The Resilient Consumer

By Dr. JoAnne Feeney, Partner & Portfolio Manager

Time is money, they say, and that’s certainly true at the Super Bowl.  $7 million bought some advertisers a mere 30 seconds to pitch their wares. The average price for a 30-second slot came in around $6.5 million this year, bringing the total in 42 minutes of ads (excluding the NFL’s and the network’s own promotions) close to $580 million. This puts total Super Bowl advertising at about the same level as last year. But wait, isn’t advertising spending suffering, as we’ve been hearing from the internet giants? And hasn’t that been a sign of an impending recession?  From the microcosm of Super Bowl ads (admittedly a small sample), we see advertisers investing to reach the consumer, perhaps because the consumer still has plenty left to spend, or because companies are fighting for a larger share of a shrinking consumer wallet. The data suggests it’s the former, and that pushes the risk of recession further into the future.

As investors assess the risks to stocks following the strong start to 2023, that’s the issue remaining upper most in everyone’s minds: will we see a recession before the year is out? The labor market remains tight and that is confounding the Federal Reserve’s efforts to slow wage growth, a key source of ongoing pressure on broader inflation.  Jay Powell, and other Fed officials, tried again last week to make clear that more work yet needs to be done to drive inflation back to the Fed’s 2% target. More rate increases are coming and investors shouldn’t expect cuts to the Federal Funds rate (the Fed’s key rate tool) any time soon. The higher cost of money remains one of the key headwinds to economic activity in 2023, but another important driver—the consumer—is actually seeing improving fundamentals. Consumer resiliency should not be ignored and could prevent recession even as rates rise further.

While personal income took a hit from inflation and the end of Covid support checks from the government, lately consumers are gaining spending power. As has been often cited, wages failed to keep up with inflation last year, and this eroded consumer demand and wellbeing. While true, this tells only part of the story because more people found jobs last year:

Source: U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis;, February 10, 2023.

The strength of sales for companies depends not on a single household’s income trajectory, but on how all households fare. So even if the average household suffers an erosion in real wages, aggregate inflation-adjusted disposable income can rise if more people enter the workforce. In addition, the rate of inflation has fallen in recent months more so than the pace of wage growth has slowed. Both of these forces—more people employed and wages starting to outpace inflation—have combined to allow inflation-adjusted income in the U.S. to grow. Notice in the chart below the firmly positive growth rate of real disposable income since July:

Source: U.S. Bureau of Economic Analysis, Real Disposable Personal Income [DSPIC96], retrieved from FRED, Federal Reserve Bank of St. Louis;, February 10, 2023.

Some areas of the U.S. economy are certainly contracting (e.g., electronics, housing), but other areas continue to expand (e.g., travel, restaurants). When consumer demand shifts as much as it has over the last year (from goods to services), any economy will take a while to adjust. Workers shed from one area need to find jobs in the others, and expansion capital also needs to be reallocated. For now, we are seeing that adjustment take place with unemployment remaining historically low because those expanding firms simply can’t fill positions fast enough.

Entertainment is one of the areas attracting more consumers. The Super Bowl was expected to draw over 110 million viewers, and some of them weren’t even interested in watching the game. In a recent poll, half of respondents (49%) saw the game itself as the main reason to watch, while 21% tuned in because of the half-time show. But a full 20% were motivated to watch because of the commercials. The advertisers know this, and they know the consumer still has plenty of spending power.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.