America’s Insatiable Thirst to Spend

For those of you who would prefer to listen:

The American people keep spending. That’s an important takeaway from a series of data points reported this week. Despite chronic high prices and spiking interest rates, consumer spending hasn’t seen much of a dent; At least not yet. Of course this matters as the Consumer accounts for 70% of America’s Economy. In Q3, spending was still strong.

Retail sales rose 0.7% in September from August. That blew away the estimates of a 0.3% increase. And August was revised upwards to 0.8% growth. Cars led the way. The automobile category recorded a 6.3% increase from a year ago. The health & personal care category grew over 8%. Also of note, the September report showed that retail sales growth rose slightly more than the rate of inflation. That broke a multi-month trend.

Treasury yields rose given these stronger consumer trends than had previously been expected. It helps support the soft-landing scenario for the Economy. It’s not landing yet. Recession has still been avoided. That keeps the Fed rate path higher. That means borrowing costs stay higher. More on this later. 

People are spending on experiences like never before. Americans are on track to spend nearly $100 Billion on event tickets in 2023. That would mark a 23% jump from last year. What’s more, it would be 12.5% ahead of 2019, the previous record year before the pandemic shut down events across the globe. 

Taylor Swift is a big reason for this. She’s an economic engine like few others. Swift’s Eras tour is estimated to account for $10 Billion of economic activity alone. Her film set a box office record last weekend, raking in nearly $100 Million in the US and another $30+ Million overseas. Everything Taylor Swift touches these days turns to gold. Her alleged boyfriend, Travis Kelce, the Pro Bowl Tight End for the Kansas City Chiefs, saw his Jersey sales spike 400% after she showed up at a game this season. Swifties are football fans now too. The NFL sees $$$ as they’re known to do. 

“Funflation” has made it into America’s vocabulary. Have you heard this word? It refers to the higher consumer demand for fun experiences, which inflates the prices of these experiences. There has been a huge trend in which consumers are more inclined to shell out money for fun experiences over products typically purchased for home use. Sales of televisions and computers have slowed big time. In fact the Best Buy CEO blamed Taylor Swift for the slowdown in his company’s sales.

American Express reported its 3rd quarter results this week. It was a clear reflection of consumer spending. They’re definitely putting it on the card. Total Global Card Member spending was up 7% from a year earlier. U.S. Card Members increased by 9%. Travel has been a huge theme in 2023. Travel and Entertainment spending remained robust, increasing 13% in the quarter. Americans went overseas in size too. The AmEx International Card Services segment jumped 15% on a currency-adjusted basis. This type of activity has certainly kept the US Economy humming. 

Proctor & Gamble, one of the largest consumer product companies, reported a strong quarter. The maker of Tide, Pampers, Bounty and Crest recorded organic sales growth of 7%. P&G has pricing power. The sales growth was driven by +7% price and +1% mix. It was partly offset by -1% volume. That means people are still paying more for less.

JB Hunt is a large American trucking company. Its earnings report is a good gauge to measure demand for stuff from coast to coast. The company has been facing pricing and competitive pressures. JB Hunt said there’s a freight recession, which is expected to persist into 2024. Remember early in Covid, people were feverishly buying stuff as they were sheltering in place. Manufacturers couldn’t keep up with demand and then increased supplies just as the country opened back up. Spending switched from stuff to experiences. 

The re-opening of America put an emphasis on travel and services. That’s certainly the story of 2023. Americans have been buying less stuff. The good news is they are starting to see signs of positive return in intermodal volumes ahead of the Holidays. Inventories seemed to have been burned off. This could be the end of the de-stocking cycle. But according to Hunt, there still isn’t any meaningful traction when it comes to re-stocking. Companies are still cautious. 

Americans continue flying the friendly skies. United Airlines reported strong Q3 results and guided for better than expected 10.5% revenue growth in Q4 with an important caveat. Those estimates are only possible if suspended flights to Israel open up again in November. United said it would slip to 9% revenue growth if those flights are suspended through year-end. Overall demand remains strong. But profits are being squeezed by higher jet fuel prices. That’s a nagging cost everyone is dealing with.

Having flown United this week, traffic was heavy at both SFO and O’Hare. Flights were packed. In fact, I’m sitting at the terminal waiting for my delayed flight as I type. Chicago was jammed with activities on the road, at the parks and along the lake, as well as in restaurants, bars and hotels. Wallets were open. Credit cards were swiping. Phones were active. People were spending.

Of course, that observation is purely anecdotal and the results are in the rearview mirror. But there is plenty of indication that spending will continue into the seasonally strong Holidays. A new Deloitte survey sees holiday spending up 14% this year. Beyond 2023 is a total wildcard.

Elon Musk sent a cautious warning after Tesla reported its disappointing quarter. These large interest rates are weighing down affordability. High energy prices are also providing pressure. Oil jumped over 3% after Iran’s foreign minister called for an Oil embargo against Israel. It went even higher, back over $90, in response to a drone attack in the Persian Gulf. The Market has been taking these pressures in stride. But there are definite limits. It’s believed an Oil spike to $120 per barrel would stall global growth.

Geopolitical concerns grabbed more Market attention after largely looking past them earlier in the week. Historically, there’s been a tendency to ignore these global events due to a pretty consistent pattern of having very little economic impact.

The Market focuses on facts, not emotion. News that an Iranian drone was shot down by the US Navy rattled things a bit, particularly sending the price of Oil soaring. The situation in the Middle East is so dangerous in many ways. It will be an overhang for a while. So will another issue: America’s debt.

The United States now has $33.6 Trillion in debt. It’s never been this large. It’s showing no signs of slowing down either. The Federal mountain of debt grew by a whopping $2 Trillion just since Spring. The cost to service the debt is growing fast too. The benchmark 10-year Treasury yield is near that psychologically important 5% level. It hasn’t been there since 2007. It was 4% earlier this year. It was close to zero in 2022.

There was a successful Treasury auction this week. That’s an important indication of healthy demand, particularly for longer maturities like 10 and 20-year debt. This means the government didn’t have to entice investors with a premium over the current bond rates to have them buy the debt. That’s big. The question is, can it continue?

Another positive factor was the intake by dealers. Bond dealers, who buy up supply not taken by bidders, had to accept 11.9% out of the $13 Billion of 20-year bonds sold. That’s only slightly higher than the average of 9.8% so far this year. Higher yields have made bonds more attractive than they’ve been in decades. That said, Bond investors don’t want to see those yields keep rising. Higher yields mean lower prices in Bondland.

China has been selling Treasuries. It now owns just $800 Billion of America’s debt. It was north of $1 Trillion before Covid. China is still the 3rd largest owner behind the Federal Reserve and Japan. But the number of buyers is shrinking. This, at a time when the Fed has switched from being the largest buyer to the largest seller of Treasuries as it reduces its Covid balance sheet.

Many have been pointing to sticky inflation and a higher for longer Fed approach for the recent spike in yields. That’s true. But we think something else is going on. The Market seems to be finally sending the message that reckless spending in Washington is no longer tolerable. Fiscal discipline has been absent for years. Both political parties are squarely responsible. There’s a serious debt problem. It can’t last.

For the first time in memory, there’s a real question of who will keep buying America’s ballooning debt. Dysfunction in Washington is pressing the limits of acceptability. It’s no coincidence that the 10-Year Treasury yield soared so much lately. The inability to simply name a Speaker of the House of Representatives is a clear message that today’s United States Congress is challenged with the very basics of governance. America’s AAA credit is legitimately being questioned because its government leadership is substandard, at the very least. 

America has an insatiable thirst to spend. It’s been that way for decades. Covid exacerbated it. At 70% of revenue generation, the Consumer dominates our Economy. In many ways, shopping is a sport. It can also be a vice. Overspending can cause problems when the bill arrives. The Federal debt sits at over $33 Trillion. Credit card debt cleared $1 Trillion. Both are record highs. Credit card delinquencies have begun to rise of late, which is an early sign of weakness at the household level. This is something we are tracking closely.

Accumulating debt is normal and even encouraged at times. But it comes with responsibility. The cost to service said debt has spiked of late. A big reason is the inability to demonstrate discipline with a healthy, balanced budget. The Market is finally pushing back. That’s new. Gold has caught fire again as a safe haven. It’s all worth paying attention to.

Have a nice weekend. We’ll be back, dark and early on Monday.


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