Slower income gains and a fraying labor market — I expect slower income gains in 2024 as both employment and wage gains moderate. Real incomes were growing around 2.5% as of March 2024, down from nearly 3.5% nine months ago, and I believe we’ll see some additional slowing in the months ahead.
Companies have adjusted to softer demand by cutting back hours. They have also been laying off some employees, especially in areas that require higher levels of education such as technology and financial services. Overall, corporate and consumer surveys paint a picture of a low hiring rate (back to 2014 levels) and a low quit rate, but, for now, contained layoffs. The services recovery mentioned earlier has helped create the strongest job growth for those at the low end of the income scale. Meanwhile, the unemployment rate has risen for those with advanced degrees while holding steady for those with bachelor’s degrees. Going forward, companies will have to seek additional cost savings or give up some margin as household incomes soften and consumers become more discerning. The risk of a prolonged period of tight Fed policy is that the unemployment rate can rise abruptly if margins erode sufficiently. This recession risk is underpriced in financial markets today.
Finally, as noted, immigration has surged, helping to slow wage growth and reduce upward pressure on inflation.
Fading headline disinflation tailwinds, less discretionary money to spend — Headline inflation has been below core inflation for much of the past year, helping to restore some purchasing power for stretched lower-income consumers. I expect this trend in headline inflation to reverse course in the second half of 2024, adding to pressure on companies to fight for consumer dollars.
Headline inflation has benefited from the steep decline in prices on the goods side, which saw recessions in multiple industries. I think this has run its course. The one exception is in the auto industry, where I expect buyer incentives to continue improving as inventories have largely normalized. On the services side, I think pricing should moderate as consumers become more price conscious and pent-up demand fades. Areas such as restaurants and leisure should see more discounting or incentives to lure spending. The lock-in effect of the Fed’s rate hikes (higher rates make existing homeowners less likely to sell) has kept home inventories low and prices high. Still, I see room for shelter inflation to move somewhat lower over the course of this year.
The dichotomy between variable-rate and fixed-rate debt — While average household debt payments as a share of income are back to 2019 levels, the actual dollar payments made on variable debt (which represents roughly 30% of total consumer debt) are now about the same as the payments made on mortgage debt. This large payment shock is responsible for the recent surge in consumer delinquencies (Figure 2). Strong employment gains have helped consumers keep up broadly, but the percentage of credit card users making only the minimum payment each month is starting to tick higher, in what could be a warning sign. In addition, the one-year grace period for student debt payments expires in October, which could well leave some consumers with yet higher cumulative debt payments.
Equity Market Outlook
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