Consumer Activity has Slowed Down

Inventory-cycle-driven segments of the economy appear to be reaching the bottom

Summary: Earnings season kicked into high gear last week with banks reporting. Many companies reported that economic activity is decelerating, especially consumer activity. Subprime credit-card delinquencies are approaching 2009 levels. Capital markets and other inventory-cycle-driven segments of the economy appear to be reaching the bottom, but geopolitics, a weakening consumer, and higher interest rates for longer may threaten that stability.

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Macro

Consumer activity has slowed down

"2022 growth rate was 9 to 10%. In '23 first quarter over last year's first quarter, say 9%. It's down to 4%. A little over 4.5%. That has held true in September and October. That growth rate to put it in context is consistent with where we were in '16, '17, '18, '19, low growth, low inflation economy. Consumer activity has slowed down… This is real-time data" - Bank of America (BAC 0.00%↑) CEO Brian Moynihan

"What we are seeing in the data, is an economy that's strong today, but decelerating. We also see that significant progress is being made on inflation, perhaps more so than other market participants based on the movement in bond yields recently." - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman

Economic pressures have increased

"Last quarter, we shared that broader economic pressures were building, particularly in North America and Europe. Over the last few months, we have seen these pressures increase, with declining outputs in global manufacturing; slowing activity in services; and subdued hiring across some industries as companies pause new hiring and spending following a period of bullish hiring and investment post-pandemic." - ManpowerGroup (MAN 0.00%↑) CEO Jonas Prising

Businesses are cautious

"Economic concerns have translated into what is now an unmistakably more cautious tone in the business. We saw those headwinds take several forms, including pauses in certain planned activities, fewer and generally smaller project opportunities, and a slower than anticipated pace in conversion and onboarding of new business." - The Interpublic Group of Companies (IPG 0.00%↑) CEO Phillippe Krakowsky

"...client…echo a sentiment of manageable headwinds in the short term, yet confirm their limited visibility on how this will evolve, which is resulting in increasing cost reduction initiatives, hiring slowdowns and project start postponements." - ManpowerGroup (MAN 0.00%↑) CEO Jonas Prising

Don’t want to be going at top speed into uncertainty

“...I am still somewhat scarred by 2009 when General Motors and Chrysler went bankrupt. So -- while that's now 14 years ago, it's -- that is seared into my mind with a branding iron because kind of Tesla was just hanging on by a thread during that entire time and with -- I mean we closed a financing round 2008 at 6 p.m. December 24, Christmas Eve. And if we had not closed that financing round, we would have bounced payroll 2 days after Christmas. So we actually closed that around the last hour, the last day that it was possible, stressful to say the least, and then barely made it through 2009. So I'm like -- I want to just -- I don't want to be going at top speed into uncertainty. A lot of wars going on in the world obviously as well, so -- and we have room here." - Tesla (TSLA 0.00%↑) CEO Elon Musk

Given how sharply rates have risen, it's surprising that we haven’t had a recession already

"...we went from zero rates to 5% in effectively the fastest period since the 60s, early 70s, fastest rate increase. What's remarkable is we haven't had a recession, by the way, but -- and I personally don't think we're going to. But with that, I mean, if you're an advisor and you've got a client sitting on a lot of cash earnings zero, I would hope you're telling them to put it in treasuries or something. So that's exactly what's happened." - Morgan Stanley (MS 0.00%↑) CEO James Gorman

Tightening may be hitting the economy with a lag

"I'm still of the belief that there's been a lag with this tightening and across a broad swath of the economy, we will see more sluggishness. Now that doesn't necessarily mean it has to be a recession, and certainly, there's a good debate on where this all lands. But we, again, in the past quarter materially tightened economic conditions. And I just think there's a lag in most sectors of the economy, not all, but most sectors of the economy. And I do think over the next 2 to 4 quarters, the impact of that tightening will be more evident and will create slowdowns in some areas. I am hearing as I interact with CEOs, particularly around consumer businesses, some softness, particularly in the last 8 weeks in certain consumer behaviors. I don't want to over-amplify that because I think the economy and the consumer has been more resilient. But I think that gear's we're watching closely." - Goldman Sachs Group (GS 0.00%↑) CEO David Solomon

The Fed is still signaling that rates will need to stay higher for longer

"...inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal." - US Federal Reserve Chair Jerome Powell

"We've been saying consistently that we believe the Fed will keep rates higher for longer and we didn't share the previous consensus view that they would cut rates by the end of this year." - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman

And now elevated geopolitical risks are worrying company execs

“You know wars on two places going now and these are all this adds the volatility and adds the movement in the markets and adds the day-to-day movement but the end of the day these are huge human crises going on that we hope solve uh we aren't sure they will but we have to run the company given that we got to be ready for anything comes at us and geopolitical risk is a major risk for the company faces on a given day" - Bank of America (BAC 0.00%↑) CEO Brian Moynihan

"...if the Fed remains very aggressive on rates, if you believe their talk and all of a sudden we have some drop off in demand, because that conflict expands and the nightmare scenario would be that a couple of tankers get sunk in the Persian Gulf at the narrow end and oil goes to $200 a barrel. I mean, the bets are off." - Prologis (PLD 0.00%↑) CEO Hamid Moghdam

"At the same time, there has been an escalation of geopolitical stresses around the globe, the war in Ukraine, tensions with China and now the conflict in the Middle East. Overall levels of risk are more elevated than we've seen in quite some time." - Goldman Sachs Group (GS 0.00%↑) CEO David Solomon

"The geopolitical backdrop has clearly become more troubling as well amounting to a lack of clarity that will likely weigh on demand." - Prologis (PLD 0.00%↑) SVP, Strategic Planning and Analysis

US elections are approaching too

"...the US will look less politically stable politically as the election approaches. And inflation will look worse because of wage increases in union issues, as well as the increasing cost of carrying US government debt. As apparent US political stability weakens, people are less likely to invest in equities." - Interactive Brokers Group (IBKR 0.00%↑) Director of IR NAncy Stuebe

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