US Consumer Starting to Slow Down

Just when everyone is abandoning the recession call, the data starts to slow down.

1) The Restaurant Performance Index has sharply declined in recent months, see the first chart below.

2) Credit card and auto loan delinquencies continue to rise, and these trends will continue with the Fed on hold well into next year; see the second and third charts.

3) Weekly data for bank lending is slowing rapidly, and weekly credit card data shows that consumer spending on durables that require financing, such as furniture and electronics, is slowing, see the fourth and fifth charts.

The bottom line is that Fed hikes are starting to negatively impact consumer spending, as also shown in the weekly data in the sixth chart.

Weaker consumer spending is not surprising. The whole idea from the Fed raising interest rates is to slow down growth and ultimately inflation.

Restaurant performance is sharply slowing down.
Source: National Restaurant Association, Haver, Apollo Chief Economist
Credit card delinquencies are back at 2008 levels.
Source: New York Fed Consumer Credit Panel / Equifax, Apollo Chief Economist
Auto loans are becoming seriously delinquent.
Source: FRBNY Consumer Credit Panel, Equifax, Haver Analytics, Apollo Chief Economist
Demand for loans falling sharply and small and large banks.
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist.
Consumer spending on furniture and electronics are slowing.
Source: BEA, Haver Analytics, Apollo Chief Economist. Note: The weekly values represent the predicted percentage difference from the typical level of spending (prior to the pandemic declared by the World Health Organization on March 11, 2020) after adjusting for day-of-week, month, and year effects, based on daily data. The typical level corresponds to a value of zero.
Retail sales are slowing.
Source: Redbook, Haver Analytics, Apollo Chief Economist

Housing Recovery Is Not Helpful for the Fed

The ongoing rebound in the housing market is putting upward pressure on growth and inflation at a time when the Fed is trying to slow down growth and inflation, see chart below.

The housing market is rebounding
Source: BEA, NAHB, Haver Analytics, Apollo Chief Economist

The Long-Run Risk-Free Rate Is Starting to Move Higher

The Fed has started to increase its estimate of the long-run Fed funds rate, see chart below. The implication is that the Fed is beginning to see the costs of capital as permanently higher. A permanent increase in the risk-free rate has important implications for investors.

Fed members are increasing their estimates of the Fed funds rate
Source: FRB, Apollo Chief Economist

Weekly Cellphone Traffic Across US Cities

Cellphone traffic in downtown San Francisco is now at 29% of pre-pandemic levels. For Chicago, it is 56%, and for New York City, it is 71%. The data compares the week of April 10, 2023 with the corresponding week in 2019.

Cellphone activity in San Francisco is only 29% of pre-pandemic levels
Source: University of Toronto School of Cities, Apollo Chief Economist. The data compares week of April 10, 2023 to corresponding week in 2019. See downtownrecovery.com for more information.

Lower Long Rates?

For the first time in 20 years, the consensus is predicting that long rates will go down. This is important because the Federal Reserve is trying to slow the economy down to get inflation back to its 2% target, and with that slowdown is the expectation that long rates will go lower. When something turns around like this after such a long time, it is rather unusual and worth paying attention to.

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Inflation Higher Than 2% for Most Categories in the Inflation Basket

The chart below shows the weights of different components in core CPI plotted against the inflation rate in each of the categories, and the bottom line is that inflation is higher than the Fed’s 2% inflation target for the vast majority of components of core inflation.

Source: BLS, Haver Analytics, Apollo Chief Economist. Note: Data as of May 2023.

Inflation Expectations Rising

The consensus continues to revise higher forecasts for core inflation in 2023 and 2024, see chart below.

Consensus continues to revise higher expectations to inflation in 2023 and 2024
Source: Bloomberg, Apollo Chief Economist