2023 was an interesting year.

Fresh off the heels of a daunting 2022, this past year got off to a start riddled with uncertainty and conservative business plans.

Negative economic forces aligned simultaneously:

• red-hot inflation

• surging interest rates

• housing market stagnation

• rising credit card and loan delinquencies

• resumption of student loan payments

This became a major drag on consumer confidence and consumer sentiment.

In fact, Consumer Sentiment Index hit the lowest all-time reading in the history of it being tracked by the University of Michigan in May 2023 (59.0). It rebounded in the second half of 2023 to it’s 2nd highest rating (69.7) of the year in December, ending the year nicely.

This index is used to estimate future consumer spending and saving. It takes into account people’s feelings toward their current financial status, perceived economic health, and probability of long-term economic growth.

Why is this so important?

If consumers are concerned over personal financial health and the state of the economy, they are more cautious when it comes to spending money. When spend contracts, businesses that are exposed to consumers are drastically impacted.

This essentially made 2023 the ultimate flat year. Little economic growth.

Physical and online retail were both negatively impacted proportionally.

In summary, 2022 was the year of fear and doubt. 2023 was the year of holding on.

Now, as 2024 is upon us- how confident are we in a return to growth?

We’ve been hearing and seeing mixed signals.

• Consumer sentiment is still extremely low, relative to the past 60 years

• The Federal Reserve is celebrating a soft landing and has already forecasted multiple rate cuts in 2024

• Inflation has reversed, but still an issue as cost of living has never been higher

• S&P 500 just hit an all-time high

• Crypto has been on a magical run

• The job market remains strong

• Companies are still largely conservative with budgets and more focused on profitability than top line growth

Confused, yet?

Here’s some data to clear the air.

J.P. Morgan just published data on consumer spending, saving rates, and household excess savings. This gives us an objective view of what’s happening.

Personal consumer spending has increased YoY since the pandemic, well beyond pre-pandemic levels. Phew. This is favorable right?

Not so fast. Let’s take a further look under the hood.

Consumer saving rates have declined year over year since it peaked in 2021, the year where inflation became a real concern. Saving rates are now well into negative territory, relative to 2019. Consumers are simply spending more and saving less.

Well, how much cash do households have stored in savings? How much runway do consumers have before debt rises higher than savings?

J.P. Morgan forecasts that US household excess savings will blow past $0 and turn negative in 2024. This spells trouble.

This begs the question: are consumers living lifestyles that arose during COVID where money was free-flowing and they had excess cash built up? Indeed, it’s hard to reverse a positive lifestyle change on a dime.

OR are consumers living the same lifestyles and only spending more due to cost of living, inflation & interest rates soaring higher?

Could be a combination of both. But, here’s what we do know: if wages and household take home pay are not rising proportional to spending, that’s where negative cash flow eats into savings.

Credit card delinquencies have risen, yet not even close to 2009–10 levels. So, not time to panic. With savings being depleted, we can certainly expect delinquencies to continue on this unfavorable trend.

If delinquencies continue on this negative path, we could see a significant pullback in consumer spend and consumer sentiment in 2024.

In the meantime, 2024 is off to a favorable start in public markets, which do carry weight with consumer sentiment.

With rate cuts and inflation reduction in the Federal Reserve’s forecast this year, it could be the pressure relief consumer savings desperately need.

I’ll be keeping a close eye on this and will be providing updates as I have them.

Yours truly,

Jonathan Snow

Follow me on Twitter and LinkedIn.

Learn more about my journey & get in touch with me here.