Consumer Strength is Weakening
While wages have been lifting dramatically since the full re-opening of the economy, the consumer is facing some challenges. Savings have been spent down and consumers are now leaning into revolving credit versus savings to augment their spending. 1 2
The critical headwind will be sentiment. With rising interest rates, high inflation, and a ground war in Europe, the consumer might withdraw some of their “animal spirits,” impairing corporate earnings in the near-term.
Inflation – Will it Transition?
Record inflation is on everybody’s mind, with headline and core CPI both at levels not seen since the late 1970s. 3
The base effect is still a contributing factor and the persistent inflationary backdrop is shifting consumer behavior from discretionary to less-discretionary spending which is another indicator of an increasingly reluctant consumer. 4 5
Interest Rates & the Fed
The risk of Fed policy errors is growing. With their current dual mandate of full employment along with price stability, they’re leaning heavily on rate increases to lower inflation.
Europe could flirt with a negative print on GDP growth in Q2 2022 induced by higher energy prices and a prolonged Russia/Ukraine war. 8
While the Russia/Ukraine war has ushered in another layer of U.S.-China tensions, we continue to believe China offers the best growth profile in the world. 9
For more on China macroeconomic policy, please watch our interview with Andrew Polk, co-founder and head of economic research at Trivium China, our Beijing-based research partner.
Tim Phillips, CEO, Phillips & Company