Powell doesn’t like goldilocks

Goldilocks may have an indigestion attack.

At first glance, the Commerce Department’s October personal income and spending report looks like what some people have called Goldilocks data. Consumer spending was higher than expected; and inflation, especially core inflation, has been weaker than expected. In other words, it was a “fair” ratio, neither too hot nor too cold.

First among those that sprung from the report was Biden’s White House.

“Today we learned that inflation moderated and incomes rose in October, following yesterday’s news that our economy grew at an even faster pace from July to September than we expected. thought so before. We are seeing the first signs that we are making progress in tackling inflation, even as we transition to smoother and more stable economic growth. This is good news for the American people and further proof that my economic plan is working,” the White House said in a statement Thursday.

Unfortunately, a bit of scrutiny will send Goldilocks out the window and flee into the woods. We already knew that consumer spending was strong in October due to the explosion in retail sales. It has been dutifully described as a sign of a resilient consumer boldly defying high prices, rising interest rates and an impending recession. We warned that the reality was probably a little less cheerful: consumers were likely doing a good deal of their shopping early in light of ongoing month-to-month price increases.

Spending rose 0.8% for the month while the Personal Consumption Expenditure (PCE) price index rose 0.3%. Core PCE inflation rose just 0.2%. This implies that after adjusting for inflation, spending increased by a solid 0.5%. Perhaps the best evidence that anticipated holiday shopping played a significant role here is that real spending on durable goods rose 2.7%, above the nominal 2.1% rise. Indeed, the prices of durable goods fell 0.6%, which is explained by the early rebates of companies. In other words, Black Friday started again in October this year.

Analysts who ignore the role of holiday sales in containing prices in the fourth quarter will likely see a disinflationary trend developing in the economy. The Federal Reserve — or at least some of its more dovish officials — might be inclined to make the same mistake. But those figures seem to indicate that retailers have been shedding overstocked inventory, with retailer inventories falling 0.2% in October and inventories’ 0.4% rise in September being revised to a 0.1% drop. . This will likely result in higher price metrics once holiday and post-holiday discounts are relaxed in the first quarter of next year.

The October data probably doesn’t look “perfect” for Federal Reserve Chairman Jerome Powell. Although the stock market seems thrilled by every sign of falling inflation, Powell ignored month-to-month data changes in his remarks yesterday at the Brookings Institution. He knows that we have already seen inflation dips which were then followed by surges. This spring, we saw PCE inflation drop from 1% in March to 0.2% in April, a drop greeted by celebrations that inflation had peaked and the crisis was over. A month later, the PCE price index rose 0.6% and rose again 1% in June. Similarly, inflation fell to 0.1% in August and then rose to 0.3% in September, where it has remained steady ever since.

Powell is likely to view personal spending news very differently. Rising nominal and real spending means that the Federal Reserve’s attempt to cool demand is still not yielding results. In his speech yesterday, Powell was quite explicit about his view that aggregate demand must fall to contain inflation: “We are tightening the policy stance to slow aggregate demand growth. The slowdown in demand growth should allow supply to catch up with demand and restore the balance which will result in stable prices over time. Restoring this balance will likely require an extended period of below-trend growth. »

Needless to say, spending growth of 0.8% month-over-month is not consistent with below-trend growth.

Similarly, nominal wage growth of 0.5% and real growth of 0.2% could provide relief to workers who have seen their cost of living rise faster than their incomes, but it’s probably too hot for a Fed. focus on work balance. market.

Stronger growth now most likely means a higher terminal rate for the Fed and a delayed but deeper recession. Goldilocks will probably regret eating too much porridge over the holidays.


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