A Hero's Journey
The American Consumer endures
It is the view of this blog that the American Consumer—a.k.a. the Hungry Beast—is the main protagonist of our macroeconomic story. It is also the view of this blog that the spending proclivities of said Beast have driven, for the most part, the high rates of inflation of the past few years (as argued in this post from two years ago). Inflation, of course, is still lingering.
While we had disinflation over the last half of 2023, both the PCEPI rate of inflation and the CPI rate of inflation have remained stuck in neutral here in 2024. The CPI increased by 0.3 percent over the month of April, as announced by the BLS this week (which was slightly lower than the 0.4 percent that occurred in both of the previous two months). The recent readings of the PCEPI have similarly disappointed (as discussed in last week’s Macrosight post).
These emotionally deflating inflation readings beg the question: what has the Hungry Beast been up to, and what can that tell us about where inflation is headed?
The Road of Trials
In spite of interest rates increasing from zero percent to 5 percent in less than two years; soaring housing prices and shrinking inventory; octogenarians or near-octogenarians steering the ship; lizard-people invasion; and amidst a never-ending stream of turmoil and conflict at home and abroad, the Hungry Beast has persevered.
Figure 1 displays consumer expenditure (inflation-adjusted) for the past 24 months (ending with March of 2024), measured as the month-to-month percentage change (and adjusted for inflation).
From April 2022 to March 2023, real consumer spending increased by 1.4 percent, which was pretty anemic by historical standards (the 20-year average from January 2000 through December 2019 equaled 2.3 percent).
Yet, over the 12 months spanning April 2023 to March 2024, real consumer spending has increased 2.9 percent, or an average of about .25 percent per month.
In the past five months, the average annualized rate equals 3.7 percent. And in the last two months the Hungry Beast gorged itself at rates of 0.48 and 0.51, respectively, which comes out to annualized rates of 6.2 and 5.8 percent!1 That’s getting close to 2021 numbers!
An Apotheosis?
The consumer spending data over the past few months, if not the past year, may suggest that the Hungry Beast is not getting back to “normal”(like this blog posited back in 2022). All of this in spite of the aforementioned trials and tribulations, including a big jump in interest rates! Perhaps, then, we should not be surprised that the rate of inflation stubbornly remains above the Fed’s 2 percent target?
What does this mean for our macroeconomy? Has something fundamentally changed with consumer spending? Do recent consumer spending numbers imply that inflation will continue to remain 3-to-4 percent, or go even higher? To answer these questions, let’s consider the historical likelihood of recent consumer spending increases.
Figure 2 displays a histogram of month-to-month growth rates of real consumer spending going back to 1959 (a total of 782 months). The bin ranges can be seen along the horizontal axis, demarcated by the half-percent.
The histogram reveals the following: 75 percent of all months since 1959 have had a growth rate of zero percent or above. Only a quarter of the time have we ever experienced a negative growth rate for consumer spending. With respect to having a growth rate of at least 0.5%, that scenario occurs 29 percent of the time.
Given this information, we can answer the question, “How common is it to have a consumer spending increase like we did in March?”. It is not, in fact, uncommon. Historically, about one month out of three will show a spending increase of that magnitude.
If we look again at Figure 1, notice that over the past 24 months, we have had only two months with an increase of 0.5 percent or higher. That is a rate of only about 8 percent (in contrast to the 29 percent historically). Yet, out of the last 24 months, 19 of them have shown positive consumer spending growth. That comes out to be about 79 percent of the time, just a bit higher than the historical occurrence of 75 percent. From this perspective, the Hungry Beast’s appetite, for the most part, has been consistent with history.
A Call to Persistence
This simple analysis suggests that there does not appear to be anything fundamentally different about recent consumer spending. What this may also suggest is that the steady consumer spending numbers, especially the past three months, do not portend doom with respect to the rate of inflation. Perhaps inflation will increase, as some fear, but it should not be due to unusually high rates of consumer spending.
Ultimately what we see here in the data is positive news. Consumers are doing exactly (more or less) as they have always been doing, keeping consumption steady over the business cycle. There are ups and downs, but mostly ups. There have been some changes in trends, but nothing that suggests there is something “new” going on with the tastes and preferences of the Hungry Beast.
And that is okay; it is a good thing. Consumer spending is the foundation upon which every macroeconomic event, incidence, and outcome rests. And that foundation appears solid.
With simply annualization, 0.51x12 = 6.2 percent. Or, with the fancier compounding formula, [(($15762/$15681)^12)-1]*100 = 6.3 percent—where the dollar values are the inflation-adjusted values for consumer spending in February and March of this year, respectively. Numbers shown have been rounded.