Real personal spending fell twice as much as expected in the US last month, underscoring flagging sentiment in the face of rapidly increasing prices.
Inflation-adjusted consumption fell 0.4% in February, closely-watched data out Thursday showed (figure below). Economists expected a 0.2% decline.
The headline increase in PCE was less than half the expected 0.5% gain. Overall, it was an underwhelming read on the US consumer at a critical juncture, albeit nothing to panic about.
January’s robust figures were revised higher, but considering everything that’s happened over the past several weeks, those revisions are arguably less relevant for the outlook than they’d otherwise be, even if they support the case for a decent Q1 GDP print.
A 0.5% rise in personal income matched consensus, as higher compensation outpaced waning government transfers. Real incomes fell 0.2%.
Current-dollar spending on goods dropped $59 billion in February. Spending for services increased $94 billion, driven by food services and accommodations, presumably as Omicron containment measures eased.
In aggregate, nominal spending is obviously elevated which, as one Bloomberg blogger gently noted, reinforces “the notion that inflation is not simply a supply issue.”
Speaking of inflation, the figures were cringeworthy, but no worse than anticipated. Headline PCE rose 6.4% YoY and the core gauge posted a 5.4% annual increase. The MoM figures were 0.6% and 0.4%, respectively.
With February’s figures, the Fed’s inflation overshoot comes to 440bps. On core, it’s now 340bps (figure above).
There’s not much one can say other than that the war means this already tenuous situation is on the verge of becoming untenable. Price pressures are rampant and broad-based, which is weighing on real earnings and could soon curtail spending. At the same time, legacy cash buffers may be supporting consumption, forestalling demand destruction.
Meanwhile, jobless claims were higher by 14,000 WoW, but “higher” is a relative term. Initial claims dropped to a fresh “since the late-60s” low earlier this month.
“Real personal spending fell twice as much as expected in the US last month”
Fed wants to slow demand – Powell has explicitly acknowledged such – so this looks like feature not bug.
The main issue with the elephant in the broom closet is to understand if inflation is “still” transitory and linked to pandemic bottleneck distortions that were overreactions to supply and demand shocks, or did super tame inflation, which was almost deflationary, suddenly explode as a serious long-term trend?
It seems logical that current inflation is the result of shock, versus a building trend that gained momentum. As such, I think the Fed can eventually fall back on it’s transitory jawboning and step away from their current lunatic hillbilly nuclear threats to Volkerize interest rates.
Short term demand destruction might be healthy for another month or so, but hopefully Powell won’t drink the entire LSD punchbowl.
From Morgan Stanley early March 2022:
“Policy distortions and
inflation risk premiums are now distorting signals. Based on
nominal values, the curve has flattened to less than 30 basis
points from 60 basis points, which could indicate a policy
error (see chart). However, the real yield curve as measured
by TIPS is upward, suggesting a solid economic outlook. The
difference between the nominal and real spreads can be explained by soaring near-term inflation.”
In regard to the elephant question above and inflation, I think this mess will boil down to balanced between nominal and real metrics, and the distortions in-between. I think the current imbalances add to volatility and overall consternation and sentiment, offset by the other mindset that wants to get this party rolling like it’s 1920 or 1999 or whatever. That whipsawed contrast is hyper sensitive to Fed jawboning and perhaps that’s a big part of this Kabuki play we’re watching. It’s also maybe the difference between a well thought out documentary, edited with hindsight versus a realtime webcam that’s focused on a deer in the headlights. This is as usual a matter of patience and perspective and nobody likes watching paint dry.
Recently nabbed stuff from some random news place, maybe Australia, I don’t care, but, it adds to this notional timeframe thing:
“The median projection for the Federal Funds Rate was increased markedly by the FOMC, implying another 6 rate hikes before the end of 2022 (to around 1.9%), and a rise in the FFR to as high as 2.8% in this cycle. The terminal rate is still thought to be around 2 ½%, meaning the central bank expects to take policy above the notional neutral rate and move policy conditions into contractionary territory in the medium term.”
In conclusion in an attempt to make sure justice is served and the blind shall see:
The following is from the New York branch of Fed, where one night except to learn about nominal trend stuff related to inflation and PCE stuff. Unfortunately, they’ve taken this tool out of the shop, because it might show how stupid they were in not recognizing the need to stop dumping a massive amount of cash into bank reserves (nevermind):
The Laubach-Williams (“LW”) and Holston-Laubach-Williams (“HLW”) models provide estimates of the natural rate of interest, or r-star, and related variables. Their approach defines r-star as the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable.
Owing to the extraordinary volatility in GDP related to the COVID-19
pandemic, we are suspending until further notice the posting of regular
updates of the LW and HLW model estimates. (November 30, 2020)
Too good not to share from Wikipedia:
“In August 2018, the Chairman of the United States Federal Reserve System (the “Fed”), Jay Powell, discussed the relationships between several of these main variables in some detail.[13] Powell noted that the natural rate of interest needed to be considered in relation to the “natural rate of unemployment” (which Powell noted is often referred to as “u-star”, written u) and the inflation objective (“pi-star”, written ?). Powell then went on to note that the conventional approach to economic policy making was that “policymakers should navigate by these stars”. However, he said, although navigating by the stars can sound straightforward, in practice “guiding policy by the stars … has been quite challenging of late because our best estimates of the location of the stars have been changing significantly”. Powell reviewed the history of attempts to estimate the location of the “stars” over a 40-year period 1960–2000 and noted that over time, there had been significant revisions of estimates of the positions of the stars.”
It turns out, Powell’s flowery words about starship rocket fueled navigation, were part of what appears to be part of love letter exchanges, which probably are something that happens in the incestuous central banker orgy network, although I can’t say, being outside that loop.
However, a decade before Powell’s navigation speech, there’s this poetic ditty from trichet, who would pull out his bazooka, then abruptly forget what he was aiming to achieve. Spending trillions is obviously not an easy game, but those pats on behind for great effort go a long way.
Exhibit One:
Ecb trichet 2008
That being said, do not forget that, for us, there are not two needles in our compass; there is only one needle in our compass. Taking everything into account, where exactly is the needle that captures the risks to price stability? It is according to the analysis of all the risks to price stability that we take our own decision. And you can see what our present analysis was today. It is clear. We trust that we had to increase the rates of our monetary policy stance by 25 basis points and we trust that this will contribute to delivering price stability in the medium term.
After a brief look at median PCE at Cleveland Fed, I ran across this ditty at Forbes:
More Problems With “Inflation” – Coping With Volatility
George Calhoun
Contributor
Quantitative Finance Program Director, at Stevens Inst. of Technology
To repeat, in bold, the cautionary comment by the Bureau of Labor Statistics cited above:
These prices are volatile and are subject to price shocks that cannot be damped through monetary policy.
This should be inscribed in every economist’s crib-notes when it comes to talking about what to do about “inflation.
Among the things that motivates me to keep researching and digging deeper, is a belief that having more puzzle pieces on the table is critical to being able to understand what the big picture is. Maybe having too many fragments is overwhelming, adding to chaos, but I find research is like a chess game that develops slowly and heuristically step by step.
I’ve often thought that the GFC and pandemic wrecked a lot of economic models which were already fragile, so I’m just increasing curious as to why the Fed is having such a heart attack about inflation and then how they think they’ll fix it all. I think they’d be better off to just bush all the pieces off the board at this point.
The following is from a PDF file obtained from a burning trash pit:
Bank of England
Monetary policy with a steady hand
Speech given by
Huw Pill
Chief Economist
The Society of Professional Economists Online Conference 2022
The Challenges of Change
9 February 2022
“This is probably the most relevant result for the current conjuncture. Where there is uncertainty about the
level of R-star, the scenario shows the advantages of setting policy rates on the one-step-at-a-time basis
embodied in difference rules. Policies that attempt to move quickly back to preconceived neutral levels
without reference to the real time evolution of the data run the risk of adding noise and volatility through a
mis-calibration of the policy response.
25”
25 Consideration of lower bound constraints and their role in rationalising aggressive policy easing
decisions on risk management grounds – in the manner suggested by Evans et al. (2015) – are absent
from these model exercises. This might imply that the case for an equally rapid reversal of the policy
easing as disinflationary risks abate is understated. However, expectations of such a rapid reversal may
themselves undermine some of the stimulative effect of the easing: expectations of a steady-handed
approach to policy decisions may help stabilise the economy close to the lower bound (or even avoid its
incidence altogether, as in Pill (2010)).