This week, many investors have undoubtedly scratched their heads at the strength of some of the economic data. The most surprising of these were the Philadelphia Fed Business Outlook (Philly Fed) survey and Housing Starts for January. Both of these were absolute blowouts, as in: so many standard deviations to the right of the mean estimate as to be almost impossible.
That last sentence is a nerdy way of saying they seemed too good to be true. However, I have no reason to suspect they weren’t.
For instance, the Philly Fed number came in at 44.3. I understand if that might be meaningless to you. However, the reading was (16.4) in December, and the Bloomberg survey guesstimate for this month was (5.0). Since the standard deviation of all responses was 4.59, the actual number was almost 11 “sigmas” from the median.
Translation: A statistician might say such a report would be highly unusual.
As for the Housing Starts number, let’s just say December’s 1,499,000 (annualized) observation was easily the highest since February 2024, easily. Further, it was almost 6 standard deviations from the mean, making it also, shall we say, a little unusual.
If the presumed “best and brightest” in predicting this stuff are that far off the mark, can you blame the average American for being a little dubious about their good fortune? It is almost like going to a Little League concession stand and getting a steakhouse-quality filet mignon for the price of a boiled hot dog.
Didn’t expect it. Can’t believe it. Will happily take it. Won’t plan on it happening again.
With that said, also this week, I made a public presentation on the economy to a group of folks here in town. As you might suspect, I spent a decent amount of time discussing inflation and the labor markets. Since the Consumer Price Index (CPI) had come out the previous day, I was able to throw out a lot of stats and line items I wouldn’t have ordinarily been able to memorize.
What I found surprising in the report was what I perceived to be a difference in inflation between elastic and inelastic goods and services.
- You can think of elastic as those things which you would like to have.
- Conversely, inelastic would mean those things you have to have.
For instance, an elastic good might be, say, new apparel or televisions. While necessary, those things can ordinarily wait until the next paycheck. By comparison, inelastic goods would be things like food and energy.
Suffice it to say, there was a lot of negative signs in front of a lot of elastic stuff in the survey. This means the prices for those items went down. The inverse is true for the necessities in life.
I suppose you could say, at least in December, the cost of living went up faster than the cost of living it up.
Therein lies the problem, the reason why many Americans feel the economy isn’t as great as the authorities would lead us all to believe. The day-in and day-out things just cost that much more, and it is putting a beating on a lot of household budgets.
During my talk, I mentioned how I had recently purchased some Doritos at a local Winn-Dixie supermarket. As I am trying, and obviously failing, to stay away from food products ending in “os,” I didn’t have any original intentions to buy the things. However, they were BOGO (buy one get one free), and my penny-pinching tendencies clobbered my best judgement.
Without the BOGO, the standard 9.25 oz bag of chips would have been $6.29. That works out to be $0.68/oz. However, in 2020, the standard sized bag was 9.75 oz. and cost an estimated $4.29. Let’s see, $4.29 divided by 9.75 equals $0.44/oz.
Thanks to the smaller bag size and the higher price per bag, the cost for the actual chips has gone up 54.5455% over the last 4+ years.
Annualized, from October 2020 to January 2025, that works out to be around 10.8%.
Hey, when you’re packing school lunches or even one for yourself, that sort of inflation will make you stand up and take notice.
Laughingly, I told the group how my wife and I had basically split a bag, but not quite, during a lunch this past weekend. When she reached in to grab a few chips more, she was surprised to find there weren’t many left. So much so, she asked me; “Just how many have YOU had?” Since I had thought I hadn’t had an unusual amount or that many, I looked in the bag and replied: “Me? How many chips have YOU had?”
We both laughed, although crying might have been a better reaction. Further, we both agreed that Doritos stink because they are now so expensive. However, we all know they are absolutely delicious and don’t [stink].
This is a little more important than you might think, because things like Doritos occupy a space which isn’t completely elastic or inelastic. They are the little, heretofore, inexpensive extras in life which make things that much, well, better. Perhaps you can think of them as the last elastic goods you will give up when push comes to shove.
For some folks, instead of Doritos, it might be ice cream or soft drinks. For others, it could be, I don’t know, donuts or a special coffee. We all have our favorites, and they don’t necessarily have to come from the grocery store.
I tell you this because IF I am having a hard time justifying something as seemingly ordinary as Doritos, I can’t imagine there aren’t millions of other homes, tens of millions, out there really feeling the pinch. Undoubtedly, they gave up many of those little luxuries long ago, if not all of them.
Sure, you can call me a cheapskate if you would like. Admittedly, I am coming across as one. Come on, a bag of chips isn’t going to break me, and I won’t bemoan buying the things this past weekend on my deathbed. But wouldn’t that be kind of funny if I remember writing this paragraph when that time eventually comes? It would serve me right.
Regardless, I would be surprised if not more than a few of those reading this missive haven’t cut out some of those little extras in life over the last several years. If not completely, then perhaps cutting them back or thinking twice before putting them in the shopping cart.
This is a problem in a consumer-driven economy. This being when the average consumer is spending the preponderance, if not entirety, of their monthly budget on inelastic goods and services. It sucks the joy out of life.
Given the disparity between public opinion about the economy and the surprisingly strong data the government keeps feeding us, I would venture to guess a lot of kids are finding fewer chips in their lunches these days.
There you have it. How my lunch this past Saturday is at odds with the economic data that the government released this week. It might seem like a bit of a stretch, but it really isn’t.
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.
John Norris
Chief Economist
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 well 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.