U.S. consumer ‘fighting back against higher prices,’ economist says

BMO Sr. Economist Jennifer Lee joins Yahoo Finance Live to discuss the U.S. consumer, rate hikes, the expectations for the upcoming FOMC meeting, and the outlook for the economy.

Video Transcript


BRAD SMITH: Well, today's recent consumer sentiment data showing a slightly higher than expected headline. This, together with yesterday's updated GDP numbers, painting a bigger picture of where consumer sentiment is headed. But is it complete?

Factors like inventory build up could distort the picture. For more, let's bring in Jennifer Lee, senior economist and managing director over at BMO. Jennifer, always a pleasure to speak with you. And thanks for joining us this morning.

Let's just begin with where we find ourselves right now in the economy. I mean, we were just having a little bit of a discussion on the debt ceiling, which could be another kind of looming cloud overhanging here. What's the most notable data point that sticks out to you right now that we should be giving more attention to?

JENNIFER LEE: Good morning. Thank you for having me on. I think overall, it always comes back to the US consumer being the biggest and most important part of the US economy. That's what we should always be watching. But at the same time, as all of you were just talking about, this is such an interesting, different time in the economy.

And it's so difficult, I think, to make a very firm call, I think. But I think this all-- all of the indicators coming together, ones that are up and ones that are down, it just goes to show that the US economy is sort of acting as the Fed sort of has been expecting. They've been slowing down. It's been gradually easing into this whole world of very tight monetary policy.

And the economy is slowing. And we're probably going to see a mild recession in the first half of this year. We're still sticking with a mild call for now. And we'll see how things fare. But this is all to be expected. Things are sort of coming according to plan, I guess, in many ways after 425 basis points of rate hikes.

JULIE HYMAN: Well, Jennifer, up until now, it looks like the consumer has been holding up relatively well. How much is that going to change here as maybe conditions deteriorate further?

JENNIFER LEE: Well, look, we already saw-- I mean, the December real spending rolled back.


JENNIFER LEE: November's increase, slight increase to the third, I think fourth decimal, was revised down to a negative reading as well. So that, of course, signals that the US consumer is becoming more cautious. They're sort of fighting back against higher prices. And at the same time, it was interesting that a lot of that-- the gains that we saw for Q4 as a whole was more front-loaded.

So there was a big gain in October, slower in November, and then an actual decline in December. So it sort of depends on the space and how you spaced it out during the quarter. But I think what was even more important or notable was that wages and salaries continued to increase.

So even though, yes, it's not great news for the economy or for GDP when consumers hold back. But at the same time, as long as they have that little nest egg, as long as they have money coming in, I think that is the most important factor to take away. And as long as they have some sort of a support system, some sort of a savings cushion under their-- or behind then, that is-- shows that there is room to grow later.

They may not be spending in December, but you could start seeing some more spending coming back in January. I think there are some-- one of the automakers or one of the research people in the auto sector was saying that there could be a big increase in auto sales potentially for the month of January. So we'll see how-- we could see some bounce-back in that point.

BRIAN SOZZI: Jen, investors are waking today. And they see news on our platform that Hasbro's laying off 15% of its workforce. I always look at Hasbro as a great pulse on middle America. On the other hand, you had a pretty strong outlook for American Express. Is the consumer spending environment just right now being driven by the high end, and that low-end consumer may already be in a recession?

JENNIFER LEE: That is a good point. And there's probably some truth to that, for sure. I mean, every-- whenever you've got this environment of higher rates, it's going to be the lower end that's going to suffer the most, the ones that have-- their incomes are not as high, higher debt levels, especially-- so they're going to be-- it's costing more to service that debt.

But at the same time, it's interesting. So I think some of the higher-end consumers who are looking at-- one of our analysts who covers the boating industry, for example, seeing a softening on that front as well but still an interest. So it's not a broad-based decline or setback for all consumers, but it's certainly starting to hit the lower echelons now, and then probably at some point starting to creep up a little bit. But we'll see how quickly that moves along.

BRAD SMITH: We continue to hear from some businesses about just normalization and getting back to prepandemic at the same time where the reality that's being painted going forward from here is vastly different. And so what does normalization look like in an environment where we have heard all of them need to acknowledge in one factor or another the risk of a recession?

JENNIFER LEE: So normalization, I guess is anything before this whole crazy pandemic began. And it's interesting how, even though we've seen consumer spending pull back over the last couple of months, I think over the longer term, I think we're looking at about a 2 and 1/2 percent growth rate so far for real PC, which is basically in line with what we were seeing before the pandemic.

So this is all coming back to normal times. I mean, remember we pulled back so much spending at the beginning of the pandemic. And then it surged as everything opened up and we rebounded it back. And now we're starting to come back down to more normal levels.

And that's probably what we're seeing now. But again, what makes this period so different is because the labor market is still very, very strong. It's not as strong as it once was. But at least we still have over 10 million job vacancies out there, which outnumbers the number of unemployed Americans by a factor of almost two. And that is-- bodes well for-- I think for the US consumer, at least the fundamental picture surrounding the US consumer.