It is fatty, and dissecting the U.S. economic data requires a fine tooth comb. We just got retail sales for the month of August, and they did come in better than expected, pointing to a resilient U.S. consumer. Now, nominal consumer spending as well as freight expenditures jumping again in the latest month.
But real transactions, as well as shipment volumes, remain contracted. And as Chair of the Federal Reserve, Kevin Warsh and the central bank meet to decide on a potential interest rate hike to combat sticky energy and core inflation. Questions are growing over whether high prices are creating a dangerous mirage of consumer strength.
Well, joining us live to break down the real state of the consumer and the macro liquidity is QI Research CEO and Chief Strategist Danielle DiMartino Booth. Danielle, good morning. Thank you so much for joining us this morning. Well, we are counting down to 2 p.m. Eastern Time, and markets are pricing in over a 90% chance of a Fed rate hike today.
So does hiking rates into an economy where real volumes are already dropping risk creating a policy mistake?
Well, that is certainly the risk here. We are seeing almost every single indicator of supply chain related inflation picking up. But whether or not one retailer after another, as they've explained to us, we pass through these higher input costs, is a much different question. We're seeing much weaker unit sales than we are seeing nominal sales, especially given the credit card spending data.
We're very much seeing the ability to continue to demand and purchase by the top of the K shaped economy, but very little at the bottom 90%.
Yeah. And Danielle, we just got U.S. retail sales figures out this morning. And you mentioned that data from Bank of America where card spending rose in August, yet same store transactions actually pulled back. So is this so called strong consumer just an inflation mirage, or what do you think needs to happen here when it comes to real demand?
I think the latter is correct. I think it's something of a mirage driven by high prices, and that we should really step back and see what we're seeing in terms of volume. When it comes to freight, we're seeing falling volume, rising prices. And that does not reflect the state of the U.S. consumer.
The majority of U.S. consumers going into the critical holiday selling season. In fact, if you delved into what Bank of America's data said, despite the fact that there were rising sales based on inflation and higher prices, you actually see that unit sales for airlines are declining and declining recently, meaning at some point we might need to make the front of the bus bigger and have it pushed into the back of the bus because they're having such a harder time filling up the back of the bus, so to speak.
Yeah. And Danielle, when we look at some of these data points, they can be confusing. Nominal credit card borrowing may be up, but when adjusted for CPI, real borrowing actually contracted. So are households out there slowing down real credit usage as borrowing costs, as well as cost of living pressures, actually bite?
Since you asked that question, we have actually been seeing credit card borrowing come down a little bit. That's been largely offset, though, and you've seen continued strength in auto buying. And that has something to do with the fact that auto lenders have now made a four month loan new norm, now is a 102 month loan.
Which sounds crazy because it starts to seem like a mortgage, and not on the term that you would see on an auto loan. We're stretching as much as we can out of the consumer. But the fact that we're seeing many on the lower rungs of the income ladder pull back in terms of credit card usage is showing you that they're reaching their limits and lenders are being needed to standard.
And Danielle, I know you mentioned what we're seeing in freight spending out there and the fact that spending hit its highest since 2023, even though the shipment volumes have fallen year over year. So given these data points here, what does this tell you about the real physical economy?
So I think this is something that a lot of the more devilishly inclined individuals on the Federal Open Market Committee are grappling with yesterday and today going into this critical decision, and that is the real economy itself is flowing. For example, a report out of the New York Fed on its factory sector.
But again, everything that we're seeing is price driven as opposed to new orders. Absolutely collapsing backwards in the same direction. And then New York, where we're sitting here today, is the largest service sector hub in the economy. It's a follow up report out of the New York Fed this morning.
That service sector is flowing on a much greater degree and that reflects U.S. consumer. So it's a red flag and it makes for some serious disconnect and particularly dissention. I would not be surprised to see a dovish dissent at today's meeting against Michelle Bowman in favor of not hiking rates at today's meeting.
Yeah, and all of us are counting down to that 2 p.m. hour for that Fed rate decision, as well as the presser and the Summary of Economic Projections to see what transpired over the course of the two day Fed meeting. But when we look at spending growth, we continue to hear about the K shaped economy. And many viewers out there are wondering when we'll see relief when it comes to the cost of living, as well as the pain at the pump.
So how long can the top earners, the top 5% of earners, continue to outpace everyone, and how long can they actually carry broader consumer spending in the U.S.?
Well, you know, as we've seen here a very long time at the top of the spending for a very, very long time. But we are seeing, to your question, consumer sentiment among the highest income earners go down. As you know, financial markets have been extremely volatile, bouncing all over the place, meaning they're checking on the positioning in their portfolios.
They're seeing something that resembles a phone call on a day to day basis. And that's making higher income consumers a little bit nervous. And so the risk is, again, that we start to see a little bit of teetering at the top of what I've been calling it. That's a game changer for the U.S. economy.
And finally, Danielle, before I let you go, you used to work at the Dallas Fed, and you are familiar with the inner workings of the Federal Reserve. So what will you be paying attention to this afternoon, in addition to what we get from the rate announcement, as well as any potential division out there? What do you think is important as we move forward?
I think we should be looking closely at the dot plot, especially for those who are nonvoters, and seeing if there are one or two rate hikes anticipated for the remainder of 2026. And I would also look because I think Kevin Warsh kind of got backed into providing forward guidance at Jackson Hole, which I don't think was intentional, but it was what the result was.
So I'd be very focused on pulling back the podium, providing even less information. And he did it at Jackson Hole, leaving markets lingering. Are we going to see a subsequent rate hike on October the 28th? Or are we going to be left to our own devices to parse all the economic data on our own, so we don't have a data blackout until Friday morning when other Fed speakers come out?
But I'll be very interested to see how Warsh comports himself today at the podium, considering the fact that he appears to have broken his own rules just a few weeks ago at Jackson Hole.
Well, Danielle, today is a big day, so I know you're very busy. Thank you so much for taking time out of your schedule to join us this morning. Always appreciate you. Thank you so much for your perspective.
And thank you. Have a great day.
