The Wage Growth During the Inflationary Era: Evidence from the First Month of the Fed-Federal Reheating
Investors, economists and members of the Federal Reserve will be poring over the September jobs report on Friday morning for clues about the health of the economy. But one figure may matter more than most…and it’s not the number of jobs added or the unemployment rate. It’s wage growth.
Inflation is not just a function of the price of oil and other commodities and production costs like manufacturing and shipping. The inflation picture is made up of how much workers take home.
People who have more money in their wallet are more willing to spend it. That gives companies additional flexibility to raise prices.
Wage growth over 5% is historically high. Before the pandemic, wages typically rose just 3% year-over-year. When it came to worker pay, the power was shifted from the employers to the employees because of the labor shortages.
The December/January General Recession of the U.S. Economy: The Year-Old Volumes Have Been More Bounce than Expected
The core PCE was up 4.7% annually and just 2% on a monthly basis, in line with the expectations of economists.
Economists have predicted that the economy will slow and inflation will moderate in the months ahead. The data shows that they are wrong about an imminent cool-down for the past 18 months. Fed officials know that they will raise interest rates to a point where they are limiting the economy and hold them at a high level until inflation slows, fearing that rapid inflation may last. Officials have estimated that they will lift borrowing costs to about 4.6 percent by the end of 2023.
Economists are actually forecasting a small dip of 0.1% in retail sales from October. It’s important to put that number in context. Retail sales surged 1.3% from September and 8.3% over the past 12 months.
The third quarter finished in a good way. The market has had another doozy. The month of September was not good. It was the worst month since the beginning of the Pandemic.
Even though we are in a bear market for everything as gold, bonds, andbitcoin have all fallen this year, there are some positive signs for the next few months.
The fourth quarter is typically a festive time on Wall Street. Investors tend to buy stocks in anticipation of robust consumer shopping during the holidays. Businesses typically spend more as well to flush out those yearly budgets. In October, major companies give optimistic guidance about earnings in the coming year.
A dozen bear markets since World War II have ended in the month of October. The market bottoms happened during the election years.
If Republicans gain control of the House this fall, traders will be keeping a close eye on Washington. That could lead to more gridlock in DC, which investors tend to like.
This October is a good time to debate if Corporate America and investors will be so bullish given concerns about interest rates and the global economy. After all, October is also famous for huge crashes, most recently in 2008 but also in 1987 and, of course, 1929.
Christopher Wolfe is chief investment officer of First Republic Private Wealth Management. “A lot of quality companies are on sale. It’s a time to be patient and reposition.”
Inflation and the Great Debt: When Will The Fed Reciprocity Run into Something? A Pedagogical Report on Wednesday’s Jobless Claims in the US
There are weekly jobless claims in the US on Thursday.
A second reason the Fed should be slowing its rate hikes is that the actual level of the interest rates needed to slow inflation is unknown. The Fed has economic models that can provide some guidance on how high to raise rates, but these models proved unable to predict the inflationary surge that materialized in 2021, and their implications for the optimal level of interest rates must be taken with more than a grain of salt.
The housing market has been hit by higher borrowing costs. And other parts of the economy are beginning to slow. But consumers, still flush with cash saved up early in the pandemic, continue to spend money. Because of the result, the Fed will have to tap the brakes harder than it otherwise would.
But many economists and several international bodies have warned that there’s a pronounced danger or overdoing it, including a United Nations agency that warned the damage could be particularly acute in poorer nations. The developing economies were already having a cost-of-living crisis due to soaring food and fuel prices, and now they are now paying more for American imports because the dollar is moving higher.
The Fed Chair described how the Federal Reserve had to raise rates in such a way that they didn’t run into something. Well, however dark that room was in 2018, it is a lot darker now. Inflation is much higher, the forces driving that inflation are more opaque, and in light of the further rise in business debt since that time, the consequences of excessive monetary tightening are likely to be greater.
The Strange Look of the U.S. Economy during the Recovery from the 2001 Great Recession, Revealed by Gad Levanon
At the Burning Glass Institute, the chief economist is Gad Levanon. He was the head of the Labor Market Institute at The Conference Board. The opinions are of his own.
The US economy has an odd look this year. On the one hand, GDP growth has slowed significantly, and some argue, even entered a recession. On the other hand, overall employment growth has been much stronger than normal.
Measures of inflation expectations, both those derived from financial markets and those based on household surveys, remain above pre-pandemic levels, but have moved down since earlier last year. Since the beginning of the pandemic, labor productivity has increased by 4%, whereas wages have barely kept up with rising prices.
Despite the slowing of the economy and the fear of a recession layoffs are still historically low. Initial claims for unemployment insurance, an indicator highly correlated with layoffs, were 219,000 for the week ended October 1 – higher than the week prior, but still one of the lowest readings in recent decades. Employers are hesitant to reduce the number of workers even as their business slows after years of traumatic labor shortages. That’s because companies are worried that they will have trouble recruiting new workers when they start expanding again.
Third, many industries are growing faster than normal because they are still recovering from the pandemic. Even though they are still below their pre-pandemic employment levels, convention organizers, car rental companies, nursing homes, and child day care services are all growing fast.
Next year will be very different. Many of the industries that are still recovering from the pandemic will have reached pre-pandemic employment levels. With demand saturated, those industries may revert to slower hiring. There is unlikely to be much that will push job growth into negative territory. Monetary policy will do that.
It is possible to increase the labor supply or reduce demand in the labor market. It is difficult to increase labor supply. To increase immigration, drive people into the labor force or grow investment in workforce training requires legislative action. This is likely to be difficult to find in today’s political environment.
Inflationary Costs in the First Three Months of the Fed’s Curvature Rate Cut and Mortgage Rate Dropoff After Two Years of Rate Increases
The report showed some progress in fighting the increases, and Mr. Biden said that the costs had gone up more in the past three months than they had in the previous three months. He acknowledged that inflation was still high.
After making three unusually large rate increases, officials had suggested they would debate slowing down in November. As a result of the new inflation data, the Fed could face difficulties in slowing down by the end of the year, as policymakers had previously predicted.
The Fed is anticipated to increase the rate that banks charge each other for overnight borrowing, which would make it the highest rate since 2007, when it was 4%.
The upward trend in rates we have seen for most of the past 11 years has ended. Those increases were spurred by the Federal Reserve’s unprecedented campaign of harsh interest rate hikes to tame soaring inflation. But mortgage rates have tumbled in the last several weeks, following data that showed inflation may have finally reached its peak.
After hitting a four-decade high of 9% in June, annual inflation dipped to 7.1% last month, according to the government’s latest scorecard. In the last 11 months, the smallest price increase has taken place.
The Problem of Mortgage Rate Rises: The Federal Reserve Bank of Kansas City, CEO Esther George, and a Mortgage Banker’s Attorney
“We see today that there is a bit of a savings buffer still sitting for households, that may allow them to continue to spend in a way that keeps demand strong,” said Esther George, president of the Federal Reserve Bank of Kansas City. That seems to suggest we may have to stay at this for a while.
George’s determination to control inflation is similar to that of her colleagues on the Fed’s rate-setting committee. She’s cautioned against raising rates quickly at a time of uncertainty.
“I have been in the camp of steadier and slower [rate increases], to begin to see how those effects from a lag will unfold,” George said last month. My concern was that a succession of very large rate hikes could cause you to oversteer and not be able to see the turning points.
“We are worried about slowing the economy to a crawl and not slowing rising prices that continue to hurt families”, wrote Elizabeth Warren in a letter to the Fed.
Shawn Woods said his company has stopped selling houses one month before the Fed started raising rates.
“Never in my wildest dreams would I have thought we’d go from 3% [mortgage rates] to 7% within six months,” said Woods, president of Ashlar Homes and the Home Builders Association of Kansas City.
“I think we’re in for a rough six or eight months,” Woods said. “Typically, housing leads us into downturns and it leads us out of downturns. And I think from a housing perspective, we’ve probably been in a housing recession since March or April.”
Wall Street will also need to dive even deeper into Friday’s jobs report to get a better sense of what’s happening in the economy. The unemployment rate is expected to remain at 3.7%, close to a half-century low.
The other problem: The Fed’s rate hikes this year have had limited impact on the economy so far. Yes, mortgage rates have spiked and that has severely hurt demand for housing, but the job market remains strong. Wages are growing, and consumers are still spending. That can not last forever.
The likelihood of an economic downturn is increasing, and the Fed’s projections may reflect that. But the Fed is not expected to start cutting interest rates until 2024 at the earliest, so it may be too late for the central bank to prevent a recession.
The Fed is expected to increase the interest rate by just a quarter-point at their next meeting on February 1, according to Fed funds futures.
The Fed will start hiking its rates by the second quarter of next year, predicted analysts in a recent note. They wrote that with inflation expected to continue to weaken and fiscal policy likely on hold, the Fed could end its tightening cycle early in the new year. The first half of the year is expected to see two quarter-point hikes.
The hope is that inflation pressures will start tobate soon enough to allow the Fed to stop raising rates quickly and prevent a recession.
The Fed Is Making It Up as They Go Along, and Consumers Will Be More Confident During the Fourth Quarter of the First Half of the Millenium
It may not be that simple. The government reported Friday that a key measure of wholesale prices, the Producer Price Index, rose 7.4% over the past 12 months through November. The increase was slower than the 8% increase through October, but it was still higher than the expected rate.
The November report could indicate that consumers are feeling the double punch of high inflation and painful rate hikes from the central bank. The data shows that consumers may be becoming more cautious with their spending during a recession.
“Inflation has probably peaked but it may not come down as quickly as people want it to,” said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.
Jones still thinks the Fed will raise rates only by half a point this week and then maybe only by quarter a point in early 2023. But she conceded that the Fed is now sort of “making it up as they go along.”
Wednesday is when the Summary of Economic Projections is due to be released by the Fed. And they will watch Powell’s press conferences for clues about what’s to come — though they may end up sorely disappointed.
The co-chief investment officer at Truist Advisory Services said that a pivot is not a cure-all for the market. “Rate cuts may be too late. Recession risks are still relatively high.”
Implications of the Inflationary Cycle for Consumers, Businesses and the Economy in the 2023-2024 Regime: Comgest Global Investors
So it’s possible consumers were simply getting a head start on holiday shopping. Inflation has an effect on the numbers too, since retail sales have been impacted (positively) by the fact that people have to spend more money for stuff.
Everybody has been talking about inflation this year. Going forward, it will be more about disinflation in 2023 or 2024,” said Arnaud Cosserat, CEO of Comgest Global Investors.
What does that mean for investors? Cosserat said people should be looking for quality consumer companies that still have pricing power and can maintain their profit margins. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes
(HESAF) and cosmetics giant L’Oreal
(LRLCF).
Friday: Eurozone PMI; UK retail sales; earnings from Accenture
(ACN), Darden Restaurants
(DRI) and Winnebago
(WGO)
It is double the Fed’s normal quarter point hike, and a sizable increase that will cause economic pain for millions of American businesses and households, by increasing the cost of borrowing for homes, cars and other loans.
But the average period between peak interest rates and the first reductions by the Fed is 11 months, which could mean that even if the central bank stops actively hiking rates, they could remain elevated into 2024.
The economy has so far held up well against the Fed rate hikes. The job market is healthy, wages are growing, Americans are spending and GDP is strong. Businesses are largely beating expectations and reporting positive results.
The Fed is Going Inflationary: Rate Increases, Housing and the Consumer Spending Puzzle in the U.S., Mexico, Costa Rica, Colombia and the Philippines
The European Central Bank, the Bank of England and the Swiss National Bank are expected to follow the United States with half-point moves of their own on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.
The hike, smaller than the previous four increases, comes after the latest government reading showed inflation is running at its slowest annual rate in nearly a year.
“It’s good to see progress, but let’s just understand we have a long ways to go to get back to price stability,” Fed Chairman Jerome Powell said at a press conference after the board announced its latest, smaller rate increase.
Many Americans are now paying more in interest on their credit cards, mortgages and car loans because of price increases. Currently, used car buyers are charged an average interest rate of 9.34%, compared to 8.12% last year, and they’re making the largest monthly payments on record, according to credit reporting firm Experian.
The central bank said in a statement on Wednesday that inflation remained elevated because of higher food and energy prices.
The stock market fell after the announcement of another increase, mostly as Wall Street digested the Fed’s warning that there are more rate hikes to come. The major indices were mostly flat by the end of the day.
The worst of shelter inflation may be behind us, according to Fed officials. Increases in market rents have slowed since spring.
The price of haircuts rose 6.8% in the last twelve months, while the price of dry cleaning jumped 7.9%. Services other than housing and energy account for nearly a quarter of all consumer spending.
The Rise and Fall of Prices in the U.S. Economy after the Swine Flu Epidemic, and the Predictions from the Fed
Powell said that they see goods prices coming down. “We understand what will happen with housing services. But the big story will really be the the rest of it, and there’s not much progress there. That is going to take some time.
More job openings than available workers have been described by Powell as out of balance. The US economy has replaced all of the jobs that were lost during the swine flu epidemic, but the share of adults in work has not fully recovered.
Many older workers who retired in the last two years may not return to the job market. The Fed is trying to reduce demand to make up for the fact that there is not enough workers.
Prices are still climbing much faster than Americans were used to before the pandemic, even though there are signs that the Federal Reserve’s dramatic steps to slow down inflation may finally be working.
The central bank has made it clear it will do whatever it takes to bring inflation back down, and on Wednesday it raised interest rates for the seventh time in nine months.
Gasoline prices have dropped sharply and are now lower than they were before Russia’s invasion of Ukraine. The prices of used cars, televisions and other items have come down because of the shortage in the supply chain. The price of flights and rental cars has been falling, as travelers become more price-conscious, as demand has dissipated after the terrorist attacks in Paris.
Fed Chairman Jerome Powell: Why do we need a deep recession if there’s a recession? — A pre-Fed Committee report
“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” Fed Chairman Jerome Powell said on Wednesday.
The central bank has lowered its growth forecast and raised it for unemployment. Powell says there is a lot of uncertainty.
He says that the opportunities they have are well founded despite the small amount of uncertainty out there. “I don’t think there will be a deep one if there is a recession.”
Changes in the weather or the war in Ukraine could cause big swings in prices at the gas station and the grocery store. Faster or slower economic growth around the world could also cause gyrations in the price of crude oil and other commodities.
The Fed is keeping an eye on haircuts and restaurant meals, as well as prices of other services. The prices that are driven by labor costs tend to come down more than the goods prices.
Wall Street Sensitivity is Back after a Breakdown: The Case of the U.S. Retail Credit Expansion in the Light of CNN Business Before the Bell
A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.
Weaker-than-expected retail sales in November pummeled market sentiment on Thursday and raised the odds that the Federal Reserve’s inflation-fighting interest rate hikes would push the economy into recession.
That’s a bad sign for the economy. Brian Moynihan, CEO of Bank of America told CNN last month that the continued strength of the US consumer is keeping the country out of a recession. Consumer spending is a major driver of the economy, and the last two months of the year can account for about 20% of total retail sales — even more for some retailers, according to National Retail Federation data.
Retailers need to get rid of excess inventory in order to ramp up profits and the weak report means that spending waned just as the holiday season started. It wasn’t good for investors to hear that.
Target, Macy’s, and Abercrombie & Fitch all saw their prices go down on Thursday.
The entire sector took a blow — the VanEck Retail ETF, with Amazon
(AMZN), Home Depot
(HD) and Walmart
(WMT)as its top three holdings, fell by 2.2%. The SPDR S&P Retail ETF, which follows all S&P retail stocks, was down 2.9%.
Ellen Zentner, a Morgan Stanley economist, warned in a note that consumers are being forced to be more conservative in their holiday shopping due to the problems of the past year.
“Households are increasingly relying on their savings to sustain their spending, and many families are resorting to credit to offset the burden of high prices. The current credit spree is a real risk and it is particularly dangerous for low-income families, said Gregory Daco and Lydia boussour.
Bank accounts in the US are still fairly robust, but they are starting to diminish. In the third quarter of 2022, credit card balances jumped 15% year over year. That’s the largest annual jump since the New York Fed began keeping track of the data in 2004.
“Against this backdrop, we expect consumers will rein in their spending further in coming months,” said Daco and Boussour. We think that real consumer spending will grow modestly in the last three months of the year, but will barely grow in the years to come.
Wall Street Reform Revisited: Audit Supervision of the Chinese Companies Listed on Wall Street in the U.S. After Freddie Mac’s Anthology
The 30-year fixed-rate mortgage averaged 6.31% in the week ending December 15, down from 6.33% the week before, according to Freddie Mac. Anna Bahney reported that the 30-year fixed rate was 3.12% a year ago.
Freddie Mac said that mortgage rates continued their downward trajectory this week as softer inflation data and a shift in Federal Reserve monetary policy reverberated through the economy.
He added that recent drops in rates had led to a stabilization of purchase demand in the housing market. The good news is that demand still remains weak in spite of high affordability hurdles.
On Friday, China’s securities regulator said it’s looking forward to working with US officials to continue promoting future audit supervision of companies listed in the United States.
The announcement marks a major breakthrough in a yearslong standoff over how Chinese companies listed on Wall Street should be regulated. Laura He said that it would come as a huge relief for these firms and investors who invested billions of dollars in them.
The chair of the Public Company Accounting Oversight Board said on Thursday that they were able to perform full and thorough investigations to root out potential problems, and that it was the first time such access had been given.
If Chinese companies did not give the audits of their financial statements by the end of the decade, they would face delisting from the US market.
According to the US-China Economic and Security Review Commission, there are 260 Chinese companies listed on US stock exchanges with a combined market value of $770 billion.
Inflation, Demand, and Consumer Confidence: A Three-Year Low-Energy Performance in the U.S. Consumer Price Index
The Fed’s rate-setting committee said in a statement that “inflation has fallen but remains elevated.” The Committee is committed to returning inflation to 2%.
Both PCE inflation watches hit their lowest levels since October 2016 when the Consumer Price index and Producer price index all fell.
Spending continued to increase in November, but at a much slower pace than in previous months. Spending was up 0.1% in November as compared to 0.8% the month before. Personal income increased by 0.4% in November, down from 0.7% in October.
Inflation within the services sector is still going strong, and not abating as quickly. Faucher commented that the PCE report showed a monthly increase of 0.4% and a year-over-year increase of more than 11% for the services index.
Finally, though the Fed has repeatedly signaled its concern that tight labor markets are boosting wage growth above levels consistent with its 2% inflation target, the risk of a wage-price spiral, where rising wages lead to rising prices, which in turn spur further wage demands, seems low.
A separate Commerce Department report released Friday showed that new orders for manufactured goods tumbled 2.1% in November, the biggest monthly drop since the onset of the pandemic.
Transportation equipment, specifically new orders for non-defense aircraft and parts, drove the decline, according to the report. Excluding transportation, new orders increase 0.2%.
“Core durable goods orders slowed but did not contract, reflecting growing unease about the economy,” Diane Swonk, chief economist for KPMG, tweeted Friday after the report’s release. The prelim reading for December suggests manufacturing will contract further in the year end. A cold winter expected for the manufacturing sector.
According to new data released Friday by the University of Michigan, a decrease in inflation is good news for consumers.
The final December reading for consumer sentiment was up from a preliminary measurement of 59.1 but still down from the final reading in November.
The Conference Board consumer confidence index, a measure of how consumers are feeling about the economy, soared to its highest level in more than a year.
An Overview of Inflation, Employment, and Wall Street: Predictions for the First-Time Jobless Benefits and Work Pay Reports
The stock market went through a period in which roughly 20% of the S&P 500 vanished and the Nasdaq went down by more than 30%. The US markets have suffered the worst years since 2008.
The number of first-time unemployment benefits applications went up last week. The claims are close to where they were a year ago before the fears of a recession emerged.
Gas prices have dropped during the first two weeks of February, but AAA warns that drivers can’t count on falling prices at the pump to keep inflation in check.
But that trend has begun to reverse, at least when measured on a monthly basis. Real wages have been growing faster than consumer prices, a significant shift that could give consumers firepower to keep spending next year.
The fear is that the Fed will eventually overdo it, raising rates so high and keeping them there for so long that it causes a recession — if the Fed hasn’t already done that.
Still, traders have been glued to economic reports even more than usual as of late, and stocks have been incredibly choppy based on what the latest figures indicate about inflation.
The report on health of manufacturing sector was less than expected, along with the solid report about labor turnover, led to greater market volatility.
That’s why investors will be looking at the weekly jobless claims that come out Thursday morning as well as a report from payroll processing companyADP about the private sector job market. There are more alarm bells about inflation and Fed rate hikes set off by further strength.
Lauren Goodwin said in a report that the mismatch between labor supply and demand continues to put upward pressure on wages.
The Fed is likely to focus on worker pay in Friday’s jobs report, not the number of jobs added. It’s possible that Wall Street does the same.
The Amazon, Meta Platforms, and Salesforce Recessions: What Do They Mean? How Do We Are Now in a Deep Economic Downturn?
Amazon and Meta Platforms are two tech firms that recently announced job cuts. Amazon
(AMZN) confirmed late Wednesday that it was laying off more than 18,000 employees.
The hope was that consumers and businesses would continue to spend heavily on tech products and services, a notion that seemed valid as the economy quickly rebounded from a brief recession in 2020.
Now, though, recession alarm bells are sounding once more as inflation and rate hikes take their toll…and tech companies realize that they may have not factored that in to their budgeting plans.
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing,” said Salesforce chair and co-CEO Marc Benioff in a recent note to employees.
There are different phases for companies that last a long time. The company does not go into heavy people expansion mode very often, according to a memo shared with employees.
The economy is not out of the woods. The head of the International Monetary Fund is concerned about a downturn that could hit China and emerging markets particularly hard.
Anna told CNN that investors in Europe appear to be growing more hopeful that the pace of consumer price increases is starting to slow. A big drop in energy prices is leading the retreat.
Source: https://www.cnn.com/2023/01/05/investing/premarket-stocks-trading/index.html
Inflation, Walls, and the Future: What Will We Learn when the Fed Overcorrects? An Analysis of the UK Consumer Price Rises in December
The British Retail Consortium stated in a report that food prices went up in December. Meanwhile, data analytics firm Kantar noted in another report that UK grocery sales hit a record during the four weeks ending on December 25, even though the number of items that consumers bought fell 1% during the same period.
Steven Kamin is a senior fellow at the American Enterprise Institute, which studies international macroeconomic and financial issues. He was the director of the international finance section of the Federal Reserve. The opinions expressed in this commentary are his own. View more opinion on CNN.
As the economy slows in response to the rise in interest rates and labor markets tighten due to this, price pressures will continue to ease.
In other words, workers have received no compensation for increases in productivity. The labor share of income has fallen over the past two years, and the corporate profits share of GDP is close to postwar highs, as acknowledged by Fed Vice Chair Lael Brainard. This suggests that, going forward, wages may rise faster than prices as workers regain their share of corporate income. But that should not force firms into additional price increases, and therefore shouldn’t impede the Fed’s ability to reduce inflation, since firms should be able to absorb those wage hikes by reducing profit margins rather than increasing prices.
Excluding volatile food and energy costs, “core” prices in December were 4.4% higher than a year ago, according to the Fed’s preferred inflation yardstick. That’s down from a 5.2% annual rate in September.
An economist at the Upjohn Institute for Employment Research tells me that it looks like a soft landing. “Inflation has come down but there’s not a recession.”
Chris Waller, the Fed governor, said two weeks ago that the Fed doesn’t want to be head- faked. “Back in 2021, we saw three consecutive months of relatively low readings of core inflation before it exploded in our face.”
Financial markets are skeptical of that forecast. Many investors are betting that the central bank will soon start cutting interest rates, despite repeated warnings to the contrary from Fed officials. The stock and bond markets have rallied because of the expectation of lower borrowing costs.
Sojourner was a senior economist for the Council of Economic Advisers in both the Obama and Trump administrations. If we get to the point where the Fed overcorrects then jobs will be lost. Hopefully we can avoid that.”
“There’s been an expectation that it will go away quickly and painlessly, and I don’t think that’s at all guaranteed,” Federal Reserve chairman Jerome Powell said last week. It will take some time and we’ll have to increase rates more, and we’ll have to look around and see if we’ve done enough.
Consumer Spending in the Presence of a Volatility in the Economy: Inflationary Warnings and a Breakdown from the Federal Reserve
“We are entering the higher-priced spring and summer driving season, and so drivers should brace for that,” said Devin Gladden of AAA. “It will likely be a volatile year given how much uncertainty remains around the economy.”
Used car prices have also acted as a brake on inflation, falling 8.8% last year and another 1.9% in January. There are signals from the wholesale market that indicate used car prices could increase in the coming months.
But there’s a catch: All that spending threatens to put more upward pressure on inflation at a time when the Federal Reserve is raising interest rates aggressively to keep prices in check.
The drop in consumer spending would help to cool inflation, but it would also make people worry about a recession. If spending grows at this rate, the Fed will be forced to raise interest rates even more aggressively to bring prices under control.
Personal spending rose 1.8% in January, according to the Commerce Department on Friday, as consumers splurged on both goods as well as services like going out for meals or the movies.
Lots of people have money in their pockets to spend, thanks to strong job growth and rising wages. This year, retirees got a raise. The cost of living increase for the Social Security program was 8.7% in January.
JonathanSilver tracks credit card use by about 100 million people nationwide and says that additional income will help support consumer spending.
During the early stages of the Pandemic, more people put away extra money than they normally do, as the government gave multiple rounds of relief payments. Americans are sitting on plenty of cash even though bank balances have fallen.
“We estimate households to still have about ten months of spending power if they continue to deplete excess savings at the pace they have over the past six months,” Wells Fargo economists wrote in a research note Friday.
Putting off Travel During the Pandemic: An Empirical Analysis of Las Vegas Business and Consumer Behavior during the First Two Months
People who put off traveling during the worst of the pandemic are making up for lost time. The number of vacations to Las Vegas jumped more than 20% last year.
Steve Hill is the CEO of the Las Vegas Convention and Visitors Authority. “I think it has driven a real energy around getting back to experiences. I am sure you do as well in the numbers, a shift from buying stuff to buying experiences.
Not everyone is flush with cash. Households are struggling. And businesses are not confident that consumers’ free-spending habits will continue.
Walmart, the nation’s largest retailer, is projecting only modest sales growth this year. CEO Doug McMillon notes that shoppers are increasingly focused on basic necessities like groceries, while limiting spending on more discretionary items.
“Customer are still spending money,” McMillon told analysts this past week. It is unclear what the back half of the year will look like.
Restaurant owner Cameron Mitchell is similarly cautious. Mitchell, who operates dozens of restaurants ranging from high-end steakhouses to more casual Mexican eateries, has noticed diners appear to be gravitating to his less expensive outlets.
“That’s just what my gut is telling me as an operator,” Mitchell says. A year ago, people knew we had to raise our prices. They were accepting of it and it was obvious. But the consumer is changing. People want inflation to come down and they are not fond of any more price increases.
Ian Shepherdson thinks that the Fed’s efforts are working. Unusually warm weather is believed to have resulted in the strong spending last month.