Consumer Spending and Credit Debt Impacts Inflation

So far, the economy is doing better than expected and the markets seem to expect a soft landing. What are we to make of this current market amid potential regime shifts in the economy? In the latest edition of LPL Street View, Dr. Jeffrey Roach, Chief Economist at LPL Financial, addresses key takeaways for investors as they prep for the rest of this year. 

The first item to discuss is the dynamics within consumer spending. The pandemic accelerated the shift toward e-commerce and promotions such as Amazon Prime days, likely added to that boost. And in July, online shopping rose 1.4% month over month for the second consecutive month, the fastest monthly pace of sales since December. Annual growth rates for non-store retailers showed consumers healthy appetite for online shopping compared to general merchandise stores.  
 
This is an economy where businesses need to carefully manage inventory and head count as consumers gravitate toward the non-brick and mortar shopping experience. Investors will likely reward those retailers most gifted to serve this post pandemic consumer. The growth of credit card debt accelerated into the recession of 2001 and 2008. So the increasing rate of card debt now could be a harbinger of things to come. When an economy is slowing and going into recession, consumer spending slows and card balances often grow to offset factors such as slowing real wage growth. The increase in card balances foreshadows a weakening consumer, and as the consumer goes, so goes the economy. We believe investors should pay close attention to unpaid credit card balances for signs of any cracking within the consumer sector.  
 
Stubborn inflation is one reason credit card debt has spiked recently and amid rising balances, credit card rates reached an all-time high since the data series began in 1972, pushing additional pressures on consumers. The third item to highlight is the shifts in emerging trends in inflation that will likely continue throughout the rest of this year. Although inflation is trending in the right direction, it doesn't mean another rate hike this year is out of the question, especially with rising prices for gas. However, we think the Federal Reserve will pause during its September meeting, but we'll keep everything on the table for the November meeting. Investors should find plenty of opportunities in this market despite the disproportionate easing in inflation pressures. 

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