This week’s marquee data out of the US showed a resilient consumer and elevated inflation, a largely “as-expected” outcome that won’t do much to change the Fed’s decision calculus around the March meeting.
PCE prices rose 0.6% MoM in January, in line with consensus. The YoY print, at 6.1%, was slightly hotter than anticipated, but not enough to spark a data-related panic.
The core gauge rose 0.5% MoM and 5.2% YoY. Both prints were in line. Obviously, the 12-month readings were the hottest in decades (figure below).
Personal incomes were flat, suggesting wage gains weren’t enough to offset the expiration of key stimulus payments which Joe Manchin singlehandedly torpedoed by refusing to back the White House’s tax and spend plan.
The data came as Fed officials indicated liftoff is a go for March. The conflict in Ukraine hasn’t changed the outlook. In fact, Christopher Waller on Thursday argued for 50bps. “With the economy at full employment and inflation far above target, we should signal that we are moving back to neutral at a fast pace,” Waller said, at a University of California event.
For her part, Loretta Mester acknowledged that geopolitics matter, but the risks are two-sided for a Fed that faces the unenviable task of waging an aggressive war against inflation at a time when various curves threaten to invert and some see evidence of waning economic momentum. Remember, the situation in Ukraine materially raised the odds of a stagflation scenario.
Read more: ‘The Stagflation Tail Just Picked Up Massive Delta’
“Geopolitical events add upside risk to the inflation forecast even as they put some downside risk to the near-term growth forecast,” Mester remarked. Bostic suggested the Fed’s liftoff plan is still on track and Barkin said that if the situation with Russia “evolves like 2014, I don’t think you are going to see much change to the underlying logic.”
Notably, Friday’s data showed real personal spending came in well ahead of expectations for January. The 1.5% increase was a marked improvement from December’s worrying decline and an underwhelming November showing (figure below). Do note, though, that when inflation is a problem, it’s important to monitor what Americans are spending money on.
Increases in goods spending were described as “widespread,” while in the services sector, the largest contributor was spending for housing and utilities, not exactly an ideal situation.
The personal saving rate sank to an eight-year low last month (figure below), as the expanded Child Tax Credit rolled off and consumers opened their wallets as Omicron eased.
On top of the PCE data, durable goods beat too, rising 1.6% for January against consensus 1%. Non-defense capital goods orders ex-aircraft jumped 0.9%, more than double December’s increase, while shipments rose 1.9%.
All in all, the data didn’t scream “downturn.” But it did shout something about price pressures. “January’s consumer spending and manufacturing orders data show the US economy easily shrugged off the Omicron wave,” ING said Friday. “GDP growth is now more likely to come in closer to 2% than the 0% we had been fearing and with the Fed’s favored measure of inflation above 5%, not even Russia’s actions can hold back the FOMC from hiking aggressively,” James Knightley wrote.
The combination of better-than-expected spending figures (even if Americans may be spending on the “wrong” things), solid durables numbers and inflation data that was “just” in line, even as it remains extraordinarily elevated, had the potential to embolden anyone looking to push the issue after Thursday’s epic squeeze on Wall Street. That comes with the obligatory caveat that you absolutely can’t trust equities at the current juncture. They could be down 3% now and up 3% an hour from now. Literally.
“The personal saving rate sank to an eight-year low last month, as the expanded Child Tax Credit rolled off and consumers opened their wallets as Omicron eased.”
Will Wall Street analysts continue to tell us that “consumers have massive savings and ample spending power?”
Especially given that credit card debt spiked late last year.
@derek How about this: which “consumers” are the “wall street analysts” (WSAs) following? The ‘Haves’ or the ‘Have-Nots’? Data-blindness? Meaning, no data no see no care. Maybe this is part and parcel with the thoroughly documented propensity of WSAs recommending ‘sells’ about five percent of the time compared to ‘buys.’ The closest most WSAs will get to saying “Sell! Sell! Sell!” or just “sell”, is to recommend “hold/neutral.” When first few WSAs downgrade to “hold” it is probably time to set stops. By the time one of them gets to “sell” the stock has probably already tanked. By then, they and their firm, risk no ire from covered managements. Was it Tzoh Su Me, the ancient ninja turtle, that said, “know thine enemy”? …. I’ve heard peace of mind and attaining something like a nearness to Truth is found by some via the school of Skepticism.