Powell maintains hawkishness … economic data feel off … how healthy is the U.S. consumer for real?
If this was a superhero movie, we’d be at the part where Federal Reserve Chairman Jerome Powell sheds his suit and tie to reveal his true identity…Hawkman! Speaking this morning at the annual central bank symposium in Jackson Hole, Wyoming, Powell let air out of the idea that the Fed was on the verge of a dovish pivot. He pledged that the central bank will “use our tools forcefully” to attack inflation that will likely persist “for some time.” He also spoke directly to the collateral damage of this focus on inflation:
While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
Wall Street has been in celebration mode based on the belief that we’ve beaten inflation, which means the Fed will let off the gas. Powell’s comments throw cold water on that belief.He said that the Fed’s focus is broader than just a month or two of data. Therefore, it will continue pushing toward its long-term 2% goal. Back to Powell:
Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.
In reaction, traders pushed the odds of a 75-basis-point hike in the September Fed meeting to 56% (as I write). This is a reversal from last week, when a 50-basis-point hike was the majority expectation.At this point, Hawkman, er, Powell, is clearly focused on killing inflation. And as we just noted, he’s willing to accept “some pain to households and businesses” to achieve this goal. The questions now are “how much pain?” and “can Powell stop this pain when he wants, or might it get away from him, like a snowball rolling down a hill?” Well, let’s begin by assessing the “state of pain” now. But this is more challenging than one might think.
Reports on the health of the economy aren’t adding up
Yesterday morning, the stock market surged in the wake of news that weekly initial jobless claims dropped.Now, on one hand, this is great. We want full employment. It reflects a healthy economy. MarketWatch even noted that this decline “[signals] that layoffs remain near record lows in a tight labor market even as the U.S. economy slows.” Let’s dig into this… The actual number came in at 243,000. For context, from 1967 through 2022, the average reading for initial jobless claims is 369,000. And the lowest level in more than 50 years came in at 166,000 back in March. Translation – today’s reading is well below average, and not too far above the lowest reading in modern history. Wonderful! Okay, but then what are we to make of the avalanche of companies laying off employees in recent months? Here are just a handful: Microsoft, Apple, Google, Meta, Intel, Lyft, JPMorgan, Netflix, Ford, Wells Fargo, Walmart, Tesla, Nvidia, Snap, Twitter, Uber, Intel, Peloton, PayPal, Wayfair, Re/Max, 7-Eleven, Vimeo, Rivian, Gopuff, Compass, Redfin, Coinbase, Carvana, Bird, DoorDash, Reef, Wells Fargo, Robinhood, Better, Noom, Canopy Growth, Thrasio, Food52, Cameo, Audacy, Zulily… And yet, somehow, despite all of these layoffs, initial jobless claims remain near all-time lows? “Jeff, relax. Layoff levels were unusually low in the first three months of the year as the economy continued to hire after the pandemic. There’s plenty of room for some increase in layoffs without it being the end of the world.” Okay, but below we look at a chart of initial unemployment claims here in 2022. This is from the Federal Reserve. Perhaps this reflects all the layoffs we just noted. But there’s certainly no pronounced spike of any kind (remember, March marked the all-time low).
And shifting perspectives, what about looking forward?A survey from PwC earlier this month polled more than 700 U.S. executives and board members across a range of industries. It found that half of respondents are reducing headcount or plan to, and 52% have implemented hiring freezes.
Meanwhile, the actual unemployment rate remains at its lowest level in 50 years
But there are questions here too.In July, we learned that the U.S. economy added 528,000 jobs – surprising many economists. But consider this counter point from Seeking Alpha:
…Those numbers just don’t add up to what the other data points suggest.For example, the Household survey (another reliable source of employment) of jobs isn’t confirming this data. In fact, it is wildly out of sync. So much so that it is a big head-scratcher. Unlike the Establishment Survey (528K), the July jobs change was a far smaller 179K increase, following the prior month’s 315K drop. The Establishment survey showed a gain of 372k in June and that is a HUGE difference. Considering the fact that there are also “third-party” data tracking the number of new employees laid off as well as new layoff events, that also doesn’t align with recent establishment job stats.
Even still, it turns out there’s a record-high number of Americans working two full time jobs – more than at any other point in time since Bureau of Labor Statistics started collecting this data in 1994.To be clear, this isn’t a full-time job supplemented by a part-time job. This is two full-time jobs. That’s defined by a minimum of a 70-hour workweek. If we soften our analysis to analyze U.S. workers who have a full-time job and only a part-time gig (as opposed to two full-time jobs), what percentage of workers will that be? 44%. If the American consumer was in great shape, would 44% of them be working more than one job? If you’re still on the fence, consider this eye-opener… From earlier this week in Bloomberg:
…About 1 in 6 American homes…have fallen behind on their utility bills.It is, according to the National Energy Assistance Directors Association (Neada), the worst crisis the group has ever documented. Underpinning those numbers is a blistering surge in electricity prices, propelled by the soaring cost of natural gas… Already gut-punched by soaring prices for just about everything, more and more people are facing a choice among food, housing, and keeping the power on. “I expect a tsunami of shutoffs,” says Jean Su, a senior attorney at the Center for Biological Diversity, which tracks utility disconnections across the US.
And what about the refrain of “but consumers are still spending”?
Well, yes, they’re spending – but on lower-priced items while using more and more debt.On the first point, here’s RetailWire from Wednesday:
A new survey finds 76 percent of U.S. consumers saying their family has changed how they buy food with prices on the rise.The survey from NCSolutions, taken in mid-June, found that 43 percent are buying only food essentials, given their inflation as well as recession concerns. To offset higher prices, shoppers are seeking out less expensive brands (45 percent) and loading up the pantry (27 percent) or freezer (26 percent). Sixty percent plan to seek less expensive alternatives when their favorite brands reach a price beyond their budget, 46 percent plan to go without their favorite brands and 43 percent will look for sales to offset the cost.
As to the second point, here’s CNN:
Americans are piling up credit card debt as they struggle to keep up with the high cost of living.US household debt surpassed $16 trillion for the first time ever during the second quarter, the New York Federal Reserve said [at the beginning of August]. Even as borrowing costs surge, the NY Fed said credit card balances increased by $46 billion last quarter. Over the past year, credit card debt has jumped by $100 billion, or 13%, the biggest percentage increase in more than 20 years. Credit cards typically charge high interest rates when balances aren’t fully paid off, making this an expensive form of debt.
Bottom-line: Powell is willing to accept “some pain to households and businesses” but there’s already a lot of pain out there. How much more pain needs to happen?
How do we reconcile the discrepancies between rosy and gloomy data?
I don’t have the answer. The closest I can come is the idea that when you see conflicting data, it means we’re in the midst of a change in direction in whatever is being examined.In any case, as you look at the growing contradictions between record-highs in Americans working two jobs, a “crisis” in paying utility bills, and record-high consumer debt levels…all set against a backdrop of the lowest unemployment readings in modern history and the narrative of “we’re going to avoid a recession,” does it feel right to you? Whether it does or doesn’t, the Fed is willing to allow more pain for consumers and businesses. Let’s hope they know when, and how, to stop.
Have a good evening,