Chances of a Soft Landing: A Trick or a Treat?

Jeffrey Roach:

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, with an update on what's new in the macro landscape and a call to action for investors. First, well-heeled millennials are keeping this economy afloat. On the surface, the consumer looks glittery, but when we look under the surface, not all cohorts are golden. Before the pandemic average, real consumer spending was similar across incomes and ages. But after the initial onset of the pandemic spending meaningfully diverged by income. The stimulus program temporarily spurred spending by lower income households. But that didn't last very long. And I'm showing in this graph the outsized growth in real spending done by upper-income households, although I don't show it here, the demographic within the wealthier consumers that supporting this are the millennials. Strong consumer spending in September suggests economic growth in the previous quarter was solidly above trend thanks to those millennials.

Jeffrey Roach:

But looking ahead, investors need to monitor any signs that the unemployed are finding it more difficult to earn a paycheck. Second, inflation expectations continue to improve. Inflation expectations over the next year was revised down recently to 2.7% from 2.9%. Certainly better news for Powell and company, but consumers are getting more hesitant to buy big purchases, according to the latest University of Michigan survey. Consumers think it's a bad time to buy, but also a bad time to sell a house, according to that University of Michigan survey. So investors really should expect a softer real estate market in the near term, especially since mortgage rates rose in the past month and inclinations to buy a vehicle deteriorated in October as consumers are uncertain about the future path of car prices and auto loan rates. Now, bottom line is this, despite rising concerns about income, growth and employment, consumers feel confident that inflation is easing.

Jeffrey Roach:

But note that a stronger than expected jobs report could force the Fed to hold at the upcoming meeting, although that's not our base case. Third, Stalwart upper-income consumers are starting to feel a little bit of pressure. What scares us this Halloween season is the potential stress on the wealthier cohort as more upper-income households reported, they're most likely to be unable to make their minimum debt payment, now at the highest percentage since mid 2014, when the economy was feeling the aftereffects of the global financial crisis, as you see in this chart. So what does this mean for markets? Expect a slowdown in hiring in the near term, expect interest rates to fall through the next 12 months, and finally, we should expect consumers, particularly those with middle and upper-incomes, to weather through the slowdown and help the economy stick that soft landing if possible. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.