2022 will remembered for a lot things, most of them bad, or at least if your benchmark is macroeconomic outcomes.
Among other things, this year taught us that being beholden to a geostrategic antagonist for one’s energy needs isn’t advisable and also that, when push comes to shove, even spendthrift Americans will rein in their penchant for conspicuous consumption when the price of food and fuel is rising much faster than wages. (Who knew, right?)
On Tuesday, markets were compelled to digest yet another ostensible downside “surprise” on the US data front, when the Conference Board’s gauge of consumer confidence printed 95.7, below expectations. “Surprise” is probably a misnomer, hence the scare quotes. Frankly, I’m not sure markets should be properly surprised by any reading on consumers’ mood, no matter how dour.
Real wage growth has never been worse, inflation has basically never been higher (if you use Larry Summers’s adjusted series, the US is very close to making history) and the national mood is divisive enough to constitute two alternate realities, separated by a sparsely populated, centrist demilitarized zone, where Joe Biden is among the only inhabitants.
The Conference Board’s Expectations gauge was essentially unchanged from June. That’s the good news, even as it marked something of a Pyrrhic victory given that the forward-looking indicator dropped to a 13-year low last month. I suppose there’s only so pessimistic people can get. The bad news (and the corollary) is that the decline in the headline index for July came courtesy of a material deterioration in consumers’ perception of current conditions, which is just a pollster euphemism for “daily life.”
A six-point drop in the Present Situation gauge was “a sign growth has slowed at the start of Q3,” Lynn Franco, Senior Director of Economic Indicators at The Conference Board, said Tuesday, adding that “concerns about inflation — rising gas and food prices, in particular — continued to weigh on consumers.”
They’re a finicky bunch, those consumers — fair-weather fans only satisfied when they can afford gas, electricity and food. I’m joking. But not really.
Franco included an obligatory nod to the likelihood that Americans will remain disaffected for the foreseeable future. “Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months,” she said. “Recession risks persist.”
Yes, they do. Persist, I mean. And who knows, maybe that’s good news. For Wall Street, anyway. “With many/most of our leading indicators on growth rolling over hard, we continue to think this is the more important variable to watch for stocks at this point rather than inflation or the Fed’s reaction to it,” Morgan Stanley’s Mike Wilson said. One of those leading indicators is the spread between University of Michigan Sentiment and the Conference Board’s gauge, which was perched at a record high prior to Tuesday’s lower reading on July confidence (figure below).
Wilson continued. “We think the equity market is smart enough to understand… that growth is quickly becoming a problem,” he wrote. “Therefore, part of the recent rally may be the equity market looking forward to the Fed’s eventual attempt to save the cycle from recession.”
There it is again: Bad news is good news. The problem, though, is that inflation, the bane of Main Street’s existence, is simply too… well, baneful, for the Fed to deviate from the path to recession. And yes, that’s every bit as vexing and frustrating as it sounds. As Neel Kashkari conceded a few months ago, “It’s the lowest-income Americans who are most punished by these climbing prices, and yet [our] policy tools to tamp down inflation most directly affect those lowest-income Americans as well, either by raising the cost to get a mortgage or, if we have to do so much that the economy [falls] into recession, it’s their jobs that are most likely put at risk.”
Even if the Fed were inclined to pivot back to growth-conscious policy settings in an eleventh hour bid to avert a recession (and they aren’t so inclined), it’s probably too late. “That opportunity is now or never,” Wilson remarked. With headline CPI above 9%, it can’t be now. So, never it is.
H-Man, I need some help from your data set. If the consumer is 70% of GDP, how much does the little guy contribute to GDP vs the big guy? We know the little guy bears the brunt of inflation while for the big guy it is water off a duck’s back. We know there are more little guys than big guys but how much GDP growth does the little guy bring to the table? That answer may tell us whether it will be a little bust or a big bust. Not to go to deep into the weeds, we need to factor into the equation the “middle class” which would be excluded from the little guys and the big guys. But we need to know what they bring to the table as well.
If the boss doesn’t have this, the BLS website does. It might take a half hour or so to tease it, out but no question since the top 5 or 10% don’t buy much more in the way of necessities than the larger poor and so-called lower middle class, the top decile will be a smaller proportion of the total GDP for this stuff. Middle class? What middle class? They (largely) gone.