The decline in UI is affecting discretionary spending: Looking at the data by sector, the UI recipients cut back the most on clothing and home improvement spending and the least on gas and restaurants/bars (Chart 1). This compares to small increases in the growth rate of spending for the non-ACH UI recipient across these categories with the exception of home improvement.
On the fiscal side, the expiration without replacement of extended unemployment benefits may already be hurting economic and market fundamentals. The importance of this program to the recovery can’t be overstated. Quoting our US economists, “absent government support disposable income would have fallen the most in history; with that support it has risen the most in history.
As markets continue their steady climb, two key engines of the rally may be running out of steam. The first is fiscal support – the critical but expired unemployment extension is unlikely to be restored soon. The second is the Fed, which stopped growing its balance sheet in June, deemed yield curve control a no-go last week, and faces new chances to step off the gas in Jackson Hole (27-Aug) and the Sep FOMC. Even if the Fed stands ready to act again, it will likely be in response to a market shock, which also looks needed to break the fiscal logjam.
…perversely, a shock looks increasingly necessary to force policy measures allowing the market to sustain these levels to begin with.
That’s fakeflation fo ya.