Traffic Ahead is Adding Time to Your Journey

Have you ever driven the roads of a foreign country? What about driving on the opposite side of the road in a foreign land? The experience can be bewildering, with unfamiliar road signs, speeds measured in different units, and intricate traffic patterns that induce anxiety (and don't even get me started on the traffic circle/roundabout debates). In the consumer finance space, C-Suite executives and strategy professionals find themselves in a similar situation, akin to driving on foreign roads with their Waze app warning of obstacles ahead. It's time to buckle up and consult the GPS as we navigate the complexities of the consumer finance landscape.

The Fed

Get ready; you'll encounter numerous speed bump signs this year. These signs signal the impending decisions by the Federal Reserve regarding the rate environment in 2024. How many rate cuts will there be – 2, 3, or perhaps 4? Will these cuts begin in March or later? Will the Fed maintain rates? If so, for how long? The constant fluctuations in the narrative surrounding rates are enough to induce motion sickness in anyone. Presently, the Fed emphasizes the need to scrutinize all available "data" before making decisions. This sounds similar to an instructor at the DMV meticulously judging your parallel parking skills.

At the moment, certain data supports maintaining rates, while other indicators suggest modest cuts in the second half of 2024. It's essential to brace ourselves for the possibility that the Fed might take more time than we'd prefer when it comes to rate reductions. It is important to note that decisions made in 2024 will undoubtedly have lasting impacts on consumers well into 2025 and beyond.

Inflation - Speeding Ahead or Going in Reverse?

Despite the recent turn of the calendar, the discourse on inflation will persist throughout much of 2024 and extend into 2025. Inflation data released on January 11 indicated a continued uptick in the prices consumers pay for goods and services in December, with a 0.3% month-over-month increase.?

While this may seem modest, the annual Consumer Price Index (CPI) for 2023 concluded with a 3.4% rise over 2022. Although significantly lower than the 8.9% surge in June 2022, this figure underscores the enduring impact of inflation on the U.S. economy. The Federal Reserve's efforts to steer inflation back to their 2.0% target are starting to gain traction, but there are plenty of miles ahead before they reach their destination. The Commerce Department’s personal consumption expenditures price index for December (released on January 26) adds to evidence that inflation, while still elevated, is continuing to make progress lower. This data is a favorite of the Fed and will certainly garner some attention in the debate to cut rates in the spring (assuming these trends continue).

Strong Consumer Spending vs. Consumers in Jeopardy

The spending habits of the U.S. consumer appear to be in full throttle, showing an "all gas, no brakes" approach. Robust employment rates and steady wage growth shielded household purchasing power from significant impacts (on average) amid the challenges of high inflation and increased interest rates in 2023. A plethora of data supports this trend:

• Overall, consumer spending was higher in 2023 than it was in 2022. Inflation didn't really affect the rate of spending in 2023.
• U.S. Census Bureau holiday spending data released on the 17th of January shows holiday sales increased 3.8% YoY, hitting a total of $964.4Bn in 2023.
• According to Adobe, consumers spent $222Bn from Nov. 1 2023 until the end of December in online shopping alone, with Buy Now Pay Later (BNPL) usage jumping 14% YoY and representing $16.6Bn of online spending during that time period.
• Retail sales for the full year grew 3.6% YoY to a record $5.13 trillion.
• Economists and industry experts concur that credit cards are a significant source of financing for consumer spending, especially considering interest rates on card balances exceeding 20%.
• The St. Louis Fed revolving credit card balance data is now over $1 trillion and growing.?
• The Federal Reserve Bank of Philadelphia recently reported that 3.2% of card balances were overdue by at least 30 days.
• 56 million Americans have been in credit card debt for at least a year.
• According to a new report by Bankrate, 49% of credit card holders carry debt from month to month, up from 46% last year.
• Of those with credit card debt, 43% say they carry a balance because of an unexpected or emergency expense (most commonly medical bills or car/home repairs).
• A new poll for Newsweek revealed that more than a fifth of Americans lack any savings, while another fifth have less than $1,000 in their bank accounts. This highlights the precarious financial situation felt by some individuals, even as the U.S. economy withstands the challenges of a high-interest rate environment.

The data pertaining to the U.S. consumer continues to flash a yellow signal. This storyline will continue to be an area of caution for the remainder of 2024 and into 2025.?

Which Direction from Here?

As C-Suite executives and strategy professionals embark on the unfolding journey of navigating the economic landscape in 2024, their reliance on the metaphorical Waze App becomes more pronounced. Despite encountering conflicting signals, such as strong GDP, signs of inflation abatement, and alarming headlines about growing layoffs, these industry players will perpetually need to "Check Routes" on their strategic apps to ensure they can adeptly steer through both challenges and opportunities on the road ahead. The long drive has only just begun, so it's imperative to buckle up — after all, it's the law. Safe travels as we navigate the twists and turns of the economic highway in the coming year.