied tariffs of 25% on Canada, and Mexico, while China got hit with a 10% tariff.
Twitter (or X) reports that President Trump has threatened that any retaliation from these countries will be hit by a doubling of the tariffs.
We’ll see where all of this lands, but we’re likely going to see a risk-off scenario when markets open. The impact of the actual tariffs is one thing but the bigger impact comes from all the uncertainty, retaliation, and potential for trade wars.
Have a safe trading week out there!
Sincerely yours,
Ayesha Tariq, CFA
There’s always a story behind the numbers.
Calendars
US Earnings Calendar
US Economic Calendar in Eastern Time (Source: Trading Economics)
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