Economics Weekly May 13, 2024

Consumers put away their credit cards

Last week saw surprising figures released on consumer credit that strengthen our view that the public is in frugal mood on spending. Consumer credit is divided into two types: revolving (mostly credit cards) and non-revolving debt (such as auto or student loans). The March data showed non-revolving debts saw net growth of $6.1 billion, up from $4.3 billion in February. However, net growth for revolving debts on credit cards slumped to just $150 million, down from $10.7 billion the previous month. Sharp movements in statistics can be blips, although if we consider the economic backdrop, with interest rates and inflation both high, it seems logical that households would continue to take out essential debt, like auto loans, but avoid using credit cards for impulse purchases. Consumers reining back on non-essential spending would have implications for demand for retail and leisure real estate, like shops, restaurants and hotels.

A slowdown in spending on credit cards is something that will help reassure the Federal Reserve rate setters that higher interest rates are slowing the economy, which in turn will decelerate inflation. The Fed will also find the latest set of initial jobless claims figures encouraging. The week of May 4 saw an increase of 231,000 new registrations for unemployment benefits, which was well ahead of Wall Street’s forecast of 210,000. Initial jobless claims can be a volatile indicator, and we will need to see a broad range of labor market figures decelerate before a turning point can be called. However, high interest rates will eventually cause the jobs market to slow, clearing a path to a cut in the Fed Funds Rate, which we see happening later in the year, possibly in November.

This week sees figures published on inflation, with the release of the Producer Price Index (often called factory gate inflation) and Consumer Price Index data. After recent marked increases, we believe price growth will begin to stabilize. Also, Fed Chair, Jay Powell, will be delivering a speech tomorrow which the financial markets will be monitoring for clues on the future direction for interest rates.  

Things to watch for this week

Tuesday, May 14

Producer Price Index Inflation, April

Previous: 2.1%
Forecast: 2.1%

So-called ‘factory gate inflation’ picked up noticeably in February and March, although we are predicting no change for April since energy price increases have lost momentum.

Wednesday, May 15

Consumer Price Index Inflation, April

Previous: 3.5%
Forecast: 3.5%  

With the economy seeing signs of deceleration, and interest rates remaining unchanged at high levels, we are forecasting consumer inflation to stabilize at 3.5% in April.