U.S. Inflation, Consumer Spending Growth Cooled in May Federal Reserve is still likely to consider July rate rise amid solid economy
The Fed’s preferred inflation measure, the personal-consumption expenditures price index, rose 3.8% from a year earlier, its lowest reading in two years, the Commerce Department said Friday.
Household spending rose 0.1% in May but was flat when adjusted for inflation, a possible sign of flagging economic growth. Americans spent more on services such as healthcare and air travel, and less on goods such as autos. (…)
So-called core prices, which exclude volatile food and energy categories, rose 4.6% in May from a year earlier, down slightly from 4.7% in April.
[Prices of services ex-energy and shelter] rose 0.2% in May from the prior month and 4.5% from a year earlier, according to Wall Street Journal calculations. The reading rose at a 3.9% annualized rate over the past three months, down from 5.3% over the three months before that. (…)
“We are still seeing spending grow, it’s gradually losing momentum rather than falling out of bed,” Wells Fargo economist Shannon Seery said. She pointed to the strong labor market and robust household balance sheets, adding “this is really just a stalling at a very elevated level.”
Bloomberg’s account has a more downbeat tone, citing the same economist:
On the heels of data out Thursday that showed US gross domestic product was revised up notably in the first quarter, due in part to better-than-expected spending, Friday’s figures set the economy up for a substantial slowdown.
“We had already expected a slowing in second-quarter spending,” Wells Fargo & Co. economists Tim Quinlan and Shannon Seery said in a note to clients. “It now appears that we may need to cut our own forecast in half.” (…)
More income and spending data:
- Real spending has completely stalled since February in spite of continued growth in real disposable income (+2.4% a.r. in the last 4 months).
- The saving rate increased to 4.6% from an upwardly-revised 4.3% in April (vs. 4.1% previously). But it’s not racing back towards its pre-pandemic level of 9.3%. Matt Klein’s data suggests that the remaining $600B in “excess savings” will be exhausted by year-end.
Matt Klein from The Overshoot
- Wages and salaries rose 0.5% MoM in May following +0.2% in February, +0.3% in March and +0.4% in April. Not a Fed-friendly trend.
- Real goods consumption dropped 0.4% MoM in May after +0.6% in April. Since February: -5.5% annualized. Durables: -1.2% in May, -8.1% a.r. since February.
- Real services rose 0.2% MoM in May after +0.1% in April. Since February: +2.4% annualized. Slowly normalizing.
- Even with declining demand, goods prices are not deflating like before the pandemic (particularly durable goods), providing no offset to rising services prices (black).
- That’s because goods spending remains well above pre-pandemic trends in spite of sharply higher financing costs:
(GS)
- Core PCE inflation was +0.31% MoM in May after +0.38% in April and 0.32% in March. Last 2 and last 3 months: +4.1% a.r..
- Services prices rose 0.26% in May, after +0.39% and +0.28%. Last 2 and last 3 months: +3.9% and +3.7% a.r. respectively. Six-month trends from GS:
- Shelter Inflation: How Much Catch-Up Remains? (GS)
Official shelter inflation has already slowed from a peak monthly annualized rate of over 10% (or +0.82% month-over-month, not annualized) to 6½% (+0.52%) in the most recent PCE report. We expect shelter inflation to slow further to a +5% annualized rate by December 2023 (or +0.41% not annualized) and +3¾% (or +0.30% not annualized) by December 2024, as growing multifamily supply keeps new-lease rent growth subdued and the gap between new- and continuing-lease rents closes further.
Rosenberg Research sees much faster rent disinflation:
We did some modelling on what is going to happen to rents and the CPI impact, tracing through the impact of soaring multi-family starts, units under construction and completions — the new supply is set to swamp the natural demographic demand in the coming two years by a factor of more than three. Epic. (…)
By the end of 2024, the rental vacancy rate is estimated to rise to 8% and then to 9% by the end of 2025, from just over 7% currently. Rents are currently running well north of +8% on a YoY basis, but the sequential slowing (we have already seen the monthly numbers moderate to +0.5% from +0.8% earlier this year) to less than 2% at the end of this year, flat by the end of 2024 and -1% by the end of 2025. Remember — this comprises 30% of the CPI!
I think Rosie’s forecasts are too pessimistic (too optimistic if your a bond bull like he is):
- CPI-rent has never declined YoY since 1950. Its worst reading was 0.0% in June 2010. It dropped from 3.8% pre-pandemic to +1.8% in May 2021 which was its worst print (other than post GFC) since 1967.
- Supply of multi-family housing has been rising for over a year. Goldman estimates that multi-family units under construction represent 2% of the rental stock. But household formation is running at a 1.5% growth rate since 2021. That in an already undersupplied market.
- People need shelter. Housing supply and affordability is very bad. But the labor market is strong and wages are up 5%+ helping rent affordability. The relationship between wages and rent has been pretty tight historically. Since February 2020, house prices are up 41% (plus a near doubling in mortgage rates) while CPI-rent is up 17% and wages are up 19%.
- Hence,
single-family monthly rental rates increased from $2,212 to $2,330 at the close of the first quarter of 2023 (last week of March) compared with the same period in 2022, a 5.3% increase. That was despite a 75% increase in inventory year-over-year, from 36, 688 to 64, 210, according to a HouseCanary analysis shared exclusively with USA TODAY. (…) “Demand for those rentals, on the single-family detached side, is outpacing the inventory,” he says. “So we’re still seeing this rise in prices.”
At the close of the quarter, the median national rent for single-family detached rental was $2,395, a 20% increase since the same period in 2021 and a 6% increase since the same period in 2022. Additionally, there was a weekly average of 64,210 listings on the market, up 75% year over year.
SFR rentals account for 35% of all U.S. rentals, rising 30% per year.
In 2019, a Wall Street Journal analysis of Census Bureau data reported that the number of households with six-figure incomes who were renting had reached 19 percent, up from 12 percent in 2006.
But that sector in the rental market is eclipsed by another: adults under 35 who, according to the Census Bureau, have the nation’s lowest rate of homeownership, at 37.8 percent. Rampant credit card and student loan debt, coupled with an inflated housing market and stagnant earning potential, now means that Americans in Generation X, who are between 40 and 55, have four times the assets of America’s youngest adults.
In all, total consumer demand has stalled since February but goods prices are resilient, so far, not meaningfully counteracting rising services prices. Many hope that slowing wages (not happening yet) and/or slowing rentflation will do the trick but solid overall economic fundamentals are not helping.
How high will rates need to be to really choke demand?
In a June 2022 paper, San Fran Fed analyst Adam Shapiro introduced the concept of cyclical and acyclical PCE inflation which decomposes the PCE into components where prices react negatively to higher unemployment (cyclical) or not (acyclical).
If the sector’s inflation rate shows a negative and statistically signicant relationship with the unemployment gap, the sector is labeled as cyclical, otherwise it is labeled acyclical. Such a decomposition can help policy makers determine, in real time, whether inflation is moving for reasons due to aggregate demand or whether they are due to more industry-specific factors.
Data since 1988 suggests that the Cyclical Core PCE Inflation Rate peaks roughly 24 months after the Fed begins to tighten which would place the next peak in the spring of 2024, inconvenient given that it’s now at 8%.
Analysing Shapiro’s methodology, I found that 30 (24%) of the 124 categories surveyed are labeled Cyclical and 24 of the 30 Cyclicals (80%) are actually “services” which would surprise just about anybody.
Looking at the resulting “Cyclical PCE Inflation” chart, it reminded me of another chart which I superimposed below:
Trends in Shapiro’s “Cyclical PCE Inflation” perfectly mimic trends in shelter inflation. Does that mean that shelter inflation will not peak until next spring?
Supreme Court Strikes Down Biden’s Student-Loan Plan The ruling threw out the Biden administration’s plan to forgive student loans held by 40 million Americans.
Federal student-loan borrowers will see interest start accumulating again on Sept. 1, according to the Education Department, with payments due starting in October.
Households making those payments could see a significant reduction in the amount of money they can spend elsewhere. Wells Fargo estimates that the average monthly loan payments will be between $210 and $314, or a total of about $6 billion to $9 billion a month. The effect on the broader economy will be limited as those payments are relatively small compared with about $1.5 trillion in monthly consumer spending.
Labor Market Headfake? The high-profile payroll survey could be overestimating job growth because of quirks in how the data are calculated.
(…) They note that the payroll data are out of step with other data showing a much weaker economy.
The unemployment rate leapt 0.3 percentage point to 3.7% in May, the sharpest one-month increase since 2010, outside of the pandemic recession in 2020. The weakening of employment measures in business surveys and a decline in hours worked could also be signs that the payroll report is behind the curve. (…)
“It’s possible that the Fed is dealing with an economy that’s not as robust as it thinks with a labor market that’s not as healthy as it thinks it is,” he said, adding that the overstatement of payrolls could be running at around 77,000 a month. (…)
The payroll survey is based on a sample of more than 122,000 businesses and government agencies covering around 42 million workers—about 28% of formal employment. The household survey is based on a sample of 60,000 households.
The payroll survey showed a gain of 339,000 jobs, while the household survey showed employment falling 310,000 and the number of unemployed leaping 440,000 to its highest level since February 2022.
The two surveys often diverge because of statistical noise or because they define employment differently. For example, the self-employed are counted by the household survey but not the payroll survey, and their numbers fell sharply in May.
Historically, economists consider the payroll survey a more reliable indicator of labor market health, except at turning points in the economy. (…)
A major cause of such overestimates is related to jobs created by startups and lost by business closures. The survey has no way of capturing businesses it doesn’t yet know exist, or whether a company that doesn’t respond to the survey is ghosting it, or has closed, until many quarters later, when tax data become available.
Until then, the Bureau of Labor Statistics uses a “birth-death model” to extrapolate from recent trends how many jobs are created by new companies and lost to business closures. Its contributions are significant, said Omair Sharif, founder of Inflation Insights. “In some years, business net births make up around 40% of the payroll increase.”
But when a weakening economy is closing companies and snuffing out new business, the model might erroneously count jobs that haven’t actually been added.
In the 12 months through May, net births contributed 43% of the net increase in private-sector payrolls—on the high side of the historical range, though in May the contribution was just 26%.
That might simply be a sign of the jobs created by a startup boom that took hold since the pandemic’s onset. It is also possible that the birth-death model is overestimating net new business creations, as it has at previous economic turning points. (…)
“If the true rate of formation has returned to the 2019 level, then the birth-death model is adding about 30,000 too much to payrolls each month,” he said.
If so, the current robust rate of job gains might be revised lower. In August, the Labor Department will publish a preliminary, estimated revision to payroll data for March 2023 that will ultimately be incorporated in February 2024, based on the final tax data. (…)
“The residual net birth-death adjustment may be the most likely culprit,” but it is also possible the sample of companies that go into the payroll report isn’t representative of what is going on in the labor market at large, he said.
Meanwhile, the household survey is worth watching, said LaVorgna. The employment decline it showed in May could be noise given gains in the prior two months, and the series is prone to swings. But three months of declines “would signal to me that the labor market is at an inflection point and we are now truly shedding jobs,” he said.
Another case where one can pick and chose the data to fit one’s narrative.
Let’s try to remain objective:
ADP (Automatic Data Processing) is one of the biggest providers of HR software solutions and outsourced services in the world. Its U.S. database covers more than 25 million employees.
About one year ago, ADP revamped its statistical unit, teaming up with Stanford University, and launched the ADP National Employment Report, based on actual payroll data of active employment, people that ADP sends cheques to or puts cheques in direct deposits, re-rated to make it nationally representative. Unlike the BLS, it’s not based on a survey but on real data from a huge database. Paying one in six workers in the United States, ADP has a really great handle on pay data.
The chart plots the BLS Nonfarm payrolls (+2.7% YoY in May), the BLS Private payrolls (+2.7%), ADP Private employment (+2.4% black) and the BLS Household employment (+1.5%).
All series have been gradually slowing since spring 2022 but only the household survey has kept weakening lately.
PMI surveys also support a reasonably strong labor market. From S&P Global’s June survey:
- “Greater success in finding suitable candidates allowed [manufacturing] firms to expand their workforce numbers in June, despite concerns surrounding future demand conditions. The rate of job creation slowed slightly but remained among the fastest in a year.”
- “Services firms continued to hire amid greater new orders. That said, the rate of job creation eased to the weakest since January amid challenges replacing voluntary leavers.”
In a recent interview, Nela Richardson, ADP’s chief economist, said that
small firms that produce two thirds of the net new jobs in the ten years preceding the pandemic, they’re still hiring. Even as larger firms are pulling back in their hiring, small firms are taking their place. They were blocked out by a lot of large retailers and warehouse firms and weren’t able to hire to the degree they wanted to last year. Now, they’re seeing some breathing room in terms of adding to their headcount. That’s why whether you’re looking at BLS or you’re looking at NER, you’re still looking at plus 200 000 jobs created in the economy in a month. In normal times, that would have been considered a strong month. I think small firms are leading that charge right now.
Saudis and Russia Extend Oil Supply Cuts, Bolstering Prices Saudi Arabia is keeping a lid on supply even as the market is expected to tighten.
Saudi Arabia will prolong its unilateral oil production cut by one month, keeping a lid on supply amid persisting fears over the global economy. Its OPEC+ ally Russia also announced fresh curbs on exports.
The kingdom will maintain the 1 million barrel-a-day reduction — launched this month on top of existing curbs agreed with OPEC+ — into August and could extend it further, according to a statement published by state-run Saudi Press Agency. The country will pump about 9 million barrels a day, the lowest in several years, sacrificing sales volumes for what has so far been a minimal reward in terms of higher prices. (…)
To Fight Stickier Inflation, Governments Take Aim at Corporate Profits Decision makers increasingly agree that booming profit margins in some sectors may be complicating central banks’ battle against inflation
The next phase in the war against inflation is taking shape in Europe, where governments are actively cajoling businesses to cut prices on everything from pasta to chicken. Their argument: Profits are too high. (…)
Now they are pushing back by putting pressure on grocery stores and food producers to limit or reverse price rises.
Those moves fall short of the price controls that governments introduced in the early 1970s, but edge Europe toward a more interventionist approach on inflation than the U.S., where the pace of price rises has slowed more sharply over recent months.
In France, where food prices have increased by more than 14% over the past year, the government is trying to persuade the country’s largest industrial companies to lower their prices.
“We will not allow big industrial companies to make undue margins,” French Finance Minister Bruno Le Maire said recently, adding that he was ready to name and shame companies unwilling to pass on lower costs to consumers, or even create a special tax on the profits of those companies.
High energy and agricultural prices squeezed food companies’ margins in 2021, according to French statistics bureau Insee. But last year, their margins expanded as raw-material prices started to decline. Food companies’ margins were 9.3 percentage points higher in the first quarter of this year than in 2018, Insee said. (…)
The French government has asked 75 industrial companies to each send by the end of this month a list of products on which they will cut their prices.
A spokesman for France’s food-industry lobby group Ania said companies would offer price cuts on certain products such as pasta and chicken, for which raw-material prices have declined recently. But for other categories of products such as milk or pork, cutting prices is impossible as food companies’ costs remain high, he added.
In the U.K., leading retailers were asked to account for their profits before a panel of lawmakers Tuesday, while Wednesday saw the government’s treasury chief meet with competition and other regulators to find ways to tackle what is known as the cost-of-living crisis.
The Competition and Markets Authority will publish the results of its investigation into food prices in July, while the Bank of England will also meet with food producers ahead of its September decision on interest rates. (…)
So far, only Croatia and Hungary have gone ahead with price caps. In September 2022, Croatia’s government imposed a 30% cut in the prices of oil, flour, sugar, pork, chicken and milk. The country joined the eurozone in January of this year. Last week, Hungary’s government announced the extension until August of caps on the prices of a similar range of food staples.
Over recent months, European policy makers have become convinced that higher profits have helped drive the prices of many goods and services higher, including food. In recent weeks, international bodies such as the International Monetary Fund and the Organization for Economic Cooperation and Development have backed that view.
In a paper published last week, IMF economists calculated that higher profits accounted for 45% of the rise in eurozone consumer prices between the start of 2022 and March 2023, while wages accounted for just 25%. The rising costs of importing energy, food and other goods accounted for the remainder.
Profits made a similar contribution to inflation in the U.K. during the second half of 2022, but rising wages were the dominant factor in the U.S. that year. (…)
In a speech earlier this week, ECB President Christine Lagarde said rising profits played a key role in the surge in inflation as businesses took advantage of the jump in energy costs. (…)
According to the ECB, the profits pressure on prices eased during the first three months of this year, although some businesses continue to report higher margins. French automaker Renault on Thursday raised its profit outlook for the year, citing an increase in its operating margins. (…)