The US consumer is resilient.
Or at least that’ll be the narrative until there’s conclusive evidence to the contrary. Friday’s backward-looking data brought no such evidence.
Personal spending rose 0.6% last month, topping estimates, figures for September showed (figure below). Real personal spending was likewise more robust than forecasts, at 0.3%.
Current-dollar spending on services rose almost $95 billion, while goods spending increased $18.3 billion.
The potential for the figures to move markets was minimized given traders already had Q3 GDP in hand, but the data nevertheless underscored commentary from big bank CEOs, who, during Q3 calls, painted a picture of a healthy consumer still working though savings buffers accumulated during the pandemic. Large increases in revolving credit cast some doubt on that narrative, and the concurrent rise in rates probably bodes ill for borrowers going forward.
Ultimately, it’s a matter of separating how things looked in Q3 versus how the macro situation will develop in Q4 and beyond. PMIs released earlier this week suggested the fourth quarter was off to a slow start, and Amazon’s disappointing guide felt foreboding.
In the eyes of many, the US economy is between two recessions: A “technical” recession in Q1/Q2 2022 and a presumed “real” recession in 2023.
On the inflation front, MoM reads on headline and core PCE price gauges matched estimates, rising 0.3% and 0.5%, respectively. The YoY print on core (5.1%) was a touch lower than expected, which, when considered in conjunction with an in-line read on the Employment Cost Index (as opposed to another upside surprise), could be construed as good news.
Sill, price growth is obviously nowhere near acceptable levels, and inflation’s persistence (figure above) should be worrisome to all concerned parties.
To restate what scarcely needs reiterating: It’s not obvious that this is going to go away. It may well be that, come this time next year, we’re all forced to concede that 2% inflation isn’t a realistic goal. And that inflation targeting isn’t a viable pursuit absent structural macro enablers.
“The Fed’s favored measure of inflation is heading higher, rather than lower while employment costs continue to rise at double the rate experienced over the past 15 years,” ING’s James Knightley wrote Friday. “The market is probably right to expect the Fed to slow the pace of rate hikes from December, but this is by no means guaranteed.”
The economy is still rebalancing from the shocks. It is taking longer than most, including myself thought. Russia ‘s war is likely part of that, and so is persistent covid zero in China. If we manage to avoid ww3, things should look a lot more “normal” by late next year when we should be in a garden variety slowdown.
In the meantime, the latest inflation read puts a 75bps hike in December back on the table, imo.
I am beginning to think that “covid zero” in China, with forced lockdowns, is really just a cover for keeping the Chinese people from protesting against Xi’s third term and against the placement of his loyal followers in all key leadership positions.
Once Xi has completed his leadership changes at all levels, including local leadership (maybe early 2023?), miraculously covid lockdowns might become less frequent.
China recently approved a Covid booster that’s inhaled. With over 90% of the population having received the Sinovax jab (regardless of its reportedly lackluster efficacy), once they can get an inhaled booster into a billion people, they’ll probably call it quits with Covid-zero.
Check out the performance of the mining stocks today. They hardly point to a world of high-powered inflationary growth. Rather the opposite.
But that doesn’t show up in the models …. yet.
Speaking of mining- I have recently been looking into mining in South America- where it appears that the Chinese government has been somewhat quietly, but methodically, locking up the control over many gold, copper, coal etc. existing mines and new territories for future mining. Especially in Ecuador and Venezuela.
Hopefully, the US government is on top of this situation.
As always, make sure to include the increasing potential for climate change exacerbated weather events in your calculus.
“As the chart below shows, the number of extreme events studied has grown substantially over the past 10-15 years.”https://www.carbonbrief.org/wp-content/uploads/2022/08/Number-of-attribution-studies-by-extreme-weather-event-type-and-year-2022.png
https://www.carbonbrief.org/mapped-how-climate-change-affects-extreme-weather-around-the-world/
NY Times’ David Wallace-Wells weighs in with a rather startling (in the “maybe it’s not the end of the world” sense) prediction in the Sunday magazine:
“Now, with the world already 1.2 degrees hotter, scientists believe that warming this century will most likely fall between two or three degrees…. A little lower is possible, with much more concerted action; a little higher, too, with slower action and bad climate luck. Those numbers may sound abstract, but what they suggest is this: Thanks to astonishing declines in the price of renewables, a truly global political mobilization, a clearer picture of the energy future and serious policy focus from world leaders, we have cut expected warming almost in half in just five years….”
https://www.nytimes.com/interactive/2022/10/26/magazine/climate-change-warming-world.html
Anyone who is interested in gaining knowledge about climate change, regardless of whether it supports one’s personal bias or not, should read “Unsettled” by Steven E. Koonin.
The reviews are not too friendly and it proclaims it’s bias in the title. In my region any mention of anthropogenic climate change is explained away with a similar sentiment to the title. Then again there are people here can be overheard speaking to each other about not getting DNA tests because they are afraid they would find African American in their blood.
The author served in Obama’s administration, has a BS from CalTech and a PhD from MIT.
H-Man, the Fed December meeting will tell the tale. More juice or less.Hope springs eternal until then.