Needs vs. Wants — Week of July 8, 2024

Spending choices and the broader economy

Essential Economics

— Mark Frears

This or that?

We are made up of our choices, and we make hundreds of them every day. You may not even be aware you are making the choice as you are. If they become habits, then you don’t have to think. Is that a good or bad thing?! It depends on whether you are happy with the consequences of that choice, and if you want to change.

One of the ways to look at broader consumer choice is through their spending habits.

Outlays

One thing that has not been in question over the past few years is that the consumer continues to spend. Some theories say it is pent-up demand following the pandemic, but this has continued on well past that. The chart below shows nominal, dollars spent and real, adjusted for inflation and spending.

two line graphs: 1) U.S. Nominal Consumer Spending May: $19.3 Trillion; 2) U.S. Real Consumer Spending May: $15.7 Trillion

Source: Piper Sandler Research

While you can see that some of the headline spending numbers are because things cost more, there is still a strong, positive trend in U.S. consumer spending.

Choices

If we have money in our bank account, or availability on our credit card, we are going shopping. What are we going to buy? One broad distinction we can make is whether it is a want, or a need. Some people have trouble discerning this difference. The chart below distinguishes the nuances of staples (needs) versus discretionary (wants).

Consumer Staples (Items considered essential to daily life: food, beverages, personal hygiene products, household items and other necessities.) Stocks come from the companies that produce these products. Versus Consumer Discretionary (Goods and services that are luxury or nonessential items purchased for entertainment, leisure or pleasure: apparel, electronics, travel, dining out, champagne, vacations, video games, toys and entertainment.). Sensitive to economic downturns when consumers tighten their wallets.

Source: Marketbeat

The reason for tracking spending in these categories is because it can be a signal to shifts in consumer behavior. If you and I are confident in our jobs and the prospects of earning a good wage, we will be comfortable spending some of our income on discretionary items. If we are worried about the future, or there is too much uncertainty, we will pull back spending in this category and staying primarily in staples purchases.

The chart below tracks companies in the S&P 500 associated with discretionary products versus staples products.

line graphs- 1) S&P C. Discretionary Relative to C. Staples - Equal Weight and 2) Overbought/Oversold

Source: Strategas Research

This confirms the consumer is not feeling much stress, as their discretionary spending, relative to staples, continues unabated. Technicians will be watching the current level to see if it breaks above, or if it bounces off once again.

If you break out staples by themselves (see below) they are in a downward trend, as consumers spend as if they are optimistic.

line graphs: 1) S&P C. Staples Sector- Equal Weight and 2) C. Staples Relative to S&P 500.

Source: Strategas Research

There continue to be many uncertainties in the economy, the presidential election, the UK and France elections, persistent inflation and high home prices, and a waffling Fed highlights the issues. While consumer spending choices do not reflect a slowing economy, we are starting to see some cracks. The Atlanta Fed GDPNow Q2 estimate, as well as the Blue Chip forecasts, as seen below, reflect that.

Line graph- Evolution of Atlanta Fed GDPNow real GDP estimate for 2024: Q2

Economic releases

Last week was all about the labor market. Still hanging in there, as hiring continues and there are jobs available. That being said, we need to wait on the revisions.

This week’s calendar is titled “inflation.” CPI and PPI both out, as well as consumer credit, sentiment and small business optimism. See below for details.

	Upcoming Economic Releases:	Period	Expected	Previous
8-Jul	NY Fed 1-yr inflation expectations	Jun	N/A	3.17%
8-Jul	Consumer Credit	May	$9.000B	$6.403B

9-Jul	NFIB Small Business Optimism	Jun	90.2	90.5

10-Jul	Wholesale Trade Sales MoM	May	N/A	0.1%
10-Jul	Wholesale Inventories MoM	May F	0.6%	0.6%

11-Jul	Consumer Price Index MoM	Jun	0.1%	0.0%
11-Jul	CPI ex Food & Energy MoM	Jun	0.2%	0.2%
11-Jul	Consumer Price Index YoY	Jun	3.1%	3.3%
11-Jul	CPI ex Food & Energy YoY	Jun	3.4%	3.4%
11-Jul	Real Avg Hourly Earnings YoY	Jun	N/A	0.8%
11-Jul	Real Avg Weekly Earnings YoY	Jun	N/A	0.5%
11-Jul	Initial Jobless Claims	6-Jul	239,000	238,000
11-Jul	Continuing Claims	29-Jun	1,855,000	1,858,000
11-Jul	Monthly Budget Statement	Jun	N/A	-$347.1B

12-Jul	Producer Price Index MoM	Jun	0.1%	-0.2%
12-Jul	PPI ex Food & Energy MoM	Jun	0.2%	0.0%
12-Jul	Producer Price Index YoY	Jun	2.3%	2.2%
12-Jul	PPI ex Food & Energy YoY	Jun	2.5%	2.3%
12-Jul	UM Consumer Sentiment	Jul P	68.2	68.2
12-Jul	UM Current Conditions	Jul P	N/A	65.9
12-Jul	UM Expectations	Jul P	N/A	69.6
12-Jul	UM 1-yr inflation	Jul P	3.0%	3.0%
12-Jul	UM 5-10-yr inflation	Jul P	N/A	3.0%

Mark Frears is a Senior Investment Advisor, Managing Director, at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Science from The University of Washington, and an MBA from University of Texas – Dallas.

The contents of this article are subject to the terms and conditions available here.

Private Banking is provided by Texas Capital Bank (the “Bank”). Advisory services are offered through Texas Capital Bank Wealth Management Services, Inc. d/b/a Texas Capital Bank Private Wealth Advisors (“PWA”), a wholly owned subsidiary of the Bank and an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). SEC registration does not constitute an endorsement of the advisory firm by the SEC nor does it indicate that the advisory firm has attained a particular level of skill or ability. Brokerage services are offered through Kingswood Capital Partners, LLC (“Kingswood”), Member FINRA/SIPC. Texas Capital Bank Private Wealth Advisors and Texas Capital Bank are not registered broker/dealers and are independent of Kingswood. Investments and insurance products are not insured by Bank insurance, the FDIC or any other government agency; are not deposits or obligations of the Bank; are not guaranteed by the Bank; and are subject to risks, including the possible loss of principal. Nothing herein is intended to constitute an offer to sell or buy, or a solicitation of an offer to sell or buy securities.

Investing is subject to a high degree of investment risk, including the possible loss of the entire amount of an investment. You should carefully read and review all information provided by PWA, including PWA’s Form ADV, Part 2A brochure and all supplements thereto, before making an investment.

Neither PWA, the Bank nor any of their respective employees provides tax or legal advice. Nothing contained on this website (including any attachments) is intended as tax or legal advice for any recipient, nor should it be relied on as such. Taxpayers should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or legal counsel. The wealth strategy team at PWA can work with your attorney to facilitate the desired structure of your estate plan. The information contained on this website is not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the authors and not necessarily those of PWA or the Bank.

Texas Capital Bank Private Wealth Advisors and the Texas Capital Bank Private Wealth Advisors logo are trademarks of Texas Capital Bancshares, Inc., and Texas Capital Bank.

www.texascapitalbank.com Member FDIC NASDAQ®: TCBI