Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

Fed’s Favored Price Gauge Rises at Mild Pace, Spending Holds Up Core PCE prices and inflation-adjusted spending each rise 0.2%

The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.2% from May. From a year ago, it rose 2.6%, according to Bureau of Economic Analysis data out Friday.

Inflation-adjusted consumer spending rose 0.2%, while May’s increase was revised higher.

On a three-month annualized basis, core inflation cooled to 2.3%, the least since December.

Policymakers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric increased 0.2% in June for a second month, according to the BEA.

The report showed inflation-adjusted outlays for services and merchandise each rose 0.2%. Housing and utilities led increases in services spending, while vehicles and recreational items propelled advances in goods.

Signs of cooling in the labor market are starting to translate into less purchasing power. Wages and salaries rose 0.3% in June, half the prior month’s pace. On an inflation-adjusted basis, disposable income growth slowed to 0.1%.

The saving rate fell to 3.4%, the lowest since December 2022.

This quarterly chart shows that Americans keep spending what they earn in nominal dollars. Quarterly inflation and real expenditures have been fairly steady at 2.5% a.r. for 4 quarters.

The Sahm Rule Signal: On the Blink or Flashing Red? To What Extent Are Labor Force Entrants Interfering with the Sahm Rule Signal?

Rising unemployment over the past year has sent the clearest signal yet that the labor market is weakening. While the Sahm Rule indicator—which highlights the historical pattern that the unemployment rate has never risen 0.5 points above its prior 12-month low without a recession—has not crossed its recession threshold, the current rise would nonetheless be unique if a downturn in the labor market were to be avoided. Of course, this has been a unique labor market, with the pandemic initially delivering a massive shock to labor supply. Is the recovery in labor supply now interfering with the Sahm Rule signal?

At 0.43, the Sahm Rule indicator has already risen more than at the onset of any recession in the past 50 years. Yet entrants into the labor force, particularly re-entrants, have been an unprecedented driver of the increase. This should assuage some concern over the current rise as it comes in larger part for the “right” reason of more workers entering the jobs market, which ultimately makes it easier for businesses to grow.

Yet the increase in the unemployment rate for the “wrong” reasons is troubling in its own right. Looking at the rise in unemployment due to job loss on the same basis as the traditional Sahm Rule shows an increase similarly reminiscent of periods when the labor market was on the brink of a downturn.

Could this be the cycle where the Sahm Rule breaks? The larger lift from labor force entrants and more gradual ascent compared to the starting point of prior recessions raises the likelihood. That said, the negative feedback loop between rising unemployment and declining spending means that neither the current increase in the traditional Sahm Rule indicator nor the job loser version should be brushed aside. Recession thresholds crossed or not, the increase in both values shows an unequivocal deterioration in the labor market. With momentum in the jobs market difficult to shift, we see the risk of recession remaining unusually high at the moment.

Note: I am travelling (Pacific time zone) until August 10. Posting will be irregular and possibly limited by time and equipment constraints.

US Economy Accelerated by More Than Forecast Last Quarter Data signals demand is holding up under the weight of higher borrowing costs.

Gross domestic product increased at a 2.8% annualized rate after rising 1.4% in the previous period, the government’s initial estimate showed. The economy’s main growth engine — personal spending — rose 2.3%, also more than forecast.

A closely watched measure of underlying inflation rose 2.9%, easing from the first quarter but still above forecast, the Bureau of Economic Analysis report showed Thursday. (…)

Consumer spending was driven mostly by a rebound in durable goods like cars and furnishings as well as a more moderate advance in services outlays compared to the first quarter, according to the GDP report. (…)

Government spending contributed more to GDP compared to the first three months of the year, boosted by defense spending. Residential investment subtracted  from growth for the first time in a year as high mortgage rates kept a lid on sales activity and new construction.

Business investment grew at the fastest pace in almost a year, led by the strongest advance in equipment since the start of 2022. A separate report Thursday showed orders placed with US factories for business equipment, excluding aircraft and defense, increased in June by the most since early last year. It’s a sign such spending will keep adding to growth in coming months.

A few charts from Wells Fargo:

  

Cost-of-Living Crisis Takes Toll on Sales of Food, Cars, Luxury Shoppers are tapped out after years of inflation, higher rates

A global consumer backtrack from post-pandemic revenge spending is starting to hit companies’ top and bottom lines.

From food producers to airlines, automakers to luxury houses, evidence of the impact is piling up. Whether it’s US grocery shoppers tapped out after a period of punishing inflation or wealthy Chinese customers postponing their next splurge, the effects are rippling across the corporate landscape.

Nestle SA, the world’s biggest food company, cut its revenue outlook for the year on Thursday, while Unilever Plc reported sales that missed estimates and Jeep-owner Stellantis NV posted a plunge in profit. A day before, US appliance maker Whirlpool Corp. lowered its earnings forecast. (…)

A cost-of-living crisis has taken its toll on shoppers who’ve traded down to cheaper brands, and consumer giants have struggled to coax them back. Around 80% of US shoppers are reducing grocery spending, according to a recent poll of 1,000 people who broadly represent the US demographic by Savings.com, a website that offers coupons. (…)

“The cost of living is just astronomical, which I’ve been feeling, especially with groceries,” Kotowski said.

US consumers have generally been resilient against the backdrop of years of inflation and rising interest rates, though are selective in how they are spending and searching for value. Walmart Inc., Target Corp. and other retailers have said in recent months that consumers’ wallets are still stretched and that the broader environment remains challenging. (…)

The pullback hasn’t been confined to budget-conscious shoppers.

LVMH, whose luxury brands include Louis Vuitton and Christian Dior, posted disappointing results in part because of China, where the wealthy have cooled on its high-end fashions.

Other purveyors of luxury goods, from Germany’s Hugo Boss AG to Britain’s Burberry Group Plc, also blamed Chinese consumers for weaker sales that prompted them to slash profit guidance. Burberry went so far as to oust its CEO, Jonathan Akeroyd, and warn of a possible loss for the first half.

“The whole luxury segment is under pressure,” Porsche CEO Oliver Blume said during Wednesday’s earnings, adding the company doesn’t plan to cut prices. The carmaker’s dealer partners in China say the luxury segment “could come back, but nobody knows when and how,” Blume said.

As they say in politics, perception is the reality, as Mr. Trump as amply demonstrated.

The economic reality is that the pressure from inflation on essentials (food, energy and shelter) has peaked and labor income is now rising faster than most prices.

On a YoY basis, inflation on essentials peaked at double digit rates in mid-2022 (CPI-Food at home at +13.5%) but it is now down to 4.0% (1.1% on food) while labor income is still growing above 5.0%.

It’s not because the more affluent segment is biasing the data. Real wages for the rank and file employees are 3.6% above their pre-pandemic level and still positive on a YoY basis.

I Changed My Mind. The Fed Needs to Cut Rates Now. Waiting until September unnecessarily increases the risk of a recession.

By Bill Dudley, a Bloomberg Opinion columnist, who served as president of the Federal Reserve Bank of New York from 2009 to 2018.

I’ve long been in the “higher for longer” camp, insisting that the US Federal Reserve must hold short-term interest rates at the current level or higher to get inflation under control.

The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policy-making meeting. (…)

Now, the Fed’s efforts to cool the economy are having a visible effect. Granted, wealthy households are still consuming, thanks to buoyant asset prices and mortgages refinanced at historically low long-term rates. But the rest have generally depleted what they managed to save from the government’s huge fiscal transfers, and they’re feeling the impact of higher rates on their credit cards and auto loans. Housing construction has faltered, as elevated borrowing costs undermine the economics of building new apartment complexes. The momentum generated by Biden’s investment initiatives appears to be fading.

Slower growth, in turn, means fewer jobs. The household employment survey shows just 195,000 added over the past 12 months. The ratio of unfilled jobs to unemployed workers, at 1.2, is back where it was before the pandemic.

Most troubling, the three-month average unemployment rate is up 0.43 percentage point from its low point in the prior 12 months — very close to the 0.5 threshold that, as identified by the Sahm Rule, has invariably signaled a US recession.

Meanwhile, inflation pressures have abated significantly after a series of upside surprises earlier this year. The Fed’s favorite consumer-price indicator — the core deflator for personal consumption expenditures — was up 2.6% in May from a year earlier, not far above the central bank’s 2% objective. The June reading, coming next week, is likely to reinforce this trend, judging from already reported data that feed into the core PCE calculation. On the wage front, average hourly earnings were up 3.9% in June from a year earlier, compared with a peak of nearly 6% in March 2022.

Why, then, are Fed officials strongly hinting that there will be no rate cut at next week’s meeting?

I see three reasons. First, the Fed doesn’t want to be fooled again. Late last year, a moderation in inflation turned out to be temporary. This time around, further progress in reducing year-over-year inflation will be difficult, due to low readings in the second half of last year. So officials might be hesitant to declare victory.

Second, Chair Jerome Powell might be waiting in order to build the broadest possible consensus. With markets already fully expecting a cut in September, he can argue to doves that delay will have little consequence, while building more support among hawks for the September move.

Third, Fed officials don’t seem particularly troubled by the risk that the unemployment rate could soon breach the Sahm Rule threshold. The logic is that rapid labor force growth, rather than a rise in layoffs, is driving the increase in the unemployment rate. This isn’t compelling: The Sahm Rule accurately predicted recessions in the 1970s, when the labor force was also growing rapidly.

Historically, deteriorating labor markets generate a self-reinforcing feedback loop. When jobs are harder to find, households trim spending, the economy weakens and businesses reduce investment, which leads to layoffs and further spending cuts. This is why unemployment, having breached the 0.5-percentage-point threshold, has always increased a lot more — the smallest rise was nearly 2 percentage points, trough to peak.

Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk.

We will know more tomorrow after the employment report but Indeed Job Postings perked up since the end of June (through July 19)

China Unexpectedly Cuts One-Year Policy Rate by Most Since 2020