Friday, February 24, 2023

Americans made more and spent more. Wall Street is freaked, but I'm not

Today, we got our most comprehensive look at how the economy started off 2023. And things were looking up.
Incomes rose 1.8% and 0.6% last month, respectively, according to the report. Consumers also put more in their piggy banks: The personal savings rate increased 0.2 percentage points to 4.7% in January.

“It seems like consumers were feeling jolly in January,” Gregory Daco, EY Parthenon chief economist, told CNN Business in an interview. “They spent more freely across the board, really on all items, despite inflation being higher.”
Sounds like a good thing to me. But that “inflation” item mirrors what we saw in last week’s reports, where prices increased more at the start of the year, both in energy prices and in the “core” index that takes out food and energy.
Inflation picked up speed in January as the Personal Consumption Expenditures price index rose 5.4% from a year earlier, the Commerce Department’s Bureau of Economic Analysis reported Friday. In December, prices rose 5.3% annually.

In January alone, prices were up 0.6% from the prior month, a higher monthly gain from December’s increase of 0.2%.....

The Fed[eral Reserve]’s go-to inflation gauge, the Core PCE index (which strips out the often volatile food and energy categories) showed prices rising 0.6% on a monthly basis and 4.7% for the 12 months ending in January.
And that combination of good economic news and a boost in inflation was something Wall Street did not want to see, as it seemed to confirm to traders that we will see interest rates continue at these 16-year highs for quite a while.
Wall Street's main indexes posted their biggest weekly drop of 2023 after sharp losses on Friday, as investors braced for the possibility of more aggressive rate hikes from the U.S. Federal Reserve as U.S. economic data pointed to resilient consumers. For the blue-chip Dow Jones Industrial Average (.DJI), the 3% fall was its biggest weekly decline since September. It was also the Dow's fourth straight weekly decline, its longest losing streak for nearly 10 months.

The S&P 500 (.SPX) and Nasdaq Composite (.IXIC) were also down 2.7% and 3.3%, respectively. After a strong January, stocks have retreated this month as a slew of economic data amplified worries that the U.S. central bank might have to keep rates higher for longer.
And after stocks rose in January and the first 2 weeks of this month on the hope that the tightening cycle was over, all those gains have been given back in the last two weeks on the thought that the Fed might raise rates all the way up to 5.5%.

But I’m going to go against the Wall Street grain on this, because the latest updates to data tell me that we’re in a strong economy that shouldn’t cause the level of economic concern that so many “experts” are giving off these days.

To start with, we are getting more confirmation that Americans’ pocketbooks are holding up. Income growth at the end of 2022 was revised up in the income and spending report, as November and December’s increases were each raised by more than $20 billion (annual rate), and disposable incomes were revised up by more than that.

We also know that wages went up in July, August and September more than we previously knew, as that was reported as part of the update to 4th Quarter GDP which came out the day before.
In addition to presenting updated estimates for the fourth quarter, [Thursday's] release presents revised estimates of third-quarter wages and salaries, personal taxes, and contributions for government social insurance, based on updated data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages program. Wages and salaries are now estimated to have increased $303.0 billion in the third quarter, an upward revision of $115.2 billion. Personal current taxes are now estimated to have increased $48.0 billion, an upward revision of $7.3 billion. Contributions for government social insurance are now estimated to have increased $41.2 billion, an upward revision of $14.8 billion. With the incorporation of these new data, real gross domestic income is now estimated to have increased 2.8 percent in the third quarter, an upward revision of 2.0 percentage points from the previously published estimate.
That’s a big difference, and it means that the US savings rate was larger than what was reported at the time. That should be something the Fed notes, and should be an argument against an “overheated” economy in need of continued rate hikes, and instead is merely a strong economy with some savings to go along with increased spending and income growth.

In fact inflation-adjusted disposable incomes are up nearly 4% since inflation peaked in June, and the savings rate has gone from 2.7% to 4.7% in that time. I also think that inflation should cool back down in February, given that the average US gas price has fallen more than 6 cents a gallon in the last month (and nearly 20 cents in Wisconsin), and with producer prices for food falling in both December and January.

So I think the US started off 2023 with a very strong economy, and am rolling my eyes at the INFLATION WATCH/high rate concerns coming back. I think we will see data come in next month that will show the January’s increase in inflation to be a one-month blip, and I also suspect January’s huge increases in spending are a one-off that will head back toward moderation in this month. But that won’t satisfy a lot of Wall Streeters and bankers, because layoffs and the unemployment rate remain at their lowest levels in over 50 years, and they can’t stand to have everyday Americans continue to grab more income and have more flexibility in their job and consumer situation.

I fear the rate hikes will continue throughout the Spring, and by the time things slow down enough to the Fed’s liking, too many will be suffering due to increased job losses and higher borrowing costs that results in an economy that starts to have real problems that hurt real people in real jobs. To the point that it’ll require more work to get things back on track.

If the Masters of the Universe were more connected to people who have to make ends meet, instead of trying to figure out how to bring things into “balance” for their crowd, they might be more likely to take this as their theme for the coming months.

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