New Year Prosperity: A Financial Forecast for Indie Retailers in 2024
Economic and Consumer Outlook Part 1
I hope everyone is refreshed from the holidays and looking forward to a prosperous 2024. I have asked Matt Dmytryszyn, Chief Investment Officer for Telemus, to share his thoughts on the economy as it relates to Indie Retailers for 2024 for this week’s Indie Insights. Matt is one of the smartest financial people I know, with an encyclopedic mind and keen insights. He manages a staff of analysts who are constantly analyzing the economy. This will be followed up with a live webinar on Tuesday January 23rd, where you will have an opportunity to ask questions as we discuss strategies for the year. Telemus is one of the 20 top rated RIA (Resident Investment Advisor) as ranked by Forbes and Shook research.
Economic and Consumer Outlook by Matt Dmytryszyn
The resilience of the U.S. economy in 2023 was a surprise to most economists and investors. Heading into the year the widely held view was that the U.S. would enter a mild recession in the back half of the year. This couldn’t have been more wrong, with the U.S. economy growing over 5% in the third quarter alone.
The dominant contributor to the surprising surge in U.S. economy was the resilience of the consumer. Consumer spending far exceeded expectations with spending patterns leaning more heavily toward services over goods. More specifically, spending has been greatest around healthcare, travel, and entertainment. In the case of the later, the summer of Taylor Swift, Beyonce and Barbenheimer had a meaningful contribution to GDP growth. Per research conducted by Morgan Stanley, these three collectively had an $8.5 billion impact on the U.S. economy in the third quarter alone.
What many economists failed to adequately forecast was the sources that consumers would tap to afford their spending habits. First, consumers have been spending down the excess savings they were able to amass during the pandemic. Per the Federal Reserve Bank of San Francisco, by August of 2021 consumers had excess savings of $2.1 trillion. That had fallen to a little over $1 trillion going into 2023 and is estimated to be down to $0.4 trillion by late 2023. A second source supporting higher spending has been a lack of savings of current income. Prior to the pandemic, the consumer savings rate hovered between 7-8%. As of yearend 2023, the personal savings rate sat at 4.1%, roughly half of pre-pandemic levels. Lastly credit card balances were up 15% on the year, finishing 2023 at record levels.
Collectively, these funding sources will eventually dry up, indicating to us that the rate of consumer spending is not sustainable. What we’ve learned from the past, however, is that excess levels of spending can go on longer than one might expect. Given the current strength of the labor market, and favorable returns from stocks and bonds during 2023, consumers generally feel confident in their financial future. Thus, as we enter 2024, there aren’t any signs or impending catalysts that would indicate an immediate change in consumers’ willingness to spend.
An added positive for consumer sentiment is the remarkable deceleration in the rate of inflation. The Consumer Price Index (CPI) is the common metric used to assess the level of price increases across the economy. In June of 2022 the CPI showed that prices, on average, were up 9.1% over the trailing year. By November of 2023, the CPI stood at 3.1%, a significant deceleration in the pace of inflation, helped by much lower energy prices. The so-called easy work has been done with supply chains back to normal and energy prices off their 2022 record highs. Going forward, a normalization in car inventories and limited growth in rental rates for housing are likely to drive inflation lower. We expect inflation to be under control in the near-term. However, as we look out over the longer-term, we see indications that future imbalances in the supply and demand of commodities and real estate could lead to another bout of inflation in the later half of the decade.
Consumer Spending
Pandemic era economics have challenged economists as traditional forecasting tools have not been useful. This is especially true in forecasting the behavior of the consumer, which has proven to be a bit of an enigma. The reason being is there are multiple cross currents that make it challenging to prescribe expectations for any specific cohort of consumers, making it hard to paint conditions with a broad brush.
There have been favorable cross currents that have allowed individuals to increase their consumption. The combination of excess savings coming out of the pandemic, combined with a lower savings rate on current income, have resulted in consumers spending more and saving less. The caveat is that spending during and coming out of the pandemic was focused more on goods, and over the last two years has flipped toward a greater allocation of dollars to services such as travel and entertainment. In the coming years, we’d expect consumers will migrate back toward a more typical allocation between goods and services.
Less favorable currents have begun to create reduced consistency in consumer spending patterns. For starters, the dual faceted impact of higher prices on big ticket items like cars and homes, alongside higher interest rates associated with financing the purchases, is slowly challenging some consumer’s spending power. Take for example the cost of homeownership, which has now reached elevated levels. According to Redfin, an individual earning a median income would need to spend 41% of their wages on housing based on the median home price. This is up from 31% in 2021. While impactful, the reality is higher housing costs have not had a broad impact on all homeowners. If you bought your home and/or refinanced in 2021 or earlier, you haven’t faced the cost of higher home prices. Therefore, those consumers that have had to purchase a home more recently, and do so with a mortgage, are going to be more cash strapped than those that have been in their home for several years and don’t have plans for moving. This logic also applies to automobiles, where interest costs have also spiked. Given the relative size of a car purchase versus a home, the impact on consumers spending power due from vehicle purchases is smaller.
More recently a new challenge has been the resumption of student loan payments. Payments on government student loans resumed in October. The average student loan payment is roughly $300, which will impact spending patterns for the roughly 44 million Americans that have a student loan.
As we consider these cross currents, what’s become more apparent is that consumer behavior is becoming more divergent. Specifically, an individual or families spending patterns are going to be a function of their savings trend, level of debt, when they took on that debt, and when the rates on that debt reprice. The significant surge in savings levels during the pandemic, and now with interest rates over the past two years, have served to magnify the differences in behavior across consumers.
What’s Ahead for 2024
As we look ahead to 2024, we expect to see some easing in the rate of growth in consumer spending. For starters, excess savings balances are expected to be exhausted by the end of the first quarter. Second, the benefit that consumers received during the back half of 2023 from the stabilization in food prices and declining gasoline costs is likely to level out. Third, over time consumers will have to gradually take on higher cost debt as they purchase a new vehicle or are required to move homes. The impact of higher interest costs will likely be a continued gradual strain on consumers for years to come
These headwinds should be offset by higher real incomes, which are a measure of an individual’s wage growth less the impact of inflation. As 2023 ended, average wages were up 4.0% while prices (inflation) were up only 3.1%. This led to, on average, workers keeping 0.9% more of their salary on an inflation adjusted basis. This provides added income for consumption or increase in the level of savings.
As we noted earlier, consumer consumption strongly leaned toward the purchase of goods during the pandemic, and over the last couple of years firmly shifted toward services. One indicator of the shift to services comes from the Census Bureau’s November 2023 retail sales data that showed an 11.3% increase in sales at food service and drinking establishments over the past year. This is far greater than the 0.4% annual increase in sales at grocery stores and 4.1% growth in retail spending overall. However, in recent months we have begun to see signs of a thawing in the pullback in spending on discretionary items such as furniture, hobbies and sporting goods.
Overall, we believe there is a reasonable underpinning to the U.S. economy that should bring some stability in 2024. We expect the rate of growth to decelerate and consumer behavior to be less predictable given the individual cross currents around savings and interest costs. Over time we expect spending patterns between goods and services to return toward patterns consistent with pre-pandemic spending.
Register here for our upcoming webinar where we’ll dive into more insights for retailers!
Matt Dmytryszyn, CFA
Matt Dmytryszyn, CFA is the Chief Investment Officer at Telemus, where he helps develop the investment strategy for the firm and spearheads the research of traditional investment managers and funds. Matt also supports the firm’s asset allocation effort along with researching alternative investment strategies. Prior to joining Telemus, Matt was a Principal with LaSalle Street Capital Management, LLC, where he was involved in equity research and portfolio management for the firm’s large and small cap portfolios. Prior to that, he was a Senior Research Analyst with Russell Investments where he was responsible for manager research on Large Cap Market Oriented managers as well as served as the Chairman of the Direct Investing Research Team. Matt has been published in an Institutional Investor journal as well as quoted in Barron’s and Money Magazine.
About Telemus
Founded in 2005 as a fee-based registered investment advisor committed to upholding a high fiduciary standard, Telemus currently manages and advises on approximately $3 billion in investment assets for wealthy individuals, families and their related interests. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Telemus is based in Southfield, Michigan, with offices in Ann Arbor, Michigan
Disclosure
This report is provided for information purposes only. The information contained herein is pulled from various financial data sources which we believe to be reliable but not guaranteed. It is not intended as investment advice and does not address or account for individual investor circumstances. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client’s specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk and cybersecurity risk. These risks are more fully described in Telemus Capital’s Firm Brochure (Part 2A of Form ADV), which is available upon request. Telemus Capital does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value.
Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. It should not be assumed that portfolio holdings will correspond directly to the comparative index benchmark shown above. The holdings and performance of Telemus client accounts may vary widely from those of the presented indices. Advisory services are only offered to clients or prospective clients where Telemus and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Telemus unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.
Forbes America’s Top RIA Firms (2023)*
*Awards and recognitions by unaffiliated publications should not be construed by a client or prospective client as a guarantee that the client will experience a certain level of results if Telemus Capital, LLC (“Telemus”) is engaged, or continues to be engaged, to provide investment advisory services, nor should they be construed as a current or past endorsement of Telemus or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized adviser. Data provided by SHOOK ® Research, LLC. Data as of 3/31/23. America’s Top Registered Investment Advisor Firms ranking was developed by SHOOK Research and is based on in-person, virtual and telephone due diligence meetings and a ranking algorithm that includes: a measure of best practices, client retention, industry experience, review of compliance records, firm nominations; and quantitative criteria, including assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerance vary, and advisors rarely have audited performance reports. Neither SHOOK nor Forbes receive compensation in exchange for its Registered Investment Advisor Firm placements or rankings, which are determined independently (see methodology above). Telemus does not pay a fee to use the awards promotional materials. Participation in this directory is limited to ranked firms; once placed on a ranking, firms may choose to pay fees to Forbes and Shook for premium listing features as indicated by highlighted names. SHOOK’s research and rankings provide opinions intended to help investors choose the right financial advisor or firm and not indicative of future performance or representative of any one client’s experience. Investors must carefully choose the right advisor or firm for their own situation and perform their own due diligence. Past performance is not an indication of future results. For more information, please see www.SHOOKresearch.com, SHOOK is a registered trademark of SHOOK Research, LLC.
You can also contact Management One directly for more information. We are always happy to discuss your results and share solutions for you and your indie retail business.
