The Atlanta Fed’s GDPNow measure has screeched to a halt:
This measure is a very good leading indicator for US growth so pay attention to it. TSLombard has more:
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The anticipated Q3 slowdown was very much in evidence in the August personal income data–they indicate 1% real consumption growth Q/Q (SAAR) in Q3 and 3.5% for real GDP. GDP will get to above trend growth in Q3 from how the mix of investment spending, inventory, and net exports adds up. This combination was also key to our original expectation of 6% Q/Q growth for real GDP in Q3. What changed is that consumption growth slowed even faster than expected. A slowdown in consumer spending was inevitable coming on the heels of an incredible spring quarter of 12% Q/Q SAAR growth in real consumption and an 11.4% increase in Q1. These increases were rooted in reopening and stimulus payments, and stimulus from both is now past tense. Still,the continued high spending levels andexpansion in employment and wages, means that this Q/Q slowdown is largely a statistical event, and growth rates in Q4 will return to those that are more typical of an economy still recovering from a recession. This is not stagflation. The monetary question is whether current policy is too easy for the growth rates soon to be in evidence. The FOMC seems to think so–they announce taper in November (right in line with our forecast from last year) and are now sending signals about raising the funds rate twice(!) in 2022. All this ties to an inflation outlook the Fed now sees a less benign, but broad brush strokes applied to the inflation data miss key details that suggests a more aggressive Fed policy is not necessarily the right tack.
Meanwhile, Biden’s negotiations with the House on his legislative agenda favours the “progressives” and cuts the party’s middle adrift–a misread of the 2020 election results. The tenor from Congress on what is workable for these fiscal initiatives, including scaling back his $3.5trn social package to $2trn, should be evidence enough that MMT rules nothing at all. The rapid return of mobility and the surge in home buying gave the economy its lift from consumers in the first half–but both uptrends have since faded. Perhaps most concerning is that social engagement, as indicated by travel (Chart 1) but similarly evident is many other sources of data including office occupancy, hit a ceiling in the spring. Many blame the“delta” variant as the reason, and we have no doubt it plays a role, but one must also consider a permanent change in work and travel routines. The current quarter (Q4) should better indicate whether this is ceiling is permeable or permanent. Covid also changed where people want to live. With millennial homeownership lagging historic demographic trends, the pandemic consequently let loose large underlying demand, but the surge of home buying has ended (Chart 2). This was always going to slow, but home buying should stay at higher levels in this cycle relative to the one just ended. Further, even with this surge, household exposure to mortgage debt remains back at1980s levels (Chart 3)–nor has it begun to shift households favouring equities over real estate(Chart 4)
The slowdown in Q3 spending is evident in the July and August data on consumer spending, and even the pace of wage growth has slowed. This reflects the “hand-off” we long pointed out, from a reopening economy to an economy growing its way back to full employment. The biggest drop in spending is for durables (Chart 5), not surprising with the tail-off in the pace of home buying. Even with the drop in real spending on durables, the level is still 18% above December 2019 levels (seasonally adjusted). In contrast, real spending on services excluding housing services, is 3% below December 2019 levels while spending on nondurables (excluding energy) is near 14% above. The comparison of July-August to Q2 spending implies about a 1%increase in real spending in Q3 over Q2. Our optimism that spending continues to grow, albeit slower than the reopening pace, is that there is another leg of reopening to come as Delta fears fade, but, more critical, employment and wages disbursements continue to grow and there is no reason to expect these trends to reverse. Compared to the 2018-19 trendline for wage and salary disbursements, a product of wage growth and employment increases, disbursements have recovered a long way but the pace of advance is still behind the immediate pre-Covid trend–no surprise given that employment has not yet fully recovered. Wage and salary disbursements are up near 9% from January 2018 levels, but they would be up a little over 10% if the immediate pre-Covidtrend pace had continued (Chart 6).
This is the direction in which the economy is turning, so monetary policy must be calibrated to the economy to come rather than the inflationary surge created by reopening. There is concern, recently expressed by Chair Powell, that lagging issues regarding the supply chain will keep prices and inflation high. Fair enough, but the inflation we are really experiencing, the price increases more correctly, is concentrated in durable goods (Chart 7)–where deflation in the past decades has been what has kept overall inflation down. This roots back to the import penetration of lower priced consumer goods and sustained dollar strength supporting that trend. In August, core inflation was up4% m/m SAAR compared to 7.7% in April. Service inflation was up 3.5%compared to 5.3% in April and durables inflation was down to 12% versus 23% in April. From 2012 to 2019, the median monthly percent change for durables was-0.13% compared to 0.20% for services and 0.13% for core. Current price changes are much more a reflection of a mix-shift in spending and the problems Covid has created in getting goods to market. None of this relates back to the level of interest rates.
The question for investors is, is this fading growth both in the US and China (then Europe) consistent with high asset prices hanging on excellent proifits growth?
The answer is no.