Investors and consumers alike prefer certainty over the alternative. High probability predictions that reflect positive trends and outcomes help grease spending and investment by people and companies alike. Strong employment conditions with wages rising faster than the inflation rate (although it might not feel like it to many Americans) also help significantly. Yes, believe it or not, in the macro, wage gains have exceeded the inflation rate for 18 months now.

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

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Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

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The Blog:

 

Just about every consumer-centric survey published over the past few weeks has reflected positive consumer attitudes as we enter the holiday season:

“Our proprietary survey of ~2,000 US consumers reveals a more positive outlook for holiday shopping versus 2023 and 2022. Overall, 37% of consumers are planning to keep their holiday budgets roughly the same, 35% expect to spend more, and 22% expect to spend less yielding a net of +13%.“ – Morgan Stanley (11/13)

“Consumer sentiment has also shown signs of improvement, and the 2024 Bank of America Holiday Survey suggests people are planning to spend $2,100 outside of typical obligations and necessities this holiday season, up 7% YoY.“- Bank of America (11/12)

“According to The Conference Board Holiday Spending Survey, the average US consumer intends to spend $1,063 in nominal terms on holiday-related purchases in 2024, up 7.9% from $985 in 2023. This is also higher than in 2022 ($1,006) and 2021 ($1,022). On gifts, consumers plan to spend an average of $677, up 3.4% from $654 last year. After slumping last year, consumers’ budgets for non-gift items such as food, decorations, and wrapping paper are also up 17% at $387.“ –  The Conference Board (11/12)

“Some 89% of consumers admitted they’re tempted to spend more than they should during the holiday season, while 94% indicated they’d be tempted to make an unplanned purchase if the item were on sale. Over half (55%) of consumers said holiday deals have caused them to overspend; these big spenders said they are most likely to splurge on gifts for others.“ – Experian (11/4)

“Consumers are reaching a little deeper into their pockets this season, their average holiday budget rising 4% y-o-y to $613, according to Accenture’s 18th Annual Holiday Shopping Survey.“ – Accenture (10/30)

“In a year when sustained consumer spending propelled growth and helped the economy skirt recession, we’re calling for a fairly modest holiday sales season. We look for holiday sales to rise just 3.3% in November and December compared to last year, which is slower than last year and below the long-run average.“ – Wells Fargo (10/28)

“Gallup’s initial measure of Americans’ 2024 holiday spending intentions finds consumers planning to spend an average of $1,014 on Christmas or other holiday gifts. This is substantially more than their forecast of $923 at the same time last year, signaling that the 2024 holiday shopping season could be a bit kinder to U.S. retailers.“ – Gallup (10/25)

“Consumer spending on the winter holidays is expected to reach a record $902 per person on average across gifts, food, decorations and other seasonal items, according to the National Retail Federation’s latest consumer survey conducted by Prosper Insights & Analytics. The amount is about $25 per person more than last year’s figure and $16 higher than the previous record set in 2019.“ – National Retail Federation (10/22)

“U.S. consumers are set to spend 4% more on holiday shopping this year, with average spending projected to reach $948, compared to $911 in 2023, according to the KPMG 2024 Consumer Holiday Shopping Survey.“ – KPMG (10/21)

“After expressing record holiday spending intentions in 2023, respondents are yet again planning to up their purchases, and expect to spend $1,778 (+8% year over year) this holiday season. The uptick in spend is attributed to a rosier economic outlook (+9 percentage points [PP]), perceived higher prices (70%), and an increase in spend by the $100K to $199K income group (+17%).“ – Deloitte (10/15)

“Despite 59% of consumers saying that inflation will probably influence their holiday spending this year, overall spending is projected to increase by 7% to an average of $1,638 per shopper.” – PwC (10/1)

Bells seem to be ringing.  Consumers appear to be ready to consume. 

But are consumers ABLE to spend more this holiday season? Do they have the means?  

Yes. They do.  Consider this:

 

 

Wage gains have actually exceeded CPI inflation for over 1.5 years.   The consumer may not be happy … but they are making more money today, after adjusting for inflation. 

According to the NY FED, total household debt increased by $147 billion to reach $17.94 trillion, according to the latest Quarterly Report on Household Debt and Credit. 

Aggregate delinquency rates edged up from the previous quarter, with 3.5% of outstanding debt in some stage of delinquency. Mortgage balances rose by $75 billion from the previous quarter to reach $12.59 trillion at the end of September. While growth in income has outpaced debt, elevated balance levels continue to reveal stress for many households. Credit card balances increased by $24 billion to hit $1.17 trillion, and auto loan balances saw an $18 billion increase and stood at $1.64 trillion. HELOC balances increased by $7 billion to reach $387 billion, representing the tenth consecutive quarterly increase since Q1 2022.”

However, despite the fact that nominal (current-dollar) consumer debt levels have surpassed all prior high-water marks (see above), the actual debt-service-ratio on that debt load is far lower than any time in the past 20 years. A sizable portion of consumer debt remains pegged to ultra-low fixed interest rates.

And households have a lot of ‘dry powder’ — they have plenty of available credit to fuel spending:

 

 

Credit card balances are now $1.17 trillion.  However, available credit card capacity, for all Americans in the aggregate, is close to $5 trillion.

No, this doesn’t mean consumers will spend more this Christmas, but it demonstrates they have the ability to do so, should they choose. And available credit capacity is not the only potential source for spending: Today, many consumers are flush with cash, savings and stock market gains.  Well, the top two quartiles are.

It’s worth mentioning that both the Atlanta and the NY FED GDP forecasts remain elevated.   As of 11/19, the Atlanta ‘real’ GDP for Q4, 2024 is expected to clock in at 2.6%.   The folks over at the NY FED are expecting a 2.06% print. 

And this brings us to the things that worry me. 

 

Washington trifecta

 

By now, everyone on the planet knows the results of the US presidential and legislative elections.  The republican party now controls the presidency, the House and the Senate.  I believe the outcome aligns well with my blog predictions from September 23rd:

https://steakhouseindex.com/shi-10-23-24-ebbs-flows-and-trends/

I think that’s a big part of the message we heard.  At least that’s my take-away:  Notwithstanding their plans to spend more this holiday season, the majority of Americans appear to be exceptionally unhappy with their personal finances and the cost of necessities like food and housing. I suspect you can add porous borders and the ever-expanding national debt to that list.  And right or wrong, many voters clearly blamed the last administration, or more generally, the Democratic Party, for these issues and concerns.   

How else can we explain the trifecta?   For the moment, please permit me a seemingly ‘political’ tangent for a moment in this admittedly economic blog.   Trust me, I’ll bring it back around to economics. 

I have no doubt we will see abundant autopsies in the coming months and years.   I found this one particularly interesting as it was written by Simon van Zuylen-Wood from New York Magazine, a notoriously left-leaning mainstream media source: 

 

“If Trump’s victory was not in fact a reflection of voter sentiment, it became less important to court or win back his voters. Through the resistance years and into the COVID era, liberal institutions from universities to media organizations to nonprofits cathartically swung left, which bred further denial about what voters cared about and were experiencing. A partial catalog of progressive denialism, listed in no particular order: that alienating left-wing positions or rhetoric were confined to college campuses; that the externalities of pandemic shutdowns, such as grade-school learning loss, were overblown; that the rapid adoption of new gender orthodoxies, especially in settings involving children, was not a popular concern; that the “defund the police” movement would be embraced by communities of color; that inflation was overstated; that the pandemic crime wave was exaggerated; that concerns over urban disorder represented a moral panic; that Latinos would welcome loosened border restrictions. Thanks to these and other issues, the gap continued to widen not just between liberals and conservatives but between the highly educated elite and the moderate rank and file of the Democratic Party.”

 

Again, this is from a mainstream media source known to be quite liberal.  I generally agree with the author’s comments.  

My take-away:  The election results do not necessarily suggest voters were “running toward” the values and beliefs espoused by the Trump campaign but, more likely, in my opinion, they were running away from the values embraced the today’s Democratic party.   

You decide.   I tend to agree with this assessment. 

So, to repeat, the presidency, the House and the Senate are all in Republican hands.  What will they do with this rarity?   Remember, they have only 2 years (from January of 2025) before the voters next express their feelings in the mid-term elections in the House.  So let’s consider the Trump campaign proposals and their possible economic impacts.

 

Tariffs and deportations

 

Say what you want about these policies, like them or not, whether you conceptually agree or disagree with the concept of tariffs, if implemented across the board in the manner discussed on the campaign trail, the United States would experience a massive increase in inflation.   I’ll repeat:   Massive. 

On the campaign trail, tariffs of 60% on Chinese goods and 20% on all others were suggested.  Those are big numbers.   Yes, a tariff does raise money for the US government by charging the exporting country or company the fee; and, yes, ostensibly increased tariff revenue could reduce the need for some tax revenues.   

But Americans buy a lot of imports.  That’s a fact.   A new or significantly larger tariff on any of the imports Americans now buy increases the price the American buyer pays for that item — typically by the amount of the tariff.   Thus, a 60% tariff generally raises the price of that consumed good by about 60%.   Multiply that tariff price increase across thousands, or millions, of imported goods and its easy to envision significantly higher prices, across the board, for many of the foreign goods and services Americans buy.   Sure, a substantial price increase on all imported goods would trigger “substitution,” a basic economic principle that does work, but no matter how we slice it, the price consumers spend would increase dramatically. 

Yes, the US has a ‘trade balance’ problem.   Yes, we have a US manufacturing problem.  But the solution is not an arbitrary, across-the-board tariff on imported goods.  How this plays out in the coming months or years will have a big impact on the US economy.   

 

Immigration

 

I am unclear on the number of illegal and undocumented immigrants inside US borders.  I have read a number of reports suggesting the majority are foreigners originally in the US legally, but who have overstayed their VISAs.   I don’t know if this is factual. 

According to the Pew Research Center, the number of “unauthorized” immigrants grew to 11 million in 2022.   Details are sketchy beyond that date.   As is the distinction between what, precisely, is an illegal or unauthorized immigrant.  

It’s also difficult to quantify the percentage of ‘unauthorized’ immigrants that hold jobs in the United States.  However, this fact would be interesting to know, here’s one that might surprise you:   The Bureau of Labor Statistics, or BLS, includes “illegal immigrants” in their unemployment survey called the CPS, or ‘Current Population Survey’ completed ever month.  In other words, the current 4.1% unemployment rate includes American citizens and illegal immigrants.  

What is clearer, according to Pew, is the number of “encounters” at the US-Mexican boarder has plummeted since December of 2023.  

 

 

In any event, I seem to recall a campaign commitment to deport 15 million illegal immigrants.  Again, regardless of your personal philosophical bend on the topic, that achievement would be economically disastrous to the US economy.  

The US labor force now totals 168.5 million people.  Regardless of whether you philosophically agree with the concept or not, assuming the new administration successfully deported 15 million people, as proposed during the campaign, the United State would have a serious labor problem.   Remember, the current unemployment rate is 4.1% — and the group of unemployed people includes those in the US illegally.   7 million people are unemployed, according to the BLS, at the present time.   I struggle to understand how a mass deportation could be anything other than exceptionally harmful to the US economy.  How this actually plays out in the coming months or years will have a big impact.   

 

Take $2 trillion off the top, please

 

Finally, we have the brand-new department of DOGE.   Elon and friends have been tasked with trimming $2 trillion off the US annual budget.  

Wow.   That’s a lot.   

 

 

According the USA Facts, an excellent data source created and paid for by Steve Ballmer, the US spent a bit over $6 trillion in fiscal year 2023 (FY 2023 ended on 9/30/23).   In FY 2024, that number ballooned to $6.75 trillion.

In FY 2023, the federal deficit was $1.7 trillion.   In 2024, the deficit grew to $1.8 trillion.  Clearly, this is unsustainable.   But where do you cut?   And how could you cut 30% of the spending when the budgeted spending for Medicare, Social Security, our military, health, income security, and interest on the debt, alone, equal almost 77%.  

Quoting Elon Musk and Vivek Ramaswamy from an OP-ED piece they wrote and published in the Wall Street Journal on 11/20,

 

“President Trump has asked the two of us to lead a newly formed Department of Government Efficiency, or DOGE, to cut the federal government down to size. The entrenched and ever-growing bureaucracy represents an existential threat to our republic, and politicians have abetted it for too long. That’s why we’re doing things differently. We are entrepreneurs, not politicians. We will serve as outside volunteers, not federal officials or employees. Unlike government commissions or advisory committees, we won’t just write reports or cut ribbons. We’ll cut costs.”

 

More specifically, they comment “ … we are focused on delivering cost savings for taxpayers. … DOGE will help end federal overspending by taking aim at the $500 billion plus in annual federal expenditures that are unauthorized by Congress or being used in ways that Congress never intended …”

The OP-ED piece is worth reading.   Here’s a link if you’re interested to read the piece:

https://www.wsj.com/opinion/musk-and-ramaswamy-the-doge-plan-to-reform-government-supreme-court-guidance-end-executive-power-grab-fa51c020?campaign_id=4&emc=edit_dk_20241121&instance_id=140223&nl=dealbook&regi_id=78191365&segment_id=183756&user_id=383fe939c1d236fb3476a3be30d03e4d

My personal bottom line:   I’m impressed with their ideas.   Time will tell. 

But I believe there are structural guard rails that will limit their efficacy.  For example, is it possible to significantly reduce federal payments for Medicare/Medicaid and Social Security?  I’m skeptical.   And if done, the resulting economic chaos would be staggering.  Consumer spending would plummet, and unemployment would probably increase dramatically.  

I really support the idea and intent of cost-cutting – as you know, I am not a fan of year-after-year deficits – but $2 trillion in cuts, in a single year, would be the proverbial medicine that kills the patient.  I’ll be interesting to see how this plays out.   I wish them success resulting is a much healthier America. 

A lot is said on the campaign trail.   This is nothing new.   I suspect many of these “goals” are more aspirational than hard targets.   I hope.  The ultimately implemented policies are likely to be significantly different.   We’ll have to wait and see. 

And then we have the FED.  Chair Powell recently shared the FED is not in a hurry to lower rates, which suggests interest rates may likely remain elevated longer than previously thought.  The FED has lowered by ¾ of a percent from their recent 5.5% peak.  But at 4.75% now, the FED funds rate, in my opinion, is still at least 150 basis points too high.   Yes, GDP growth is fine today.   Powell is correct.   But this elevated rate is corrosive over longer periods of time.   The FFR is too high.   This concerns me, too.

 

Tail risk

 

There is never a shortage of things to worry about.   Consider this image from Bank of America:

 

 

Inflation, recession, wars, pandemics … there’s always something.   Today, the most commonly quoted “tail risk” is “geopolitical conflict.”   War.  Indeed.   The world has clearly emerged from a generally peaceful period (depending on who you ask) into one with numerous current, and potential, conflicts.   Will the new administration have success in trimming these fears?   Or will they fan the flames? 

Uncertainty, in any form, adversely impacts economic growth.   To the extent more becomes known in the coming months, this will help.   However, the conflicts in eastern Europe, the Middle East, China saber-rattling, and the overall increase in xenophobia post-pandemic all keep me up at night.  At least until I’ve had a glass of wine or two.   The wine always helps. 

🙂

Travel made it impossible to measure reservation demand at the steak houses this week.   Sorry.  Next week. 

Well, in closing, I’ll add this:  At least we can take comfort from a couple of things.   First, bitcoin is now close to $100 thousand.   Perfect.  🙂

And second, did you notice that image of a banana duct-taped to a wall at the start of this blog?   Yes, that one.  It’s an art piece just sold at Sotheby’s for $6.2 million.   That’s right.   A banana.  Duct-taped to a wall.  

And what did the buyer intend to do with his exceptional new art piece?   “In the coming days, I will personally eat the banana as part of this unique artistic experience, honoring its place in both art history and popular culture.”

After Elon is done cutting costs in DC, I think we need to send him to Sotheby’s.   They could use a bit of economic sanity over there, too. 

<:>  Terry Liebman