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Hello, and welcome to Notes on the Week Ahead, a J.P. Morgan Asset Management

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podcast that provides insights on the markets and the economy to help you stay

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informed in the week ahead. Hello, this is David Kelly. I'm Chief Strategist here at J.P.

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Morgan Asset Management. Today Today is June 24th, 2024.

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The play, entitled Steadily She Slows, has from a dramatic perspective turned out to be a dud.

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It started with such a promising prologue of pandemic, recession,

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recovery, political upheaval, war and inflation.

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However, it has since settled into a drawn-out, repetitious script,

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wherein the lead actor, Consumption, hogs the centre stage and the supporting

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cast in the form of investment spending, government spending and trade has very

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little impact on the plot. The promoters on cable news shows and social media feeds do their very best

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to gin up public interest by prophesying catastrophic collapse into recession

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or reignited and blazing inflation.

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But still the play drones on, unloved by all, except, of course,

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the investors, who are profiting handsomely from its extended run.

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That being said, consumption is showing signs of faltering, warranting a health

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checkup on behalf of those investors who worry that the show could be brought to a rather abrupt halt.

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The week ahead should provide some further evidence on the issue of consumer

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momentum, with the release of May numbers for personal income and spending.

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We estimate that nominal consumer spending rose by three-tenths of one percent

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in May, and because we expect the consumption deflation to be essentially flat,

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this should also translate into a real spending increase of three-tenths of a percent.

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However, the latest retail sales report suggests that spending will be revised

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down for both March and April. Because of this, we now expect second quarter real consumer spending to rise

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at a modest 1.3% annualized rate, following 2% growth in the first quarter and

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3.3% growth in the fourth. Looking at the details, there are three clear areas of softening.

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Vehicle sales, housing services, and non-durable goods spending.

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While consumer spending on services outside of housing continues to grow at a robust pace.

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Vehicle sales and home building both look relatively stagnant.

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With May data in the door, we now estimate that light vehicle sales would be

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15.8 million units annualized in the second quarter, essentially unchanged from a year ago.

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Housing starts are tracking 1.32 million units annualized for the second quarter,

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down from 1.46 million a year earlier.

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In both cases, soaring prices in recent years, followed by surges in interest

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rates and insurance costs, have reduced the pool of potential buyers.

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Meanwhile, very slow growth in the native-born working-age population is limiting

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demand, and many new immigrants are in no position to impact the demand for

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new vehicles or new homes. For non-durable goods, the problem is likely just a squeeze in discretionary income.

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Pandemic aid has been long spent, and over the past two years,

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consumer spending on the basics, such as food, clothing, energy,

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and household supplies, has been supplemented to an extent by run-up in consumer credit.

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However, consumer credit, which rose by 9.9% in the year ended in April 2022,

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climbed just 1.9% in the year that ended in April 2024.

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This likely reflects greater caution on the part of lenders,

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as delinquency rates in consumer loans have now risen above pre-pandemic levels,

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although they remain far lower than in the years surrounding the Great Financial Crisis.

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Meanwhile, for the one-third of U.S. households that rent their accommodation,

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rents continue to absorb a greater share of disposable income than before the

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pandemic, forcing families to economize in other areas.

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Because of this, it isn't surprising to see some softening in consumer spending on the basics.

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However, it's important to recognize that there are significant offsetting forces.

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First, strong growth in both employment and real wages have led to solid year-over-year

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gains in real disposable income since the start of last year.

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Second, assuming there is no significant change in the stock market over the

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next week, we estimate that the net worth of U.S.

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Households will have increased by a huge 13.7% or $18.6 trillion over the last

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18 months, a number that coincidentally is more than the total spending of U.S.

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Consumers in 2023, versus $18.5 trillion.

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Finally, it should be noted that while interest rates are higher on new mortgages,

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new vehicle loans, and revolving credit, those of the existing fixed-rate mortgages

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continue to be insulated from the impact of higher borrowing costs while benefiting

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from higher interest income. All of this is bolstering the finances of richer and older households,

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supporting spending on high-end consumer goods, leisure, and entertainment.

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This is being further enabled by a remarkable surge in labor supply.

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As an example, health care employment has risen by 782,000 workers,

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or 4.6% over the past year, which is allowing for more patient care to be delivered

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in an area where staffing shortages remain a severe problem.

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Finally, some point to falling consumer confidence as a warning sign of lower spending ahead.

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However, this theme may not be as important as it seems.

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First, it should be noted that the University of Michigan, which has fallen

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from 79.4 in March to 65.6 in early June, has a bias due to the transition to

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new survey methods, which may account for more than a third of this decline.

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Moreover, the Conference Board survey due out this Tuesday has so far shown no such weakening.

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More generally, though, neither consumers nor investors are behaving as if they are scared.

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Investors have pushed this S&P 500 to an all-time record high 33 times already

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this year, while consumers have maintained a personal saving rate of 3.6%,

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far below the 6.2% average in the five years before the pandemic.

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In short, it appears that worries about consumer spending probably amount to

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a false alarm, at least in terms of triggering an imminent recession.

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Consumer spending will likely keep growing, although more slowly in the months

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and quarters ahead, suggesting that it would take a significant shock elsewhere

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to tip the U.S. economy into recession.

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For investors, this is a generally positive outlook. Milder but continued economic

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growth should allow for a continued gentle decline in inflation and,

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particularly when the Fed finally begins to ease, some fall in long-term interest rates.

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However, it should be noted that a continuation of this benign economic scenario

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is encouraging more and more lofty valuations, particularly for large-cap growth stocks.

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For this reason, while the show is likely to continue, investors should be aware

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of the location of the exits, and more deliberately diversify their investments

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to counter markets that continue to grow more concentrated.

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Well, that's it for this week. Please tune in again next week,

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and if you have any questions in the meantime, please Please reach out to your

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J.P. Morgan representative. Before investing. The value of from them may fluctuate, including loss of capital.

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Past performance and yield are not indicative of current or future results.

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Forecasts and estimates may or may not come to pass. J.P.

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Morgan Asset Management is the asset management business of J.P.

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Morgan Chase & Company and its affiliates worldwide.