Consumer Spending Holding Up Against Historic Inflation 

For the past week, investors have been pummeled with negative inflation data and its effects on the economy. 

The data have spoken, and one would surmise that the apparent doom and gloom in an economy tied so heavily to consumer spending would have had a much bigger impact on the stock market than the 9% pullback endured from its high set in December. Soaring gas, food, home improvement, personal services, labor, travel, business-related investment and anything related to discretionary spending would almost surely affect spending patterns that reflect elevated prices.

However, having traveled for the past couple of months, I can say with a relatively high level of conviction that the anecdotal evidence argues against this seemingly rational position. Trying to make a call on peak inflation in this investing landscape is akin to catching mercury in a bottle. It is dangerous to try.

But this past week, there was an upside surprise with one data point that might be considered a warning not to buy growth stocks until you see the “whites of their eyes.” And it bears close watching to see if it’s a one-off or a pivotal moment. 

This past Thursday, it was reported that the preliminary University of Michigan Index of Consumer Sentiment for April jumped to 65.7 (consensus 58.8) from the final reading of 59.4 for March. It was a notable improvement, although the April reading is still one of the lowest readings over the last 10 years.

Here’s how the data broke down according to briefing.com: 

Key Factors

• The Current Economic Conditions Index edged up to 68.1 from 67.2 in March.
• The Index of Consumer Expectations jumped to 64.1 from 54.3 in March.
• The year-ahead expected inflation rate held steady at 5.4%.
• Five-year inflation expectations were unchanged at 3.0%.

Big Picture

• The key takeaway from the report is that the improvement was driven almost entirely by the Expectations Index, which jumped on improved wage expectations and a belief that gas price increases will moderate substantially in the year ahead.

This reading coincides with prior sentiment lows in April 2009 and April 2012 when the S&P 500 suffered heavy downward pressure that underwent a selling climax soon thereafter, followed by an extended uptrend. The market is so efficient at pricing in fear and greed that when there is a fear-of-missing-out (FOMO) rally like what took place in late December and a sell-any-and-all-rallies mentality that dominates the current narrative, history would argue that a change in trend is about to take place. 

The thinking behind the potential pivot higher for the market this time around is the solid foundation of consumer spending demographics. As of 2020, there were about 11 million more consumers over age 60. 

“While millennials have dominated headlines in recent years, baby boomers (those born between 1946 and 1964) have continued to dominate consumer spending in the U.S. In fact, consumers over 50 now account for more than half of all U.S. spending. They are also responsible for more spending growth over the past decade than any other generation, including the coveted millennials,” according to usa.visa.com.

As a group, this over-50 crowd should continue to be a major force in U.S. consumer spending, especially as those over 60 years old drive growth over the next five to 10 years, according to Visa Business and Economic Insights. 

“This is happening for two reasons: demographics — there are simply more consumers over 60 than there were 10 years ago — and behavior,” Visa Business and Economic Insights continued. “Baby boomers, compared to generations that preceded them, are retiring later, holding on to more debt and maintaining budgets for travel and other discretionary treats.”

The other big driver of the Teflon U.S. consumer trend is the staggering size of the transfer of wealth beginning to take place. Between now and 2045, a total of $84.4 trillion in wealth is expected to pass down either to beneficiaries or charity in the United States, according to a report from Cerulli, a research and analytics firm. Most of the money (63%) will come from baby boomers. This passage of wealth is already well underway. Tens of thousands of young families with one income earner and two kids are moving into expensive neighborhoods in America’s nicest zip codes.

The report — titled “U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021: Evolving Wealth Demographics” — found that Gen X will get the highest inheritance amount at $29.6 trillion. Millennials are next with $27.4 trillion, followed by Gen Y ($11.5 trillion) and boomers ($4 trillion).

To put this data into perspective, the U.S. gross domestic product (GDP) is forecast to top $22 trillion in 2022, roughly a fourth of the amount of the amount of money that will go to our kids, grandkids and great grandkids. Again, it’s a fantastic sum that should provide some basis as to the level of confidence consumers are exhibiting despite inflationary pressures.

This tsunami of wealth transfer will evolve over several years, but what is does is paint a landscape of incredible financial security for the next three decades of recipients. To the here and now, consumers are spending. Delta Air Lines raised guidance last week, and for good reason — most flights are sold out, hotels are fully booked for the summer, bars and restaurants are back to pre-pandemic sales levels and the pace of home sales, remodeling and big-ticket purchases is robust — despite a 7.9% annual inflation rate.

The phrase “it’s always darkest before the dawn” comes to mind when I view the current economic situation on the ground in the major metropolitan cities in the United States. The one thing that sticks out now, when the market is in full retreat, is that the labor market is so strong: job openings galore, weekly jobless claims at historic lows and pay raises all around.

This is, to my understanding, never the case in prior times leading up to a recession. There is little, if any, evidence of pending layoffs because of slack demand for goods and services, and that is why the market might be nearing a selling climax.