November 16th, 2024 | Consumer Spending, Tariffs, Inflation, Work Income vs Retirement Income, Honeywell International Inc. (HON), Dominos Pizza, Inc. (DPZ) & Bristol-Myers Squibb Company (BMY)

Are you spending like other consumers?

Retail sales in the month of October showed an impressive gain of 2.8% compared to last year. With lower gasoline prices, gas stations were a major negative as they declined 7.1% compared to last year. If this group was excluded from the headline number, retail sales would have been up an even more impressive 3.7%. There were several areas of strength as gains were quite broad across various industries, but nonstore retailers, which was up 7.0% and food services and drinking places, which was up 4.3% continued to lead the charge. Interestingly, both furniture and home furnishing stores, which was up 1.5% and building material and garden equipment and supplies dealers, which was up 2.8% showed annual gains for the first time in many months. I wouldn’t necessarily say these categories are particularly strong, but it appears they may have finally bottomed. With that said, I do believe they could be areas of strength in 2025 considering they have both been depressed areas for a couple of years now and I believe people will look towards home improvement next year. Overall, this is further evidence that the consumer remains healthy and willing to spend in this economy. 

 

How the tariffs with China could play out over the next few months

I’m beginning to get questions from people who have concerns about the tariffs on China products such as when will they start? How much will they be and should I buy products such as appliances now before the tariffs on China begin? These are all great questions. It's important to understand the tariffs cannot be placed until after the inauguration of the Mr. Trump. It is possible on is his first day that could be one of the many things he will do when he is the official president. It is, however, possible that he may hold off on the tariffs because the purpose of tariffs is to force equal trade or free trade with China, and Mr. Trump may want to use tariffs as a negotiation tool. In 2023 the trade deficit with China was $279 billion. Mr. Trump wants China to import more goods from our economy, which was only $148 billion in 2023. This could come from such things as agricultural products and based on the amount of oil we could be pumping in 2025, we may have more oil than we can use here and maybe China will purchase some. There are also other products as well that will be on the table. It should also be noted last time Mr. Trump was in office, China’s economy was very strong, and they were not as willing to negotiate. Fast forward to today and the Chinese economy has weakened. This could mean they would be more open to talk on trade to help their economy. No one knows exactly what the new president will do or how much the tariffs will be, but if you need to buy goods that are made in China, your window of opportunity may be running out!

 

Is inflation continuing to cool?

The October Consumer Price Index (CPI) showed price gains came in line with expectations. Headline CPI increased 2.6% compared to last year and core CPI, which excludes food and energy climbed 3.3%. The headline CPI was above September’s reading of 2.4% and core CPI matched September’s reading of 3.3%. According to economists, the monthly inflation rate in October 2023 was unusually low, which made the October 2024 reading look relatively high. Hopefully, this means we will see further progress in the months ahead as core CPI has not shown much progress as of last as it has been stuck at 3.2% or 3.3% since May’s 3.4% reading. While much of this sounds problematic, there are not many areas of concern when looking at the inflation report. The major issue continues to be shelter which rose 4.9% compared to last year and accounted for over 65% of the annual increase in core CPI. I continue to believe shelter inflation will eventually resolve itself, which would then bring the major inflation measures more in line with the Fed’s desired level. Powell even said during a press conference, “Market rents, newly signed leases, are experiencing very low inflation." He also mentioned the current shelter inflation readings are due to a catch-up problem and "It's not really reflecting current inflationary pressures." I do believe with this report a December cut looks more likely, but that would not leave room for as many cuts in 2025. Based on the current data, I believe a Fed Funds Rate around 3.5% would be a fair level and that compares to a current Fed Funds Rate of 4.5-4.75%. That means if there is a cut in December, we could be looking at maybe just 3 or 4 rate cuts next year. 

 

Work Income vs Retirement Income

When planning for retirement, it’s important to understand the difference between your work income and your retirement income. If you get paid $200k/year, close to $17k/month, after taxes and savings, your net paycheck might be closer to $120k/year or $10k/month. If you go into retirement with the idea that you need to replace that entire $200k of income to continue your lifestyle, that’s just not true. In retirement you are not paying payroll taxes, which in California is a flat rate of 8.75%, you’re typically not saving much anymore, and if planned properly, you’re paying less federal and state taxes as well. In this scenario, Social Security alone might be between $5,000 and $6,000 per month for a married couple which means any retirement savings just need to cover the remaining living expense need which a nest egg of about $1 million should be able to do if invested appropriately, even after taxes are considered. We see retirees all the time where their income potential, or the maximum amount they can spend without running out of money, is much larger than they are currently living on, and they have no idea. If you’re planning for retirement, know how much you actually need so you can either retire earlier or at least have the peace of mind that you are financial independent if you’d rather keep working.  

 

Companies Discussed: Honeywell International Inc. (HON), Dominos Pizza, Inc. (DPZ) & Bristol-Myers Squibb Company (BMY)