The Decisive | Season 4 Ep.18 - It's Beginning to Look a Lot Like... the Economic Outlook for US Consumer Spending

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Kristen Hallam:

You're listening to the Decisive Podcast. Insights and analysis to empower confident decision making.

Hello and welcome to The Decisive Podcast. I'm your host, Kristen Hallam. And today we're going to be talking about the U.S. economy and in particular U.S. consumer spending. The U.S. consumer is very much in the spotlight at this time of year, given the holiday shopping season. We're recording this episode on December 3rd. So we've just had Black Friday and I know I've been inundated with pitches for the past month at least.

So here to discuss consumer spending is someone who's recently been quoted by the New York Times, the BBC and Forbes, our own Michael Zdinak, Ph.D. a director in our U.S. economics team. Michael, welcome back to The Decisive Podcast. It is great to have you here.

Michael Zdinak:

Good morning, Kristen. Thank you. Excited to be here.

Kristen Hallam:

So let's kind of start at a high level, Michael, now that the US government has reopened, are we finally getting a clearer picture of the economy or is there still a data lag from the shutdown?

Michael Zdinak:

Great question. We're three weeks now into the reopening process for the federal government following a six-week shutdown, which is expected in our forecast to shave about a percentage point from fourth quarter GDP growth, which will inevitably be added to first quarter growth. The shutdown's direct impact on government services, however, has been significant. And the focus going forward right now is on how quickly federal agencies resume regularly publishing key economic data. So far, the Bureau of Labor Statistics and Census Bureau have only announced dates for a few delayed data releases to address this backlog. And so the important thing to keep in mind here is that BEA, the Bureau of Economic Analysis, relies on the data from BLS and Census to produce their estimates of

GDP growth, meaning we're more likely weeks, not days, away from having an updated picture of the US Economy.

Kristen Hallam:

Sounds like maybe that will be a late Christmas gift to us all. So what is a high-level view of the data we have, Michael, and where are the gaps still?

Michael Zdinak:

Since reopening, we've gotten BLS data on employment, earnings and prices through September and Census data on September retail sales as well as trade, manufacturing and construction data through August. So what we're waiting on right now is still a chunk of the census data from September that informs our estimates of inventories and investment during the third quarter. And not to mention the BLS reports on September job openings and labor turnover, which is known as JOLTS, as well as the October employment report, both of which were canceled because of the shutdown.

Kristen Hallam:

Just to be clear, you said canceled like the Taylor Swift song, and not just delayed. What does that mean for the data? Is it, is it just gone for good?

Michael Zdinak:

Yes. The monthly employment report actually contains data from two separate surveys. One is the survey of businesses and the other of households. So the data on payrolls and earnings which comes from October's establishment survey will actually be included in November's report, set to be released on December 16. But October's household data, which includes things such as the unemployment rate, actually weren't collected and will not be available.

And to be clear, that's never happened before. Your household employment data stretches back to 1948, you know, almost 77 years. And while past reports have been delayed, this is the first time we'll actually have a gap in the official data. So when policymakers on the FOMC meet on December 9, they'll have data on JOLTS for October, but not data on

October employment or November employment. And this kind of helps explain the tension that you may be hearing about going into their final meeting of the year.

Kristen Hallam:

Wow. The first time in 77 years. That's incredible. So I know your focus is on the consumer and not on the Fed, Michael, but I have to ask, since you brought it up, what do these delays mean for monetary policy?

Michael Zdinak:

No, it's my own fault. But policymakers do have their work cut out for them. You know, one side of their dual mandate shows a notable downshift in the labor market. Payroll employment's been little changed since April and gains for the past five months have averaged only like 40,000 jobs, you know, which is well below the average of 150 for the preceding 12 months. And we now have two months both in June and August, where non-farm payrolls actually declined. So things are clearly slowing. But on the inflation side of their mandate, you know, September's report also showed average hourly earnings rose and are up about 3.8% in the last 12 months. And while this is below the peak we saw in early 2022 of about almost 6%, it's still above a range, you know, three, three and a half percent that we view to be consistent in our forecast with 2% inflation.

And that number is also little changed in January. So what the tariff report does is really highlights the risks to both sides of the Fed's dual mandate. And it's one reason why we expect the decision in December to not only be close, but also to be the last cut we see for some time.

Kristen Hallam:

Interesting. Well, we'll have to pop some popcorn for the FOMC meeting for sure.

Michael Zdinak:

I will certainly be watching.

Kristen Hallam:

So getting back to the US consumer, what's the next big piece of that puzzle that you're waiting for? What data will help you shape your outlook going forward?

Michael Zdinak:

Absolutely. As you said, we're recording this episode on Wednesday, December 3rd. And so on Friday, December 5th, we'll get our first peek of the GDP data for the third quarter, and that's with the release of personal income and outlays for September. So as of Friday, we'll have monthly data on consumer spending and prices through September. And while we won't get the initial GDP report for the third quarter until the 23rd, so an early Christmas present indeed, this data should give us a pretty good idea of where the economy at least was heading into the fourth quarter. Now, we've all heard and we know that consumer spending is about 70% of GDP and obviously prices are front in mind right now. So this is incredibly valuable data. But the income data that we'll get on Friday is just as valuable as well.

And with that, we'll have a near complete picture of what's known as gross domestic income by the end of the week. And that should go a long way to getting us back on track for, you know, the regularly scheduled data we hope to have starting next year.

Kristen Hallam:

Right. All right. Now just hopping back in time for a minute. Right before Thanksgiving, we got data on retail sales for September. Which is better late than never, I guess. But what does that data tell us about consumer spending this year?

Michael Zdinak:

Absolutely. After a soft start to the first half of the year, data on retail sales show consumer on sure footing heading into the third quarter. The headline figure rose modestly in September and followed strong gains in August. And yes, growth slowed, but that was after two consecutive better than expected reports. And it really helped to affirm our view of a couple things that are going on with the consumer right now, particularly in the third quarter. That first, the recent headline figure was boosted in fact by temporary factors, tax credits for electric vehicles, promotions at online retailers, and you know, starting the third quarter, back to school shopping. But also broadly that consumers follow their wallets and

not their fears in the third quarter. And that's a big indicator of where things may be headed later this year.

Kristen Hallam:

So just drilling down a little bit on this, Michael, does that picture look different for low earners versus high earners?

Michael Zdinak:

Absolutely. If you asked me to summarize the current economy, it would be as follows. It's a great time to have a job and a terrible time to not have a job. And you can really see that in the breakdown of wage growth into different income quantiles. You know, those high earners, which actually saw less wage gains at the start of the recovery coming out of the pandemic, have now caught up and surpassed gains at the lower end of the income and at the same time have also enjoyed gains in wealth stemming from the stocks that they hold and the homes that they own. So when you hear about high income earners driving consumer spending, that story is true. On the lower side of income, especially if we're talking about those who are receiving government benefits or may have missed staff, snap, SNAP or WIC payments this last month. That's where you're really going to see people struggle this holiday season. When we're talking about averages, which a lot of the numbers that we, we produce and forecast are, it doesn't always tell the full story of the economy.

They're still important, mind you. You know, consumer spending is in fact growing, no matter how bad it may be for individual people or how good. But those averages can sometimes hide a lot.

Kristen Hallam:

Yeah, that's an important caveat for sure. So taking a look at core sales, which maybe you could define that term for us as well, taking a look at core sales. You wrote recently that core sales were softer than expected in September. What implications does that have for consumer spending heading into the fourth quarter?

Michael Zdinak:

Core sales are what informs our estimate of PCE growth on a quarterly basis. And so we use the monthly data to get ahead of our quarterly estimates for consumer spending. More broadly, core or control retail sales excludes the more volatile retail components, which are sales of building materials supply stores, auto and motor vehicle dealers, and gasoline stations. So the things that you expect to go up and down more each month, you know, or have large seasonal variation. No, and recently, you know, core sales have slowed, but to a still solid number. And it's kind of indicative of the balance between the slowdown in hiring we see and the rise of pricing. It doesn't portend that, you know, sales are expected to fall off in the fourth quarter, but they are expected to slow from where they were. And, you know, if we look past core sales to consumption broadly, you know, if you're looking at the headline retail numbers in the next couple months, one thing that's going to be really pulling them down is the drop in auto sales.

We expect to see. You know, a lot of those sales were brought forward from the fourth quarter into the third because of the end of tax credits on electric vehicles, which, you know, are cars that are on average more expensive than combustion engine vehicles. But the end of those incentives is really going to, you know, add drag to consumer spending more broadly in the fourth quarter, especially at the top headline number. So if you're wondering how the consumer is doing, you know, you might want to make sure you strip out those more volatile components to get a real focus on how the trend is evolving.

Kristen Hallam:

Got it. That's the top tip. So, Michael, can you give us an update on where consumer confidence and sentiment stand right now? How does that number tie into your outlook for spending?

Michael Zdinak:

Consumers clearly did not need government data to turn more bearish. In November, the University of Michigan's final consumer sentiment index fell to 51, which is a single index point above the all time low of 50 seen in June 2022. And consumer confidence tells a similar story. November's tally there was the second lowest reading in the past year and the second lowest since again, the pandemic recession. So right now, consumers are in a clear funk. There's no news good enough to cheer them up and they keep finding new things to be worried about that weigh them down. But the real question is, what will the impact on spending be? So far, the contrast between consumer feelings and consumer spending has been the story of not just 2025, but 2023 and 2024. While spending data shows a consumer

who's far from ebullient, data is still light years away from showing the angst reported in these, in the, in these survey measures of consumers feelings.

And basically had consumers followed these fears, you know, had they, had they been spending like they say they would spend, you know, the economy would have been in recession a long time ago. When we try to understand this story, you know, it's important to look at things like, you know, what the BLS reports, and that's real average hourly earnings and those have continued to increase. And this kind of goes to underscore why consumers may not be happy, but they're continuing to spend. That doesn't change the fact that we are starting to see the impact of higher tariffs on resale prices. We estimate offline that in September, retail prices confirmed further and are up almost 2% from a year ago. So that's something that people are really going to notice when they do go to shop this holiday season.

Kristen Hallam:

Very interesting, that kind of divide between sentiment and what people are actually doing. And that's a good point. You made as well, about prices going up this year. It makes me wonder about the difference between what we spend and what we actually get. So with, with prices on the rise again, what is your forecast for holiday sales for this year and what's the real story once you account for the possibility of inflation?

Michael Zdinak:

In preparing our forecast for holiday sales, prices feature prominently. The short end of it is that after two years of flat to falling retail prices, we forecast holiday prices will rise, you know, about one, one and a half percent, you know, so this means that while discounts on certain items may draw shoppers in the stores, the total cost of the gifts they bring home will likely be higher. And in our forecast, we break that down into its different components. We look for current dollar holiday sales to grow about 4, 4.8% in 2025. And part of that is boosted by rising prices. So do you look at this number which is above the Pre pandemic average of 4%, you ask yourself, you know, well, it's solid, right? That's, that's good news. And it's. Well, yes, it's certainly better than sales falling.

But you have to account for the notable increase in holiday prices, which is again the first time this has happened in about two years. That increase of about one, one and a half percent is more than double the pre-pandemic average and it's nowhere near as high as the surge we saw in 2021. But when we look past the impact of inflation, real sales growth is

expected to be more modest this year. Real holiday sales are forecasted to rise 3.2%, a notable slowdown from 4.8% in 2024. And while this number may be in line with the pre pandemic average, it's a notable decline from what we've seen in recent years.

Kristen Hallam:

Now, the data you mentioned on confidence and sentiment that is up to date and came out right before Black Friday. Correct? Is the, is there any evidence that shoppers’ sour moods kept them at home this year?

Michael Zdinak:

Thankfully not. Early reports suggest Black Friday sales are holding up well this year and there were even some reports from private companies that showed solid gains. Now, we won't have the official data for some time and so we don't know how much of that increase is in volume and how much reflects the higher prices I mentioned earlier. But our expectations broadly are that with retailers just as uncertain as consumers, they were pretty ready to roll out the red carpet. You know, go deals are in full spring this season, you know, in hopes of getting people into stores early and often to shop this year.

Kristen Hallam:

So out of curiosity, why is it that we care so much about Black Friday? Michael? Why does it matter?

Michael Zdinak:

Before the rise of the always online consumer, you know, Black Friday was the unofficial start to the holiday season. And with the winter holidays only a few weeks away, a lot of demand was concentrated in that one weekend. So Black Friday set not just the expectations for the entire holiday season, but created a significant revenue surge for retailers. And for some businesses, that holiday marks the moment that they move into the black for the year. You know, they finally start making money after loading up on inventories in prior months. And that's not where the name came from. It's often thought of together. So Black Friday still matters, but not like it used to.

Holiday shopping now stretches across weeks, if not months, thanks to savvy online shopping and ever earlier promotions. So it's no longer quite the make or break day for retail that it once was. But it is an important check in on the consumer. If sales are strong this year, retailers can head in December with confidence and probably hold the line on prices. But if results were to disappoint, you know, expect a fast shift to deeper discounts as stores, you know, really try to ignite demand and move inventory before time runs out this year.

Kristen Hallam:

Just as a consumer who's been on the receiving end of many of these sales pitches and marketing campaigns, it's been interesting to see how, how early they started and how they changed over time in the run up to Black Friday. And then, of course, we have, you know, Small Business Saturday and Cyber Monday. So it's not just about Black Friday anymore, is it?

And speaking of Cyber Monday, if shoppers are hunting for deals, where does the real action happen? Does it happen in stores or does it happen online? And what share of the pie are online sales expected to take this year? And one more question, I'll sneak in. Are online sales growing?

Michael Zdinak:

Yeah. In our forecast, the push and pull of spending and prices plays out both online and in stores this year. And while online shopping continues to be an engine of growth for retail, the gains there are also more modest than in recent years. So we look for online holiday sales to grow over a bust 8.6% this year. And that pushes the holiday spending share to about 29%. So roughly one in every three dollars that people spend on the holidays is spent online. And part of what's driving that is that just like coming out of the pandemic, the online channel remains the perfect venue for a cautious consumer, one who's trying to balance convenience against that hunt for a good deal. And you see this a lot in the retail data.

So online shopping is definitely and E-commerce is one thing we'll be keeping an eye on. An interesting recall in that story is that in recent quarters the growth of online sales that retailers classified as stores has actually outpaced the growth of non store sales, which are those who operate only online. So improved online offerings and in store pickup have really mattered for brick and mortar retailers and allowed them to capitalize not just on

convenience, but to compete more readily in price. The latest data we have on retail sales though shows you know, that trend kind of reverting back to where, where it's normal. You know, a lot of the strength we see in E commerce appears to be coming at the expense of brick and mortar. You know, slow sales growth at general merchandise is much more modest than what we've seen versus the E commerce channel. And so a big question when we get the breakdown of this data into store and non store next year will be, you know, where was the growth driving? Is it still being driven by, you know, online shopping or in store pickup at you know, traditional brick and mortar retailers or is it shifting back more to, you know, the purely online offerings? And that, that tells us, you know, something about where those companies are able to be most aggressive in their pricing and most able to attract, you know, scarcer retail dollars.

Kristen Hallam:

Something to, something to look forward to next year. So Michael, we're coming to the end of our time. Any final thoughts? What message do you want our listeners to take with them or how to think about this resilient but seriously stressed out consumer?

Michael Zdinak:

No, thank you. It's been a blast. Critically, what I'm looking at and thinking about this year is that the downshifting real growth is a reminder of consumers’ precarious position. They've managed to continue spending despite the ebb and flow of prices in recent years. But each time that growth has, you know, been a bit more measured for much of the decade. After inflation surged, you know, retail prices declined, restraining the growth of nominal spending while consumers got more for their dollars. Real retail sales, which is the value adjusted for the level of prices, are a measure of volumes and better reflect what shoppers take home rather than what they spend. And so while nominal dollars matter for retailer cash flows, from a consumer perspective, real sales are what directly impact their consumption and standard of living.

It's a big part of why we break it out this way in our forecast. And the theme of the current economy is kind of a return of this uncomfortable dichotomy. In 2023 and 2024, holiday prices remained essentially unchanged, rising and falling modestly in their respective years. But prices are still higher than they were before the pandemic. And this is a source of ongoing frustration for consumers, so much so that they often overlook the increases in their income in recent years. And these frustrations are particularly acute when shoppers have become accustomed to getting more for their dollars, as they typically do during the

holiday season. So even small price increases like we're forecasting can cut deeply into, you know, how people think and feel about their standard of living. Thankfully, as grumpy as they are, there's no evidence that these foul moods have stopped them from spending.

And you see this in outlays. While they haven't been strong this year, they're not really falling apart either. And we describe that as, you know, as I said earlier, consumers following their wallets and not their fears. Had they done that, the economy would have been in recession a long time ago. And yes, a bad enough inflation or jobs report could always change that. But for now, we expect consumers to muddle through the malaise. And whether you call that tradition or benefiting from past momentum, whatever is pushing consumers to spend, as long as nothing breaks in the weeks ahead, we look for sales this year to be pretty unexpectedly average. Yes, sentiment is hanging by a thread, and retailers and consumers are both holding their breaths, but we expect them to do well this year overall.

Kristen Hallam:

Thank you so much, Michael, for joining us on the Decisive. My only regret is that I wish I could have woven some references to favorite holiday films throughout our discussion, but I appreciate you taking the time to share your insights with us and we’ll leave it there.

Michael Zdinak:

Absolutely. Thank you so much. Have a great holiday season, everyone. Take care and stay warm.

Kristen Hallam:

Thank you for listening to the Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.