Unless you haven’t bought anything in the last 12 months or so, you know just about everything is a little more expensive. Further, American consumers are finding things a little harder to find, everyday stuff like laundry detergent and other household items. Shoot, pundits on the television were giving tips last week on having a turkey-free Thanksgiving, as the birds were in short supply and had spiked in price.
What in the world is happening here, and how much longer can it continue? Great questions. The answer, and there is just one, is: until we quit demanding stuff at the feverish pace we have been.
To be sure, there have been supply chain issues and distribution bottlenecks. I mean, who hasn’t read about container ships sitting offshore of Long Beach and the nationwide shortage of truckers? That sort of thing. While there are some nuanced reasons why this is, we wouldn’t be discussing such things if the American consumer hadn’t been spending money like a drunken sailor on shore leave.
According to the 3rd Quarter 2021 GDP report, “real,” or inflation-adjusted, personal consumption expenditures (PCE) have grown 7.0% over the last 4 quarters, my calculations. Breaking it down a little more, our demand for non-durable goods has surged 7.6% and 9.7% for durable goods ex automobiles. In nominal terms, cash out of our pocket in today’s dollars, overall demand has grown 11.6%. Our appetite for non-durables goods is up 12.7%, and for durable goods it has soared 13.3%.
These types of numbers aren’t the norm, trust me.
However, you’ve undoubtedly seen this in your own situation and whenever you go to the store. Am I right? Regardless of whatever the headlines might say about Black Friday or Cyber Monday or what have you, have you been to a Sam’s Club or a Costco recently? The grocery store? Have you run errands on a Saturday morning recently? Have you found yourself wondering from where in the [world] all these people came? And they all move so slowly, don’t they?
Admittedly, that makes me sound like a curmudgeon and the misanthrope of the year; however, I strongly suspect many people nodded their head in agreement with that last paragraph.
Now, the most oft-given reason for this surge in consumer spending is post-pandemic “pent up” demand. Perhaps this is the case, but does it matter when it comes to inflation? Does the relationship between supply and demand suddenly change because of COVID-19 and its numerous variants? Of course not. Further, but for the collapse in spending in March and April of last year, the US consumer has been steadily increasing its purchases.
To that end, for the 3 months ending in October, nominal PCE grew at a 3.07% rate. While that might not sound like much, it annualizes out to a 12.9% rate. When adjusted for inflation, it still comes out to a robust 6.7% annualized growth rate. To put these numbers into perspective, they are about 2-3x the historical average.
Make no bones about it, the US consumer has been on a binge for a variety of reasons, and, from the data we currently have at our disposal, it doesn’t seem to be slowing down in a meaningful way. Shoot, the holidays are just around the corner, and, anecdotally, people have been spending more than usual due to a sort of FOMO, fear of missing out, because they are worried there won’t be enough stuff to buy come the week before Christmas.
In a lot of ways, complaining about how much everything costs while you are loading up your shopping basket is kind of like complaining how tight your clothes have become while enjoying a Sea Salt Toffee Fudge Blizzard Treat at Dairy Queen. Just one look at one of those things is enough for your pancreas to write a will.
To be sure, the devil is in the details here; I get that. Yes, the US is producing less oil than it was in 2019. There IS a shortage of microprocessors in the auto industry for a variety of reasons. No argument, our left coast ports are some of the least efficient in the world. As we all know, finding sober, competent people is a difficult task in many sectors of the economy. The list goes on and on.
However, where the rubber meets the road, when the dust settles, when the smoke clears, and when the cows come home, US consumer demand has been, and continues to be, off the charts. For that, you can blame a strong labor market, soaring stock and housing prices, and incredibly accommodative fiscal and monetary policies. Add it all up, and there is a ton of money, bushels of it, chasing a level of supply that simply hasn’t been able to catch up with demand. Voila.
So, when does this all reach a crescendo? A conclusion? When do the goods times, and they are good times, end? Because end they must, right?
The best answer I can give you is: when Washington and the Federal Reserve quits flooding the economy with cash. As for Washington, let’s just say we can kick that can down the road.
As for the Federal Reserve, despite it tapering its monthly purchases and ceasing them altogether by the end of 2Q 2022, no one is predicting the Fed will reverse its recent quantitative easing and drain reserves from the system any time soon. Further, the overnight lending target is currently close to 6% less than the official YOY Consumer Price Index. Essentially, the Fed has a lot of rate hikes to do before monetary policy starts being “restrictive” in real terms.
When you put everything together, the surge in cash will slow, but not stop. As such, consumer demand will also slow, but also not stop. Therefore, inflation will start to revert back to more normal levels as next year progresses. As all of this happens, the ports will become unclogged, and the headlines won’t mention anything about a nationwide shortage of truckers.
In essence, expect everything to cool down a bit in 2022. As for the exact timing, well, that depends on Jay Powell and the rest of the folks on the FOMC. However, as I type, the futures market is currently predicting by the end of June.
In the meantime, go ahead and go nuts this holiday shopping season. The Fed’s punch bowl is still on the table, and the Congress is still dreaming up ways to spend money it doesn’t have. Just understand one thing when you are shopping: when demand exceeds supply, prices go up. Yes, it really is that simple.
I hope this newsletter finds you and your family well, and may your blessings outweigh your sorrows not only on this day but on every day. Also, please remember to listen to our Trading Perspectives podcast. https://tradingperspectives.libsyn.com/
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.