This year, the primary topics of discussion have been inflation and the Federal Reserve. While the economy was noticeably weaker, it wasn’t hitting red panic buttons outside of a few industries. After all, companies were creating jobs and complaining about not finding enough workers. Airplanes were full and it was hard to get reservations at a nice restaurant. All of that, and more.
Essentially, if THIS was the recession that had everyone wringing their hands and gnashing their teeth, well, it was one of the darnedest recessions in our nation’s economic history. So much so, on more than one occasion, I said things seemed to be “different” this time. After all, inflation was at a 40-year high. The Fed was jacking up the overnight rate pretty aggressively. The U.S. Treasury yield curve inverted, which isn’t a good sign. The growth in the money supply slowed to a trickle.
Yet things continued to move forward. That is until they didn’t.
I won’t mince words or try to put lipstick on a pig. This week’s economic releases were, in aggregate, not good at all. Yesterday’s data was enough to make me say, “hmm, that’s unfortunate.” Indeed. As evidenced by the Empire Manufacturing and Philadelphia Fed Business Outlook surveys, it appears U.S. manufacturing is drying up in December. We are talking about rotten negative observations of (11.2) and (13.8), respectively.
While that might be Greek to many, let’s just say a negative sign in front of an economic data point generally isn’t a good thing. And those two numbers won’t make the headlines. Nope.
You see, Retail Sales for the month of November fell 0.6%, with a lot of weakness across the board. Even more, this series has shrunk three of the last five months. Make no bones about it, unless something miraculous happens in December, the U.S. consumer is limping to the finish line in 2022. Obviously, that isn’t a good thing when “personal consumption expenditures” make up roughly 68% of the Gross Domestic Product (GDP) equation.
Finally, as if those black eyes weren’t enough, Industrial Production fell for the fifth time in seven months (0.22%).
Of course, you could counter my Nervous Nelly worries with: “but, Norris, the Consumer Price Index (CPI) came in less than expected, and that is a good thing. Also, Initial Jobless Claims were a miserly 211K, which suggest the labor markets are still strong. This isn’t Armageddon, so chill out, Ace.” Fair enough.
I suppose what has me a little concerned is the Federal Reserve, as usual. The Federal Open Market Committee (FOMC) met this week and raised the target overnight lending rate another 0.50%. As a result, Prime increased to 7.50%, and revolving variable debt got that much more expensive. To be sure, the CPI is still running a little hot at 7.1% for the last 12 months. Further, the Unemployment Rate remains comfortably under 4.0%. By these measures, the Fed has plenty of room to make money even more expensive in the U.S. economy.
That is what has me worried.
Consider these comments by Chairman Jay Powell in his press conference yesterday:
“The U.S. economy has slowed significantly from last year’s rapid pace. Although real GDP rose at a pace of 2.9% last quarter, it is roughly unchanged through the first three quarters of this year. Recent indicators point to modest growth of spending and production this quarter. Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has weakened significantly, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment. As shown in our Summary of Economic Projections, the median projection for real GDP growth stands at just 0.5 percent this year and next, well below the median estimate of the longer-run normal growth rate…
We are taking forceful steps to moderate demand so that it comes into better alignment with supply. Our overarching focus is using our tools to bring inflation back down to our 2% goal and to keep longer-term inflation expectations well anchored. Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done.”
At first blush, you could read those paragraphs as the Fed has to do what the Fed has to do. That is just how it is. However, something just doesn’t feel right, does it? “We are taking forceful steps to moderate demand.” Hmm. “Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor market conditions.” Again, hmm. Pretty much the entire first paragraph spells out, in no uncertain terms, a much weaker economy. One more time, can I get a hmm?
The reason this bothers me is it seems somewhat arbitrary. By goodness, the Fed is going to use its tools to bring inflation back down to our 2% goal. Okay, why 2%? Why does that matter? Why not 3% or 4%? Why worry about the absolute level of inflation to a degree you are willing to wreck the economy when it is relative inflation that matters.
Bear with me just a little longer. There isn’t much more, I promise.
Which would you rather have? Inflation at 3% when your paycheck is growing at 5% OR inflation at 2% when wages are rising 3%? Heck, the CPI can be 5%, and if I am making 8% more than I was, so what? As such, the Fed’s 2% target seems to be, shall we say, a little bureaucratic? Perhaps a goal in an academic vacuum? Where there are no such things as monthly budgets and paychecks and the like? Where workers and businesses are so many numbers on a spreadsheet?
Admittedly, I am being very cynical here. However, collapsing economic activity will take care of inflation far faster than another 50 to 100 basis points, or more, from the Fed. While we all understand that, do the members of the FOMC? Shoot, will they even read their own economic reports or are they too committed to their processes and their theories? Data be darned, and all of that. After this week, I am not as comfortable about these questions as I was.
To be sure, one month’s bad economic data doesn’t a recession make. Nope. Further, I am not sure if the red panic buttons are flashing across the board just yet. However, this week’s economic data was certainly weak enough for me to take a little notice and go hmm. After all, it released three really bad reports on manufacturing activity in the country, and didn’t seem much to care.
At least not to my way of thinking.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist & Story Teller
Please note, 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, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.