Yu: Welcome to Asset TV. I'm Michelle Yu. Thanks for joining us as we have a great panel discussion here in our New York studios with our friends at Thrivent Asset Management. Joining me today from Thrivent are Steve Lowe, chief investment strategist, Eric Johnson, equity consumer research analyst, and Tracy Pamperl, director of investment grade research.

Employment numbers were good for much of 2024, but the topic here is how are consumers feeling about jobs right now, Steve?

Lowe: Yeah, I think they're feeling relatively well despite the slowdown in the job market. And you can look at consumer confidence surveys. And there's one done by the conference board that focuses on jobs. And it's held up well. And there's not a lot of concern about losing a job. I mean, it's gone up, but it's low versus history, and people aren't that worried about the ability to find a job if they lose a job. But I expect those concerns to increase over time because the job market is slowing. And we've had this huge shift from during the pandemic.

During the pandemic, the main issue was a shortage of labor and there are too many jobs. If you looked at it there was two openings for every unemployed worker. And that made it very easy to switch jobs, it made it very easy to get higher pay by going somewhere else. And that was good for consumers because their pay went up. And that's changing pretty quickly right now. You can look at the number of job openings, and that's fallen very rapidly, mainly by people hiring less, not as much by layoffs, but now it's in balance.

It's about one job opening for every unemployed person, and that's back to about where it is in the long run. The main concern now is unemployment, that's starting to go up. It's going up of a couple of reasons. One is simply because people are hiring less. There's some layoffs, but also for a good reason, which is that more people are entering the workforce. So, one of the things that happened during the pandemic was that baby boomers retired, and they left the workforce. But you've seen more people come back in or people just didn't want to work because of COVID.

And the other aspect of that is immigration is increasing the overall workforce. So that's good. That's good for inflation and overall. And I think one of the key positives which we've talked about is that wages are higher adjusted for inflation, and that's really important because people were way in the hole through 2021 and 2022, they fell behind and the price level just got very high. And if you step back and look at the big picture of what drives market which usually goes back to the Fed, often there's a shift there going on there. And they've been laser-focused on inflation for years.

And now you're seeing inflation come down and it's approaching 2% which is their goal. So, what that does, it enables them to shift. Because they have two mandates from congress. One is price stability, that's inflation, and the other is maximum employment, which is the job market. So, the Fed is paying much more attention to the job market. They haven't declared victory on inflation yet, but they're starting to cut rates now, and that should help companies who should help economic growth and that should help the jobs market and consumers.

Yu: Eric, what's your perspective?

Johnson: Yeah. In research at Thrivent, we tend to try to bifurcate it between two buckets, right? The bottom 80% of households. We look at the raw capacity growth, that's going to influence spending almost one-to-one. For most years what is earned is what is spent for that group, whereas for the upper 20% of households, capacity is just one component, but sentiment psychology is another component because the capacity is always there. It's more of an art, not just a science. It's a bit of an art to figure out what's going to compel them to spend.

And so, psychology plays a key role. But in terms of assessing capacity, it starts with three components, job growth, wage gains, and then hours worked. And so those three generally are all tracking pretty good. And if you step back to the front line, the entry level of the economy, the retail markets, the restaurants, retailers, the job market there, job openings have come down there below pre-pandemic levels into the mid 2010s levels. So, it would be indicating that Slack is building somewhat in the labor market. Turnover has gone down back to pre-pandemic levels for most of the companies we speak to.

So, consumers are hanging onto jobs, they're not getting paid, signing bonuses and big premiums to switch jobs, and so they're hanging on to what they have. But at the end of the day, we're also still seeing wages grow at 3 to 4%, which is a nice happy medium for the economy for companies to manage and for the consumer to spend above inflation if we trend into this low single-digit level year over year from inflation. So that's all positive. A bit on the counter side is you're starting to see more calls for remote workers to return to the office. Amazon highlighted this yesterday to five days a week.

You see a little bit more local news on layoffs, restructuring. And then this is all coming into an election year where the consumers particularly are a bit more volatile. And so, you have all this building here. That's something to watch for. Is this the confidence level here in the coming months to close the year? Volatility could start to threaten consumer spending if the worry starts to build here. And historically when we've seen the unemployment rate start to tick up which it has year to date.

Even if you get a lower Fed interest rate environment, that growth rate of unemployment, that build rate can continue for multiple quarters after we get a first cut. And so that's something to watch for going forward. So, all this boils down to the consumer perspective. We're starting to see them increasingly make choices, whether that's down trading in the grade of meat or produce they're buying at the grocery store, whether it's deferring, auto maintenance, brakes, rotors, tires, you're seeing some of that activity build.

And then one of the clearest signals we watch is the spread between off-price retailers think like a T.J. Maxx and their same store sales relative to a full-price retailer like a Macy's. You're seeing pretty strong divergences there favoring the value retailers, which would be indicative of the consumer looking to manage their budget, potentially bracing for what's around the corner. And so, these are signals we will continue watching in the next year.

Yu: You had me at T.J. Maxx. Thank you, Eric. Tracy, what about you?

Pamperl: No, it's a great point. I mean, I think consumers right now are being cautious, and that's on both discretionary and nondiscretionary spend. What's been very clear which has been a little bit of a shift in dynamic this year is before we were talking about just the lower income consumer being really focused on value. What's shown through this year that we're hearing from the companies that the investment grade research team covers are that really, it's across the spectrum now. Consumers are seeking value. And we've seen it very clearly in a couple of different ways. It's that trading down impact.

So going into the store and right now, not everyone's needing that name brand. They're willing to go generic or store brand to save a little bit of money. They are smaller basket size. So that can mean take your grocery cart, take your literal basket when you go into a store, it's less items in the basket. And that's one because prices are still elevated, even though inflation has come down, the overall price of that good is more expensive than it used to be. Consumers are also going, "You know what? I'm just going to buy one of those."

They're buying what they need right now and they're willing to go back to the store more often, willing to go closer to or right after they get a paycheck. So, it's definitely a shift in consumer behavior. And while that's generally been a negative, for a lot of companies there are companies that benefit. If they can show that they offer the consumer value that's where the consumer will go. And really that's been benefiting Walmart and Amazon this year because people feel like they get more for their money when they shop at those retailers. I would say at a high level, we are seeing also discretionary start to pull back.

I think there's still a bit of revenge spending, but I think it's normalizing at this point because U.S. we like to eat out and that's still happening, but we are starting to see maybe a shift down of going out one less time a week. We're also starting to hear lodging companies most recently started talking about they are starting to see a pullback in demand for U.S. leisure travel, so that's your vacation. So again, maybe one less vacation a year. What's been a nice offset for those lodging companies as business travels picked back up? So, it's actually been a pretty nice offset, but it's definitely a trend to continue monitoring because of what the consumer's telling those companies at this point.

Yu: Yeah, go ahead, Steve.

Lowe: So how persistent do you think that trend is going forward?

Pamperl: I mean, I think that consumers still like experiences over buying things. And we weren't allowed to have experiences for a couple years, as you noted, and now we're going back to that. So, concerts, sporting events, international travels really picked up. I don't think we're going to revert all the way back to preferring goods and stuff, but I think, again, the consumers being a little more conscious on how they're choosing to spend their money at this point.

Johnson: Yeah, it's interesting. You mentioned that trickled up. We first saw this at the lower incomes making those choices, the dollar stores have talked about the consumer spending heavier in the first three months of the three weeks of the month before the paycheck gets tighter. And then that last week is a little more managed until that paycheck clears. So that would be indicative of consumer stress. And I think that's tied to either the rent inflation really strong, really fast, immediate for all renters, whereas the home price headwinds, the cost-of-living headwinds for the homeowners, that has been more gradual and that flows in year by year as home turnover accelerates and people lock into higher mortgage rates.

So that's been a persistent factor. The other thing that's interesting, you call about convenience. The one thing that's kind of shocked my mind since the pandemic is DoorDash, Uber Eats, Grubhub, Instacart, even those services are quite a bit more expensive than going into the store restaurant, getting the food yourself, those have remained very sticky even with these consumer stresses building which tells you the consumer is willing to pay for convenience as it saves them time. And you've seen an increase here in recent years of workers that are holding multiple job holders, which means things are tighter, but they're still willing to pay for convenience. So that is an avenue for consumer companies to grow through convenience or outright value.

Pamperl: I think the retailers that have been the most successful are the ones that can offer the consumer kind whatever they want. So, a consumer has three ways they like to shop. And I want to go into the store, I want to order online and pick up in a store, or I want to order online and have it shipped to me. And if it was a healthy company that was able to invest in the technology that supports those three ways for the consumer, I feel like those companies are doing the best right now because the consumer wants to shop the way they want for that convenience.

So, I do think companies are recognizing the shift in consumer behavior and how they are shopping. We're starting to see promotional activity pick up. We're also starting to see restaurants; my favorite example is McDonald’s, and that $5 value meal has returned. It's been so successful because it's that value proposition. It's been so successful that McDonald's has extended it, I think twice at this point through December. And it's really increased traffic through the drive-through and through the store.

Lowe: And others have followed.

Pamperl: Yes.

Lowe: Right?

Pamperl: Yeah.

Johnson: You see it in QSR you get price wars or value meal wars, but then you also see it in grocery. Walmart has been pretty vocal about the drumbeat of, "Hey, we're going to bring disinflation to the consumers." And they've been pushing back much harder on their CPG consumer packaged goods suppliers, whether this is beverage companies, food vendors. "Hey, that third or fourth round of price increases you've taken in the last three years, we don't think this is maybe justified, and we want to go win volume with the consumer, so we're going to push back on that.

And if you want to keep shelf space on the store, you're going to get us a lower price because we're trying to do this for the American consumer." So, they've been winning volume doing that, and when they move, it's kind of like McDonald's and QSR, they're so sizable that everyone else kind of has to fall in line which leads to more promotions, lower pricing. And that is the dynamic we're starting to see spread across retail.

Lowe: So, some pushback on the so-called greedflation.

Johnson: Yeah. Yeah, absolutely.

Lowe: Companies kept raising prices and raising prices.

Johnson: For a while.

Lowe: Until they got pushback.

Johnson: For a while it seemed like the consumer was just, "We can manage this. No problems." But you are starting to see the consumer choose, make choices, change form factors or the channels in which they buy the same goods to save dollars.

Yu: Well, it's great to hear that consumers are spending, but they are concerned in some way about their jobs. What about their paychecks? Because you need a paycheck to spend, Steve.

Lowe: Yeah. Well, if you have a job, you have a paycheck. So that's good. And the job market is still relatively healthy. It's softening, but we're still adding jobs, and we talked about it. The bigger issue, I think, for paychecks has been the erosion of buying power, as we mentioned before because consumers fell significantly behind. And if you look at prices now still up about 20, 21% above trend from where they were before the pandemic and consumers had negative wage growth for two years. And so, the buying power permanently eroded. And you're starting to see them climb out of that a little bit.

And the impact has been large because they still haven't fully recovered completely. Inflation is lower, but prices remain high. Especially lower to middle tier consumers are struggling. That's where we've seen the delinquencies and so forth. The upper tier is doing pretty well, and that's very important to the economy, because the top 20% account for about a little more than half of consumer spending. So that 20% has as much spending as the bottom 80%, and they're doing okay. I mean, what's interesting though is the inflation rate is coming down, but that doesn't really register as much with consumers.

It just means you measure inflation year over year or month over month. So, it was 5, 6, 7, 8%, and now it's 2%. So, it means prices are going up. What consumers, how they view it is over several years, and they view it in particular relative their buying power. So, they're still looking for relief there. And you've seen, as you talked about, consumer shifting down to lower price goods like Walmart or the value meal. And I think the takeaway is that it's still this bifurcated economy. Many people have stretched budgets, and other people are doing quite well. And the other thing we're watching really is productivity.

So, the thing about productivity is it allows wages to go up because you can make more for less. And ideally you want wages going up about 4%. Inflation is about 2%. So, companies do well, and consumers do well. And we're also looking at the impact of artificial intelligence. That has the possibility of significantly increasing productivity. It also has the likely impact of some disruption in the jobs market because some jobs will likely be eliminated. But if you look back historically, there's always been concern about jobs disappearing, there was a senator who tried to ban robots at one point in Congress and that didn't happen. But what happens is the composition of jobs shifts over time.

Johnson: Yeah. We are certainly monitoring some concerning dynamics that could take away some of the economic pop from pretty stable, strong paycheck growth, right? And so, this is. We look to areas where U.S. housing savings levels are at 50 to 60-year lows, not quite there, but pretty close to where we've been. So that's a concerning sign of stress. We also look at consumer debt levels which are increasing, financing that debt is increasing. And so, these are kind of concerning factors that could be a drag on consumer paychecks.

And so, you know one area that's in the last year has resumed from a payment perspective is federal student loans. We're in deferral for three, four years, those kick back in the fall. And then the new cohorts of graduates that'll be coming out of school in the next couple years went into school at higher financing rates and elevated tuition levels. And so that could be a potential drag for those cohorts as they move into the workforce.

Lowe: Have you seen any impact from that? Because that's a pretty big delta in what you have to pay.

Johnson: Payment, right?

Lowe: Yeah.

Johnson: You've seen that, and I think it's been most pronounced under the discretionary side of the wallet. So, apparel, footwear, pretty discretionary categories. And so that's the first line of consumer defense. And so those have been areas that have been pretty challenged over the last two years. And so that I think would be reflective of anticipation of those payments resuming and then the actuality of those events.

Pamperl: You might also keep living at home. We've talked about how rent's expensive, how it's not affordable for a lot of consumers to buy home, with those payments restarting you may stay living at home for a while.

Johnson: Right. Yep. And back to credit cards for a second, we've seen delinquencies have increased overall. They're not too bad, but where they're really pronounced, both autos and credit cards are in the younger cohorts, where those are the levels where we're starting to get closer to prior recessionary periods, which is indicative of the whole dichotomy where if you had assets, you had net worth before 2022 locked in, you were able to refinance that at lower rates, you benefited from inflation, whereas if you're earlier in your earning career or earlier in your household formation, those dynamics are actually quite a bit of a headwind for you. And so, you're seeing a bifurcation in the economy from that perspective.

And then the other thing I'd note that is a sign that you don't generally see in a strong backdrop for the consumer is 401(k) hardship withdrawals tracked by Fidelity and Vanguard. Those are up two to three X the rate. It's still low levels and absolute, but two to three X what they were. And we had some pandemic regulations that made it easier to access those funds in a less onerous way, but they're still not easy. There's some requirements you have to do to manage that penalty free. And I would think that's indicative of consumer stress. You generally don't see people tapping that unless there's a real tough reason for them to do so.

Lowe: And to some point did people just get accustomated to spending a lot? Because they had stimulus in and their savings grew, and that's just a hard thing to break.

Johnson: Yeah. Consumers are habitual, and if you replaced your furniture every three years for a period there, when you have to stretch that to six or whatever, that's hard to break that habit right across all kinds of categories.

Lowe: I saw an interesting survey the other day where people's spending expectations are significantly higher than their earnings expectations, which is classic American consumer. Spend more than you earn.

Johnson: Yes.

Yu: By the way, how real is consumer stress?

Lowe: I mean, it is very real for some people. It just depends on who you are, what your income level is. If you talk about it, is particularly the lower tier that is struggling right now, and that's always the case. I think the upper income levels which really drive a lot of the spending are doing just fine. But yeah, no, it is very real.

Pamperl: I think job openings, those seem to have come down a lot too. Even the companies we listened to a year and a half ago or so, they were constantly talking about how hard it was to fill open positions. That's almost not a topic of conversation at all anymore. It's a much more balanced environment. They aren't having to pay significantly higher wages to attract or retain their workers. I mean, there's still elevated wages from those spikes that we saw coming out of COVID, but not having to escalate those wages as much anymore.

Lowe: Yeah. And the same time I've been hearing that companies are reluctant to lay off people because they're still scarred by the inability to get enough workers and have constraints. So, they may not be hiring, they're cutting back on that, but they're less willing to lay off people than they were prior.

Johnson: Yeah, the scars are pretty deep. Truck drivers were getting paid four, five figures or sign-on bonuses to show up for a job for six, eight weeks, was all that was required because the companies could not find labor because of how generous the federal unemployment programs were on top of the state levels. That was a lot different than prior recessionary levels when unemployment went up. And so that is something that's probably going to stick with consumer companies as they manage their labor forces.

Pamperl: Yeah. And I think employee turnovers declined a lot. We mentioned earlier you could leave a job and get paid a lot more. That's kind of stabilized too. So, I feel like wages have stabilized, employee turnover has come down significantly. So, we're definitely in a more stable environment right now on the job front.