Consumer Spending To Rise Modestly In The 2023 Holiday Season;
U.S. Economy Should Feel More Normal In 2024 As The Job Market And Inflation Cool
Consumers are in decent shape heading into the holiday season. Most people who want jobs have them, and Americans are confident about their job prospects in 2024. High prices are still a source of frustration, but income growth has outpaced inflation since May, bolstering spending power. While homebuying affordability is abysmal, high mortgage rates and home prices have little effect on the two-thirds of households who already own their homes. Consumer spending will likely rise 2% in the 2023 holiday shopping season, reflecting higher volumes of purchases against flat prices. Consumers are finally seeing deals at retailers: Used car prices were down 7% on the year in the October CPI report, TVs down 9%, computers and peripherals down 6%, and smartphones down 12%.
New car prices rose 1.9% on the year in the October CPI report. Auto inventories likely fell in October as the UAW strike held back production, but should quickly rebound. Fundamentals will be mixed for car sales next year. Supporting sales, the labor market is solid, wages are growing, and the overhang of unmet demand built up over the last few years will support foot traffic. To the downside, car loan rates are up by more than 1.5 percentage points over the last year, and high prices are persuading some consumers to keep repairing older vehicles they normally would trade in. Meanwhile, carmakers are releasing more new models, especially new EVs, and need them to sell to recoup investments in new technologies. On balance, this backdrop suggests solid growth of unit sales in 2024, but also more incentives and pressure on profit margins.
The economy will face ongoing headwinds from high interest rates next year, but also will benefit from the recent decline of gasoline prices, which fell to the lowest since January in November despite the Israel-Hamas war. Higher home equity and capital gains from the stock market will support spending by affluent households. House prices will likely rise modestly next year, with tight listings of existing homes supporting construction and sales of more single-family units. A lot of rental supply will come to market, too, slowing increases of new residential leases.
The economy is starting to meet the Fed’s pre-conditions for a pivot to less restrictive interest rates. Inflation is moderating, wage growth is trending lower, and a small margin of slack is opening in the job market. The Fed is likely to hold short-term interest rates steady at the next few decisions, then reduce the funds target a quarter percentage point at the June decision. The Fed will likely cut short-term rates another half percentage point in the second half of 2024, and slow the pace of their balance sheet reductions, too. Long-term rates will likely come down even more on expectations of rate cuts in 2025. However, the deficit poses ongoing upside risk to long-term rates.
