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I started writing about economic outlooks last year to reflect my perspective on what the next 4-6 months hold for us. I use shorter (6 month) timeframes for prediction as I do not believe anyone can be accurate with very long term forecasts provided the uncertain environment we have moved in post covid.

I wrote about the my first outlook in Oct 2022 where I stated that the dark clouds of uncertainty that started with covid is starting to clear up providing area to start economic speculations.

In my second outlook posted in Dec 2022, I wrote about the holiday season of 2022, with a focus on high inventories and discounts. My predictions in that newsletter was about reduction in impulse shopping and slowness in customer expenditure in 2023. The prediction came in line to reduction in spending on non-essential items.

Sentiments

For me one of the best indicator of sales or consumer spending in the market are associated with freights. Meaning if there is capacity surplus in freight it points to a soft growth. And this is exactly what is happening so far in late 2022 and early 2023. This has driven the inflation down to 6.5% for the month of December down from 7.7% in Oct 2022.

One of the main reasons for steady inflation is widening gap between low and high income families. Low income families are continuing to curb spending to bare necessities, whereas high income families are still spending on discretionary items keeping inflation high.

Personal Consumption Expenditures (PCE) which is Fed’s favorite metrics when it comes to inflation. PCE report which came on Friday (Feb 24th) showed that PCE (without Food and Energy) increased to 4.7% in Jan’23 compared to 4.6% in Dec’22. This means that retails sales are still growing at a healthy pace. As a result Feds have decided to keep the interest rates higher for longer timeframe. And we all saw what happened last week to the market, worst session of 2023.

We shall see that earnings from companies in the coming months will be pressurized due to high interest rates. Stock market will continue with bearish sentiments as companies look to cut operation costs across sectors. It is now becoming evident that Feds will like raise interest in the upcoming meet and in the summer cycle.

Analyzing Retail and Chip sector earnings to predict outlook

RETAIL

I am assuming the cause for PCE to remain high is because most of the disposable income is going towards travel and continued inflation in non-durable goods. Real consumer spending and core income growth have been relatively weak, with modest improvements in consumer sentiment. Real consumer spending was negative in two of the past three months, with durable goods spending now declining, and services spending momentum waning.

CHIP

NVIDIA also posted earnings bitter sweet earnings on Wednesday this week. Revenue were down 21% YoY but better than expected. One of the core reasons can be attributed towards slowing mining demand of Ethereum as the lower prices have made mining less profitable. Another important factor is the impact on gaming. During covid Gaming community grew but since travel and other services have opened up leading to less time spend in front of gaming PCs. On the other side, Business segment of NVIDIA which is Data Centers have shown signs of growth with 11% YoY increase in capacity.

What are my two predictions for first half of 2023?

1. Slow down in spending on Luxury Products and Services

As cost of living surges, consumers are adjusting their behaviors and will reduce their spendings on luxury items and travel for the next few months. Consumers are responding to higher inflation by ‘trading down’ brands and stores to continue spending on experiences.

2. Adjustment in Consumer Spending behavior

With high inflation in energy and essential goods, high interest rates and borrowing costs consumers are looking to navigate the “cost of living crisis”. Labor market is tight and as I mentioned earlier, there is growth in disposable income in Jan’23 compared to Dec’22 inflation will remain a primary driver in consumer spending.

Some key points:

• More grocery visits, less spend per visit.
• Consumers are spending less in discretionary retail (furniture, electronics and apparels). It is evident from CHIP sector earning reports which I shared above.
• More visits to restaurants for experience and social interaction

What I have been reading is big retailers like Whole Foods and Walmarts are making their suppliers reduce prices. Retailers, in general are gaining market share with their private label brands which are growing sales at double digit percentages.

Other Predictions

1. Growth in 2023 will slow down. IMF predicts growth at 2.7-2.9% compared to 3.4% in 2022. For US specifically the growth will hover around 1%.
2. Possibility and Probability of a recession in US in 2023 is still high. With expected tightening in the market, unemployment rate in US should go up and may potentially lead up to a recession.

Other important updates and snippets on factors that impact economic outlook.

Slowing Wage growth

Frow WSJ

Wage growth across ad-vanced economies is plateau­ing or de­clin­ing from high lev­els. For cen­tral banks, it is good news: There are no signs of a spi­ral in which wages push up prices, which push up wages again. That makes it more likely in­fla­tion could de­cline with­out a sig­nif­i-cant in­crease in un­em­ploy-ment.

In the U.S., nom­i­nal wage growth—mean­ing un­ad­justed for in­fla­tion—has slowed sharply since the mid­dle of last year, ac­cord­ing to a va­ri­ety of mea­sures. Av­er­age hourly earn­ings for pri­vate-sec­tor non­farm work­ers rose 4.4% in the 12 months through Jan­uary, down from 5.6% last March and less than the 6.4% rise in con­sumer prices in the year through Jan­uary.

Wage infused inflation is slow to control as wages tend to sticky. Firms are wary of cutting wages later as it is bad for morale. Home Depot warned in its report that its profits will reduce by $1B as it invests this sum in the wage increase of its hourly employees.

Travel is growing

From WSJ

Travel com­pa­nies, af­ter re­port­ing mostly strong trendsin re­cent quar­ters, are pre­dict­ing an­other bustling year amid signs that trav­el­ers are pri­or­i­tiz-ing spend­ing on trips. Con­sumers are shrug­ging off surg­ing prices for every­thing from air­fares and ho­tel rooms to din­ing out, and in­dus­try ex­ec­u-tives say there is lit­tle sign of a travel slow­down com­ing.

Home sales dropped for 12th straight months

From WSJ

The U.S. hous­ing mar­ket weak­ened in Jan­uary for the 12th straight month as con­tin­ued high mort­gage rates kept buy­ers on the side­lines.

One of the main causes of sinking demand is high interest rates. It is preventing new buyers to invest and also preventing existing homeowners to not sell to move. Most of the exisitng homeowners have interest rates well below 4% and they are unwilling to give up on that.

Till Next Time

Cheers…