00:00You know, it's so funny. I don't get called an optimist all that frequently until I come on the show.
00:05But the consumer is still stable and consumer spending makes up two thirds of GDP. Now, that's not to say
00:11there isn't a hairline fracture in the glass. I think we're starting to see a little leakage maybe out of
00:16that glass half full.
00:17The one metric I'm watching very closely is inflation adjusted incomes are tentatively rolling over. But our consumer, they're still
00:24on stable footing. They have, you know, almost record high assets, net worth still holding up. So we do see
00:31those wealth effects. But for a more immediate spending perspective, we still have access to credit. So there are other
00:37levers that the consumer can be pulling.
00:40Inflation is the decline in oil. Does that take the inflation risk out of this economy?
00:47It does not take the risk out completely. I think that's going to help us in the near term. Some
00:52normalization in oil prices, that's been built into our forecast. However, we are still expecting to see rise in the
00:59CPI. We've already seen this upward movement for over a year now in the PPI. So consumer goods inflation is
01:05very likely to track behind that PPI inflationary environment.
01:10Really, we see these drivers as fairly broad based, nowhere near as acute as that immediate post COVID timeframe. We
01:18really go through some of the key fundamentals here from how much stimulus is being done today.
01:23Yes, that's going to be inflationary. Yes, that's going to be inflationary, but nowhere near as inflationary it was in
01:272021. Same thing with the money supply. Same thing even with these supply chain issues, things like oil and other
01:33petroleum-based products.
01:34This is not the golden screw problem that we saw in the early 2020s, but this is a hotter than
01:39baseline inflation experience. So I think businesses and consumers, they need to take on a different mindset going forward.
01:46Describe the core ex-shelter series Lauren Seidel Baker looks at. Which inflation series should we study if we want
01:56to take out the madness of shelter and rent in Boston and across America?
02:03Man, the shelter and rent component, that is astounding to me. We're still seeing that rise there, really despite some
02:11dislocations in that housing market.
02:13But for the average consumer, I know we think about food and energy costs so much. Just we go to
02:19the grocery store, right? We see the price of gas at the pump.
02:22It's really the other side of the equation that I'm watching, though, is the service sector. Wages are still elevated.
02:28We have a tight labor market. It might not feel like that for everyone out there.
02:32But if you look at the numbers on balance, we have limited labor availability with our aging population, more baby
02:38boomers retiring than Gen Z workers entering the labor force.
02:41And with very low, even net negative immigration numbers, that's not going to support a broadening in the labor pool.
02:48And that's going to keep upside pressure on wages, which in turn is flowing through to the service sector.
02:53I don't think that one gets nearly enough attention.
02:56How about the consumer in general here? Consumer spending seems to be holding up.
03:01I know the K-shaped economy has nuances to that analysis.
03:05How do you think about the consumer these days?
03:07Yeah, for me, this all comes back to the K-shaped economy.
03:10Really, it's middle to upper income earners that are doing the bulk of our retail spending out there.
03:16So the other prong of that challenge, really, as we look at something like retail spending, is we're looking at
03:22these numbers on a nominal basis.
03:23And with higher inflation, well, we could be buying the same basket of goods, but it just costs more today.
03:28So pricing is helping us out here in terms of those net kind of nominal numbers.
03:33If we do deflate retail sales, the growth rate is a lot lower, still just about 1%.
03:39So it's tracking in there on real volume gains.
03:42I don't think the consumer is in such dire straits that they're cutting back.
03:45They're really just allocating their budget differently.
03:48And I don't mean in terms of oil or gas versus other kind of necessities.
03:53I'm really talking about do I buy the store brand or the brand name?
03:57Is there something that I can go slightly longer without, right, stretch out the time between those purchases?
04:02It's going to be kind of that money-saving, belt-tightening mentality, but not the ultimate shutting down in what
04:08we're purchasing.
04:09So if you write 12 pages of a June 34 review for ITR, what's your most difficult paragraph to write?
04:18Where's the greatest Lauren Seidel Baker uncertainty?
04:22The big question we have, again, it goes back to just how the consumer can be funding these purchases.
04:29As I said, lenders are really showing credit availability out there.
04:34It's easier to get loans.
04:36We don't want that to be the one leg supporting our consumer.
04:40So if we do continue to see this decline in real personal income, that's where I'm going to personally get
04:45a little bit more nervous.
04:46Again, things like wealth effects.
04:48My home is worth more now.
04:49My stock portfolio has been doing great.
04:51That feels good.
04:52We have the wealth effects mentally, but that is not going to the grocery store for me, right?
04:57That's not putting fuel in the gas tank.
04:59So the longer this goes on, the kind of greater duration of this trend, that's when we will start to
05:05see some of those choices get a little bit more acute for the consumer.
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