Consumer pullback ‘make sense’ amid inflation, housing market: Economist

Mastercard Chief U.S. Economist Michelle Meyer speaks with Yahoo Finance about anticipated Black Friday retail sales and how she anticipates higher prices and inflation will affect holiday spending.

Video Transcript

BRIAN SOZZI: All right, let's stay on all things retail and economy. Let's bring in friend of the show, Mastercard chief US economist Michelle Meyer. Michelle, actually, it's the first time I'm seeing you in person after 10 years of knowing you.

MICHELLE MEYER: I think that's right.

BRIAN SOZZI: All right, so take us through some of your holiday numbers. I'm an avid consumer of the Mastercard SpendingPulse data. How do you think this holiday season will shake out?

MICHELLE MEYER: Well, it's interesting. We're forecasting just over 7% growth this holiday season for retail sales ex autos. And we're really keenly focused on what happens this Black Friday period. We're looking for just Black Friday alone to be up 15% year over year.

And I think what we learned so far from this season and looking at our high frequency data is that the consumer is focused on promotions. They're looking for those moments in time where they feel like it's the appropriate point to purchase, to go in full ahead and buy those holiday gifts. So you see a bit of fits and starts thus far, and I wonder if that's going to continue into the rest of the holiday season.

BRIAN SOZZI: Michelle, that's a huge number, 15%.

MICHELLE MEYER: It is.

BRIAN SOZZI: I thought we were nearing a recession.

MICHELLE MEYER: Part of the reason it is a big number is because last year, Black Friday wasn't really characteristic of Black Friday, similarly, as the year before, because you didn't have as much in-store purchasing, you didn't have the typical door buster sales that you had in prior years.

Last year and the year before that, it was a lot more spread out. It was much more concentrated online. And retailers also accommodated that or looked for that. This year, I think you're anticipating-- and we'll see, but it seems like we're going to see a lot more of the in-person sales, where people rush out to get those promotions and make sure they check everything off their list.

BRIAN SOZZI: One thing that has surprised me, just talking to a lot of retail executives, as they have been reporting earnings the past two weeks, they're telling us that consumers making over $100,000 a year, those higher income households, they're trading down. I haven't heard that in some time. Are you hearing that?

MICHELLE MEYER: Yeah, I think that is something we have to keep an eye out for. And I we are seeing it to a certain extent. And it makes sense, given the macro backdrop, as you noted before, the economy has been faced with high inflation. And a lot of categories have seen extremely high price shocks. We are seeing an environment of higher interest rates. The Federal Reserve is actively hiking rates and anticipates will continue to hike interest rates.

So the consumer is trying to navigate this environment. So a certain amount of trading down when their budget is becoming more constrained is-- makes a lot of sense. Also consider where we're coming off of. Last year and the year before was really, really, really strong when it comes to overall consumer spending where consumers had a lot of discretionary income to put to work.

BRIAN SOZZI: I'm really testing your knowledge here, but how concerned are you about the savings rate really coming down? The way I look at the decline in the savings rate this year is people have tapped their savings to go out there and buy food and household essential. How concerning is that for the economy, as you look towards next year?

MICHELLE MEYER: So it's going to get a little wonky, but there's the rate--

BRIAN SOZZI: Love it. That's what we're here for.

MICHELLE MEYER: There's the rate of savings, and then there's the level of savings. So the rate of savings has certainly come down, and it will remain a lot lower because, in part, people have a stock of money still out there, this pandemic savings. By our calculations, about a quarter to maybe a third of that cumulative pandemic savings has been used. So there's still some capacity out there to put that money to work, but it does mean that the rate of savings, that savings rate's going to remain historically low for some time.

BRIAN SOZZI: As we look towards next year, we have a slowing housing market. We have a stock market that has just caused a lot of wealth destruction. How do consumers adjust to that? How do you see that playing out?

MICHELLE MEYER: So I think what you're speaking of is this idea of a negative wealth shock.

BRIAN SOZZI: Negative-- yes, negative wealth effect.

MICHELLE MEYER: That consumers are now seeing their finances shift, particularly those higher income consumers that are more levered to the stock market or maybe homeowners. But I also think it's important to think about the starting point, right? The wealth effect doesn't happen overnight. It is a response, the cumulative change in wealth that happens over several years.

So a bit of what we've seen throughout this year has been a payback from extraordinary appreciation in the stock market, even in the housing market as well. Home price appreciation, nationally on a year over year basis, ran above the peak rate in the early 2000s. So we're now seeing the normalization of that market, and it's happening quickly. And it's causing some ripples and some shocks, and people have to adjust to that. But it makes sense that we're seeing these adjustments, given how excessive some of these gains were over the last few years.

BRIAN SOZZI: Based on what you're seeing there and just inflation, inflation is still high. I know we had a positive reaction in markets to that CPI index rolling over a little bit a couple of weeks ago. But I mean, do you see a recession at all next year?

MICHELLE MEYER: So first, on the inflation point, I think the October inflation report was really important, as the markets react. And the reason that it was so important is if you dig into the details, what we're starting to see is core goods inflation come down. Some of the categories that have the biggest price increases are now starting to see some declines. That's critical.

And that matters for how you think about the possibility of a soft landing because to the extent that inflation can come off the highs, that supply chain issues start to be resolved, as you just spoke about, that the demand story starts to shift, then you get a more natural mitigation of inflation pressure, which means that maybe the Fed doesn't have to be as aggressive as slowing down the economy in order to achieve their goals.

That's not to say the Fed is done. Clearly, the Fed still has more to go in terms of interest rate hikes. But it's really the path forward for inflation and the success in terms of getting to price stability that will dictate whether or not we'll end up seeing that downturn or not.

BRIAN SOZZI: When does the economy feel the effect of these Fed rate hikes? I guess, what, the old rule of thumb was six months down. What does that effect even look like?

MICHELLE MEYER: Those long and variable lags in monetary policy?

BRIAN SOZZI: Yeah. Please, you're [INAUDIBLE] my CFA textbook. Oh, no. Oh, god, I can't take it.

MICHELLE MEYER: Bring it out of you. So Chait Powell actually talks about that in the last press conference, that they are quite aware of the lags. They are studying them. They don't know exactly what those lags look like. And it's possible that the lags are a lot shorter now because of so much forward guidance that goes into monetary policy. The market moves in advance of the actual changes in monetary policy.

So if those lags are, indeed, shorter, then for the Fed, they can react maybe a bit more to real-time movements in the economy. But it's a risk, and they have to be aware of that because what they don't want to do is tighten too much, realize, oops, we overdid it. The economy is going to be too weak. And then they have to pull that back. So they're going to tread very carefully, I think, from here on.

BRIAN SOZZI: Last 30 seconds, your big prediction for this holiday season.

MICHELLE MEYER: I think experiences are still going to be key, still be a priority in terms of gifting and experiences, spending on experiences, travel, restaurants, recreation, theater. People still want to go out and live and enjoy themselves. And they have to buy good clothes to do that.

BRIAN SOZZI: Yes, yes, yes, yes, they do. Well, it's good to see you in person--

MICHELLE MEYER: You, too.

BRIAN SOZZI: --Mastercard chief US economist Michelle Meyer. And have a happy Thanksgiving.

MICHELLE MEYER: You as well. Thank you.

BRIAN SOZZI: Thanks for doing this. Appreciate it.