July 15, 2022
Whew. Is it just us, or did that feel like a long week?
- The Fed just got some good news on longer-term inflation expectations, as we head into the blackout period before the upcoming policy meeting. More on that and strong retail sales below.
Today's newsletter, edited by Kate Marino, is 579 words, a 2-minute read.
1 big thing: The powerhouse consumer
For all the talk about a recession, the consumer — the bedrock of the economy — appears to be holding strong.
Such is the great weirdness of the U.S. economy right now: Americans' spending behavior, as spelled out in today's solid retail sales report, screams, "No recession here!"
- Meanwhile, consumer sentiment has actually ticked up so far this month, according to a preliminary reading from the University of Michigan, though it remains low by historical standards.
Why it matters: High gas prices might be making people miserable, but consumer demand is holding up even as the Federal Reserve acts to bring down inflation.
Details: The retail sales data shows a broad advance in spending, rising 1% in June, more than the 0.8% analysts had expected. The figure reflects higher prices — but even excluding gas stations, sales were up 0.7%.
- Through the first six months of the year, electronics and appliances is the only category that's seen a decline in spending from 2021. But that's mostly a function of Americans pulling back on goods that they already stocked up on early in the pandemic.
- The new number is consistent with overall consumption spending continuing to rise in the second quarter, which would lower the odds of a second straight quarter of shrinking GDP.
What they're saying: "Spending was broad based and not just boosted by more money spent on gasoline," said Jeffery Roach, chief economist at LPL Financial, in a note. "Given this report, the U.S. may actually post positive growth figures for Q2 and avoid two consecutive quarters of negative growth."
Between the lines: Normally, this would be stellar news in an economy where consumer spending makes up two-thirds of activity. But in this topsy-turvy environment, the Fed wants to see consumer demand slow enough to temper inflation.
- The report shows solid demand, yet it might not be strong enough to tip the committee in favor of an ultra-big full-percentage point interest rate hike, particularly given another reading out this morning that we discuss below.
The bottom line: There are plenty of risks ahead, but American consumers are chugging along for now, which could keep overall growth in positive territory.
2. Inflation expectations recede, maybe
Last month, Fed chair Jerome Powell cited an uptick in long-term inflation expectations shown in the University of Michigan sentiment survey as a reason for raising rates more aggressively.
- The good news out this morning: The same preliminary survey showed those expectations receding in June. This should give the Fed comfort that it need not escalate rate increases further just yet, and can instead stick to another 0.75 percentage point rate hike.
Futures markets this morning shifted back to assign lower odds to a full-point rate hike July 27, helping reverse a move toward a 1 percentage point hike that followed Wednesday's high inflation reading.
By the numbers: The University of Michigan also said today that consumers' expectations for inflation five to 10 years from now fell to 2.8% so far in July, down from 3.1% in June.
Yes, but: It's not a great sign that such consequential policy choices are viewed as hinging on a survey of only about 500 respondents, and based on asking those survey participants what they think will happen far in the future.
The bottom line: The Fed puts great weight on the idea of inflation expectations remaining anchored, but there is a distinct lack of reliable ways to measure those things, which puts excessive focus on evaluations like the preliminary Michigan reading.