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Fed wants to see a 'slowing, but still resilient' consumer

US retail sales moved slower than expected in May, increasing by 0.1% against economist forecasts of 0.3%. What does this retail data signal about the state of the US consumer and even the greater economy at large?

Deutsche Bank Chief US Economist Matthew Luzzetti believes the consumer and economy are both "slowing," but retail sales data may not be as "worrying" a trend at this moment. Luzzetti turns his attention to the likelihood of the Federal Reserve cutting rates in the second half of 2024.

"So they [Fed officials] need to see better inflation, but they would also like to see an economy that is not re-accelerating, that is not too strong. So today's consumer spending I think is supportive from from that perspective," Luzzetti tells Yahoo Finance's The Morning Brief. "But [what] the Fed would ultimately like to see would be better inflation, a labor market that is slowing but is still resilient, and a consumer that is slowing but is still resilient."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.


This post was written by Luke Carberry Mogan.

Video transcript

Investors are digesting the latest retail sales report out today as well.

Sales increased at a slower pace than expected in May as high interest rates and inflation continue to weigh on consumers.

The report comes as economists remain wary of any signs of a consumer slowdown here to weigh in.

We've got Matthew Luti, who is the Deutsche Bank chief US economist here in studio with us.

Great to see you, Matthew.

Great to see you guys too.


All right, so the market is trying to make up their mind off of this retail sales.

For what does it tell you about the state of the consumer right now?

Yeah, I, I think you know, we clearly have slowing going on in the economy if you look back.

You know, last year was a very robust economy above 3% growth.

The consumer was a big part of that.

Government spending was also a big part of that.

You do have a consumer slowdown that is ongoing.

The labour market also seems to be slowing and coming into better balance.

But I think you you you need some context.

So this morning's report for retail control stripping out the volatile items was actually up 0.4%.

It was a decent print.

Retail control over the past three months is actually the highest since December.

So the economy is slowing.

The consumer is certainly slowing, but at the moment I don't think it's a worrying trend.

I think it's just getting back down to what we think is a more normal type of pace for the economy.

So, Matt, how do you think that's gonna translate into how many cuts we're going to see by the end of the year believe your base case is still one cut?

But I guess my question to you is following the signs that we have seen some weakening in the economy, especially on the heels of that softer than expected inflation print.

Uh, just last week.

Does that still leave the door open for the possibility of a September cut?

I think it does.

I. I think that we we could get a September cut the number one consideration.

There will be inflation, you know, Do we get three more inflation prints that look like what we got last week?

If we do, then I think the probability of a cut by September could be reasonable.

That's not our base case.

We think that you'll get another strong inflation print between now and in the September meeting.

That creates enough uncertainty for the Fed.

But chair power was pretty clear last week.

Um, they're considering the totality of the data, so they need to see better inflation.

But they would also like to see an economy that is not re accelerating.

That is not too strong.

So today's consumer spending, I think, is is supported from from that perspective, what the Fed would ultimately like to see would be better inflation, a labour market that is slowing but is still resilient and a consumer that is slow.

But it's still resigning.

And so I mean, those two go hand in hand.

Of course.

What are what are you seeing within the labour market right now that is starting to make its way over into some of the consumer readings that we're getting the the the labour market.

Is this really mixed picture depending on what data you look at?

Um, John Williams spoke, spoke this morning and is, you know, you have to look at the totality of the data there as well.

You know, we we got a jobs report that showed 275,000 jobs added, um, incredibly robust numbers.

At the same time, you're seeing the unemployment rate tick up and measures like the household survey are showing weaker employment.

I think as you kind of look at the the broad swath of data that the labour market looks roughly as tight as it was in 2019.

You know, the unemployment rate has moved up.

The quits rate is down, but employment growth still remains strong.

Income growth remains resilient from the consumer perspective.

And with that backdrop, I'd be surprised if the consumer slowed in a worrying way.

Man, I guess at what point do you think the Fed is going to be a bit more concerned about the labour side of the mandate?

Because, yes, we are starting to see some softening.

Maybe it's nothing to get too concerned with just yet, but we could see maybe a further deterioration rather quickly.

Yeah, I think that's always the way with the labour market, you know, the it looks great until sometimes it just, uh accelerates to the downside in this non linear way.

Um, typically, if the unemployment rate rises by 50 basis points over the course of a year, you're in a recession.

And so the Fed is balancing those risks at the moment.

II I you know those risks are are there, but I don't think that they're particularly heightened from a historical perspective.

We still see robust job gains that are there.

Income growth is still resilient.

Consumers have a lot of wealth on their balance sheets.

You still have excess savings on those consumer balance sheets.

And so while there is are some strains, particularly for parts of the the parts of households, I would be surprised if you saw a slowing in the labour market and a slowing the consumer.

That was enough to get them to cut by September.

We often hear for companies they they would look at the macro environment.

And if they see any type of, you know, storm clouds in the equation, they're they're quick to say OK, what's the head counts that we're operating on right now?

And do we do we need to make further cuts?

Should we expect more cuts in the employment situation or from from jobs right now, uh, in companies that have already for many of them implemented cuts.


I mean, the interesting thing about this labour market is we've had these, you know, clouds or headwinds for the past two or three years.

I think companies have been worried about recessions.

Over that period.

You've had, you know, shocks to the system.

We had this aggressive monetary tightening.

Yet within that context, if you look at layoffs for the broad economy, they've remained incredibly low.

Um, the jolts data shows that layoffs are lower than they were at any point.

Why does it feel like they're so large?

I think you you get headlines out there for large companies that have laid off individuals.

But those are a relatively small share of the US economy.

And when you look at broader numbers, you know, even initial jobless claims, continuing jobless claims, they remain low.

From a historical perspective, they've moved up a little bit.

But just about any data point that we see show layoffs broadly speaking, remain low Now.

Sometimes they do tick up in in you know, this this way.

But I think it takes a shock really to get there and push you into a weaker labour market outcome.

Ma'am, my question is we we we had we had, uh, Mohamed El Aian on the show last week and he was telling us that he thinks that December cut would be too late.

He also talked about the fact that the risk that maybe is posed here about the Fed remaining too data dependent.

Do you see that as a real risk at all?


I mean, the Fed is is emphasising that they're data dependent And, you know, part of that, I think is it's been really difficult to forecast in this environment.

You know, most forecasters miss the inflation shock.

They missed the upturn in inflation earlier this year.

And so there still is some upside risk in terms of how they're thinking about the inflation outlook and for them, and I think rightfully so.

Gaining confidence on inflation is the number one story.

I still see an economy that looks resilient.

Now we are downshifting to something that looks closer to 2%.

But that should be viewed as normal, not something that is worrying.

You know, if you begin to get data points that look something different than that.

If layoffs actually do begin to pick up, I actually do think the Fed would be relatively quick to pivot and begin to cut rates.

So if you got that evidence by September, that would certainly be a reason for them to cut rates.

All right, Matt Lizzette always great to have you and special thanks for coming in studio here with us today, Deutsche Bank's chief US economist.