One of the major themes for retailers this year was the normalization of Personal Consumption Expenditure (PCE) to services from goods, a shift that made 2023 difficult for many retailers. In our view, high inflation on essential services that appeared in the second half of the year also encroached on consumer spending.
The table below shows PCE’s change from Oct. 2022 to Oct. 2023 segmented by spending types. Over the year, PCE climbed by +$950B to hit $19T (annualized). Growth in Goods was 15% of the $950B growth and Services represented the remaining 85%. Discretionary goods--non-auto durable goods and other nondurable goods, or as we call it “Stuff”--represented 7% of the growth. Services, which has been segmented into "Essentials" (64%) and "Fun" (Recreational Services, Food Service & Accommodations, and Foreign Travel), was at 21%. Compared to 2019, the growth in Stuff was half (7points) the growth seen in 2019 (14%). The growth in Fun in 2023 was 4 points more than 2019. And so, while Fun enjoyed a strong year of post-pandemic recovery, that was less than the slowdown in Stuff. The cause? The high rate of inflation in essentials appears to have been a 4 point drag on Stuff. Overall, spending on Stuff was up +2.5% year-over-year, Fun increased +9.1%, and overall PCE +5.3%. What does this mean for 2024?
More optimistic economic forecasters see nominal PCE increasing +4.5% in 2024. Fun is now at a normalized pre-pandemic level. Stuff is still higher, but that is largely the result of the shift to work-from-home (owing to home offices and other IT expenditures). Excluding that influence, Stuff is only 3%-4% above its normalized pre-pandemic level. Assuming that half that excess is absorbed during 2024, that would leave Stuff up +2.5%-3% for 2024. From 2012-2019, spending on Stuff grew at a +3.1% CAGR. And so, it would seem that 2024 could be stronger than 2023 and nearly like “normal” for Stuff and retail. Alas, several dynamics may influence the shape of that growth.
Some dynamics to consider. First, there will be both inflation and deflation, which we frequently comment on; deflation in many categories is here as we've discussed in our last two Anchor reports here and here. Consumers remain hyper-focused on price and they expect lower prices. (See the latest University of Michigan survey of consumers where expectations on future inflation have sharply diminished, consumers expect inflation to sit at 3.1% a year from now, down from last month's 4.5%.) Treasure hunt retail had a very strong 2023. It will be fascinating to watch if it can build on last year’s gains. Second, there is the lingering impact of the Fed’s interest rate hikes and the ongoing impact of quantitative tightening (decreasing the Fed’s balance sheet). Both of these were massive, and they don’t have tight precedence, as such, we just don’t know. However, they are certainly not helpful to PCE growth. However, we can see the 10-year Treasury and the 30-year fixed mortgage rate have slid lower. Moreover, the 30-year is currently at a 250-basis-point premium, 50 basis points higher than normal. Should expectations for future inflation continue to ease and other stresses moderate, both rates will slide towards 6%. 6% would be a meaningful unlock for spending, especially in home improvement and auto.
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Third, there is the “unprecedented.” We seem to get a new one each year. Given that precedent, we expect businesses to remain conservative and focused on efficiency. During 2013, large employers did layoffs and small employers hired. The Business Trends and Outlook Survey (December 07, 2023), which assesses the outlook for small business, has an expansionary reading of 52.7 for Future Employees (six months from now), down from 55.3 at the start of the year. All told, +125K new payrolls monthly feels like the right figure for 2024. That more moderate pace (125K) will keep our strong labor market from getting overheated. The "unprecedented", in whatever form it takes, will shape PCE growth. 2023 brought Temu, which rose from nowhere into a disruptor for some digital and brick & mortar retailers. Late in 2022, few had even heard of Temu.
