Did The American Consumer Just Fold?
US retail sales fell by the most since December of 2021 last month, data out Thursday showed.
The 0.6% decline was three times larger than the expected drop (figure below). The range of estimates, from nearly six-dozen economists who, assuming an average professional career of one decade, boasted a combined 700 years of forecasting experience, was -1.1% to +1.1%.
November's decline came on the heels of a 1.3% increase in October. The data isn't adjusted for inflation which, I'm told, is elevat
perhaps the combination of upside surprise in job stats and disappointing retail could be interpreted by the fed as tight labor conditions causing inflation which is so high that its starting to bite in consumption. we are faced with a deteriorating economy and more determined fed.
Jerome Powell will be the only person in the world surprised by the precipitous rate at which employers start shedding service industry jobs in Q1. He might as well get it over with and go back go to being dual-mandate-Jerome before he gets kicked out of his country club.
The unemployment rate is now 3.7%. The FOMC’s SEP projections have UE at 4.4% to 4.7% by the end of 2023 and 4.3% to 4.8% in 2024. One percentage point in UE is about 1.6MM jobs, if the labor force is constant, and the Fed does not see labor participation increasing. Thus FOMC is expecting up to 1.6MM net job losses during 2023 and no net job recovery during 2024.
FOMC projects core PCE not reaching 2.0% until 2024. It is not inclined to move the goal posts to 3%. The Fed knows that goods inflation is falling and housing inflation will fall in 2023. It believes that the remaining 55% of the inflation index is driven by rising wages in an imbalanced labor market, so it intends to force the labor market back into “balance”.
Powell won’t say out loud that a “balanced” labor market means 1MM+ net job losses in the next couple-few quarters, but given the SEP projections and not seeing growth in the labor force, we can figure out the Fed’s unsaid expectations. No doubt FOMC hopes the rebalancing can be bloodless, but they won’t be counting on it.
When we start seeing net job loss of -100K/month, pundits will rush to predicting a quick Fed pivot to easing, partly due to recency effects and partly because that’s the bullish scenario. Meanwhile, Powell is telling you:
“I’ve made it clear that right now, the labor market’s very, very strong, near a 50-year low where you’re at or above maximum employment. In 50-year low in unemployment, vacancies are very high, wages, nominal wages are very high. So the labor market’s very, very strong. Where we’re missing is on the inflation side. And we’re missing by a lot on the inflation side. So that means we need to really focus on getting inflation under control, and that’s what we’ll do. I think, as the economy heals, the two goals come more into play. But right now, clearly, the focus has to be on getting inflation down.”
Transcript
https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20221214.pdf
SEP
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20221214.htm
Some macro commentators are projecting net job losses starting in 2Q23 and asserting the Fed is driving by “looking in the rearview mirror”, intimating that the Fed will be surprised by job losses and swerve to easing.
Suppose instead that the Fed is looking “through the windshield”, sees the net job losses coming, and intends to plow straight over the bodies to its 2% destination?
On Monday the FRB of Philadelphia revised downwards estimated payroll jobs added in the US 2Q from 1,112,500 to 10,500. Maybe less “very very strong” than some think.
Those credit card numbers look bad. We are going to start hearing a lot more about high credit card balances/interest rates over the next few months in the media in early 2023 after the holiday spending season is over.
I like your take, I just wonder how well those jobs that were added in October and November will stick. Looks like a lot of leisure and hospitality hiring and delivery drivers. That’s like a half million private sector service jobs in the last two months, according to ADP. Seems expandable in light of the grim retail number this morning. What if there was a big negative number in Q1?
“What if there was a big negative number in Q1?” Perhaps, nothing. Maybe Powell and the FOMC would grimly nod and get back to fighting inflation.