This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Wednesday, December 7, 2022
Another month, another strong jobs report.
News last Friday that some 263,000 jobs were created in November showed the Federal Reserve's efforts to slow the economy and bring down inflation remain a work in progress.
Next week, the Federal Reserve will meet and likely vote to raise interest rates another 0.50%.
The central bank's goal in raising interest rates this year has been clear: Bring down inflation. Specifically, by slowing the pace of spending from businesses and consumers.
As the Financial Times reported Tuesday, on the business and investor front, big bank CEOs are certainly hearing more caution from clients as we head into 2023.
But on the consumer side, the situation for the Fed is more challenging.
And the consumer, as ever, is the bulk of the story for the U.S. economy. Consumer spending accounts for about two-thirds of GDP. Shelter, food, clothes, and vacation all fit under this umbrella.
We've written in this space before that as goes the housing market, so goes the economy. But this idea is just a way of saying housing is the largest expense for most consumers.
Consumers — you, me, our friends and family — are the biggest engine of economic growth. And currently Fed Chair Powell's biggest economic problem.
In an email last week ahead of this jobs data, Neil Dutta, head of economics at Renaissance Macro, highlighted card transaction data from the Bureau of Economic Analysis, which showed consumer spending running roughly 11% above pre-pandemic levels in the first two weeks of November.
As the following chart from Dutta shows, on a week-to-week basis, spending against 2019 has been volatile, suggesting a series of apparent head fakes on the health of U.S. consumers.
But when smoothed to reflect the four-week average change against the last year before the pandemic, we see steadier growth in spending nearing 10%.
"There is room for consumers' spending to remain solid," Dutta wrote. "If you look at the latest data, consumers are simultaneously seeing an increase in their real incomes as gasoline prices drop and drawing down their excess saving."
Not all retailers, of course, are quite as optimistic in their assessment of the current environment.
Speaking with Yahoo Finance this week, Costco (COST) CEO Craig Jelinek said there are some signs of consumers behaving more cautiously. High-end jewelry and high-end televisions were specifically flagged by Jelinek as areas where consumers are slowing purchases.
A change in some consumer habits or preferences after a frenetic year of consumption in 2021 no doubt presents operational challenges for retailers. And what Costco and Walmart tell us about the U.S. consumer is not to be dismissed.
But altered trajectories for margins or comp sales growth — two all-important metrics for retail executives and investors — don't necessarily reflect the broadest slice of consumer behaviors.
"For me the main issue is straightforward," Dutta wrote. "For all the talk about long and uncertain lags, the Fed has increased the federal funds rate by 400 basis points over the last year and during this time, nominal consumption [has been] stable."
And as consumption stays firm, the Fed will remain resolute in keeping interest rates high, which means Powell's biggest problem is really the market's biggest problem — the U.S. consumer just won't quit.
What to Watch Today
MBA Mortgage Applications, week ended Dec. 2 (-0.8% during prior week)
Nonfarm Productivity, Q3 final (0.7% expected, 0.3% during prior quarter)
Unit Labor Costs, Q3 final (3.0% expected, 3.5% during prior quarter)
Consumer Credit, October ($28.000 billion expected, $24.976 during prior month)
Brown-Forman (BF.B), Campbell Soup (CPB), C3.ai (AI), GameStop (GME), Korn/Ferry (KFY), Lovesac (LOVE), Ollie’s Bargain Outlet (OLLI), Sportsman's Warehouse (SPWH), Thor Industries (THO), United Natural Foods (UNFI), Verint Systems (VRNT)