Consumers becoming more cautious

From a distance, there appears to be little change in financial markets at the mid-point of the quarter. Treasury yields are a little higher at the very short end of the curve, and a little lower further out. The S&P 500 index has gained over 4%, again hitting all-time highs. So, what’s not to like?

Economic data continue to give cautionary signals about consumer behavior and future growth and inflation. Consumer prices stubbornly refuse to cooperate, rising a more-than-expected 0.5% in January and 3.0% over the last year. Price increases were broad-based, as shelter, airline, used car and core goods prices all rose; nearly half of the CPI components rose at more than a 5% annualized rate, the highest since February 2023. 

Real-time reads on the consumer are mixed: weekly jobless claims continue to be low, actually falling from 220,000 to 213,000 in the last week, while January retail sales fell far more sharply than forecast. Though December sales were revised higher, November sales were revised lower, pointing to a more cautious consumer. Declines in January sales were broad-based, from building materials to electronics to furniture to vehicles. Overall, nine of the 13 categories posted decreases. While the California wildfires and awful winter weather doubtless cut into sales, the broader slowdown likely points to other factors. Consumers turned to credit cards and loans to fuel their spending and appear to be having more difficulty paying down their balances. 

The Federal Reserve next meets on March 19, and markets currently see little chance of a rate cut before midyear.