"Q4 2023 - The Frog's Economy"

  • By: Joseph R. Tranchini, CFA, CFP®
  • February 2024










Briefly indulge me for a moment and picture this – you’re enjoying your time in a nice warm, tropical habitat. You have sunshine, calm waters, a gentle breeze, and not a soul around to bother you. Your skin is perfectly moisturized, and you’ve never felt more limber ever before in your life. You start to feel an appetite coming on but notice there are no agreeable options within reaching distance. So, you assess your options, make a decision, get a quick stretch in, then you ……. jump from your lily pad in search of some tasty flies.

By now you have probably realized this is not the experience of an actual person, but of a frog instead.

As it turns out, although the differences between us humans and frogs are both obvious and numerous, nature has a funny way repeating itself, and we may actually be a lot more similar in behavior to our slippery green friends than initially imagined.

Humans, as well as frogs, are infinitely adaptive creatures and there is no better illustration at highlighting this remarkable ability than by looking at the state of the consumer in the U.S. Economy over the past 4 years. Of particular note has been seeing just how the consumer has responded to stubbornly high inflation across so many of the things we rely so heavily on. One of the most powerful weapons the consumer has had in combatting inflation has been the ever-increasingly important concept of Substitution. In the exact same way that a frog may substitute one lily pad for another in search of better food options, consumers have been successful in substituting out various products and services that have become prohibitively expensive for more agreeable options.

The direct effect of these consumer substitution is more straightforward in that this practice allows individuals to retain, reduce the decline of, or even grow disposable income in the face of abnormally high pricing pressures. The other effect of this consumer substitution is less straightforward in that it introduces intra-categorical volatility within the consumer-facing side of the economy (which is the lion’s share of the economy). GDP is a combination of 4 major categories (Consumer Spending, Private Investment, Government Spending, and Net Exports), with each of those categories being the culmination of many individual sub-categories. If you measure intra-category variability between those sub-categories each quarter, and then analyze how that variability has evolved over time – a unique insight can be found.

What we’re seeing is that although economic growth has generally been high during the post pandemic-era – so has the variability amongst where people spend money. One could point to this finding as the quantitative manifestation of Consumer Substitution effects. If that is the case, then what would that mean exactly for investors moving forward? Here are a few ideas…

To start, a rising tide may not lift all ships anymore. During the post global financial crisis era, ultra-low interest rates and job growth fueled rather indiscriminate consumer spending across pretty much every consumer facing industry. With the massive hindrance that is persistent inflation, consumers have exhibited a frog-like limberness, shifting their spending to more agreeable arrangements. Firms whose products and services can no longer be justified at their price level may experience a deterioration in business (by way of slower growth, or even outright contractions) as their market shares decline in favor of more agreeable products and services. Why would someone buy a fast-food burger if it costs pretty much the same as a filet mignon?

Additionally, as the rather dusty economics book taking up space in my closet would suggest, if we are in an environment where prices across many goods and services have gotten out of equilibrium (by way of overshooting) than we could be in store for isolated instances of supply surpluses. It seems like a counter-intuitive idea after having been recently plagued by ongoing inventory and labor shortages, but nevertheless this could very well be a viable outcome in specific instances (most likely not in an economy-wide manner). In theory, this could ultimately be a landing point for firms losing market share to more agreeable competitors.

Finally, isolated price wars. Many, but not all, firms have experienced at least some degree of margin expansion during the past few years. With the new backdrop of a more selective consumer, firms could attempt to take advantage of the ‘buffer’ these slightly higher margins afford and initiate a ‘race to the bottom’ in an effort to win consumer business. Price wars may also not be confined to business-to-consumer firms as well. Although not directly counted as Consumers, businesses do make for cost-cognizant shoppers as well, and as such could also be beneficiaries of pricing competition. Stated in amphibian terms, if two lily pads are pretty much the same size – I’m headed to the one with more flies.

So, much like our lily pad occupying counterparts, consumers are far from sedentary creatures. When faced with higher prices, or even lower wage growth positions, it has become more probabilistic now more than ever that we’ll follow the direction of our slippery green friends and ‘switch lily pads’. In essence, consumers adapt to the economy, and then the economy adapts to the consumer. Moving forward, we may be on the cusp of transitioning to the second link in that chain of events; as always, time will tell. In the meantime, keep in mind two things – this is a big pond, and there are a lot of lily pads in it.


[See Below for Disclosures & Annotations]


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.



  1. FactSet. “Economics – Country/Region – United States”. February 1, 2024
  2. Bureau of Economic Analysis. “Gross Domestic Product, 4th Quarter and Year 2023 (Advance Estimate)”. February 1, 2024.
  3. Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. February 1, 2024.
  4. Bureau of Economic Analysis. “Personal Income”. February 1, 2024.
  5. FRED. “5-Year Breakeven Inflation Rate”. February 1, 2024.
  6. FRED. “10-Year Breakeven Inflation Rate”. February 1, 2024.