Consumer Spending Continues to Surprise Despite Inflation Headwinds
RedStone Resource
November 21, 2022
Inside This Edition
Inflation Remains High Despite Some Softening in October
The Consumer Price Index for October came in 7.8% higher year-over-year, this was down from an 8.2% inflation rate in September and this reversal of trend changed sentiment in the stock market. But one Wall Street analyst coined it best when they said, “this just means that inflation went from horrible to terrible”.
Rail Cooling Off Period December 4th
There are 12 unions that make up the national rail contract currently being negotiated. Seven of those have approved and ratified the current offer, 3 have rejected it and 2 have yet to vote on it. The three that have voted it down have gone into a cooling off period that ends on December 4th (with some further negotiation that deadline could be extended to December 9th).
Producer Price Index Tells a Story of Freight Price Normalization
The New York Federal Reserve’s Global Supply Chain Pressures Index decelerated further at the end of August (latest available), the index came in at 1.47, which is down from its peak of 4.31 in December of 2021.
ECONOMIC BRIEFING
Consumer Spending Continues to Surprise Despite Inflation Headwinds
Consumer spending accounts for 70% of GDP and although measures of total spending are still not available for Q4, retail spending monthly is more easily tracked. Current retail sales through October were up a surprising 8.3% year-over-year, when stripping out food and fuel, retail alone was up 7.5%. When adjusting for inflation, there is a slightly different story. Inflation adjusted retail sales came in 0.5% higher on spending that was still near historic all-time highs.
Retailers are still warning that consumer spending is being focused on more essential items, and that inflation is indeed hitting consumers hard. Although they appear to be spending roughly the same amount per trip to the store as they have in recent years, the consumer dollar is not purchasing as much as it did a year ago. Therefore, it is depleting retail inventories slower and non-essential items are not being purchased as quickly. Seasonal retail shopping could change purchasing patterns, but consumer households are still under inflationary pressure. Approximately 60% of the US population is now living check-to-check and the rate of consumer credit card use is accelerating. There remains a significant amount of cash still sitting in consumer bank accounts, but it is concentrated in just 40% of US households.
Inflation Remains High Despite Some Softening in October
The Consumer Price Index for October came in 7.8% higher year-over-year, this was down from an 8.2% inflation rate in September and this reversal of trend changed sentiment in the stock market. But one Wall Street analyst coined it best when they said, “this just means that inflation went from horrible to terrible”. At 7.8%, inflation was still the highest since 1982 and it calls into question just how rapidly inflation can come down and whether the Federal Reserve will slow down their rate of interest rate hikes.
The Fed’s target for inflation is 2% +/-. Currently, wage inflation is still 4.5% and wages are not keeping up with overall service and product inflation. Even when one looks at the most conservative measures of inflation, they were still 4.7% higher year-over-year (the Trimmed Mean PCE) and still inflating in the latest readings (heading the wrong direction). At this point in the economic cycle, analysts are taking any positive change in inflationary direction as a positive, despite the long road that they may have in getting back to the Fed’s 2% target rate.
As mentioned in a prior piece, 60% of US households are now living check-to-check. Inflationary pressures risk pushing those households into using credit cards and other debt instruments to make ends meet each month. The Federal Reserve is concerned that if they can not get inflationary pressures easing, a majority of US households could be at risk of “not making it” and are only one major event away from financial hardship (i.e. an unexpected vehicle repair, medical expenses, a home repair, etc.).
TRANSPORTATION BRIEFING
Rail Cooling Off Period December 4th
There are 12 unions that make up the national rail contract currently being negotiated. Seven of those have approved and ratified the current offer, 3 have rejected it and 2 have yet to vote on it. The three that have voted it down have gone into a cooling off period that ends on December 4th (with some further negotiation that deadline could be extended to December 9th).
The cost to the national economy in the event of a rail strike would be approximately $2 billion a day which could be a low-side estimate. With the Mississippi River currently in a hit-or-miss navigational state (due to drought), rail service is as critical to the national economy as it has ever been.
The two largest unions in the contract are voting on the proposed contract and results should be available during the week of Thanksgiving. But regardless of how those votes come out, all 12 unions must ratify the agreement to avoid a work stoppage. Much will happen between now and December 4th, and much is riding on the negotiations between now and then. The American Chemistry Council warned that a strike could cost the economy more than 700,000 jobs and a 1% drop in GDP (a loss of $160 billion).
Producer Price Index Tells a Story of Freight Price Normalization
There has been much debate about the current slowing of freight activity and the resulting drop in spot prices. The debate surrounds the nature of the drop in prices and whether it is a normalization process (coming off historic peaks and returning to a “normal” range) or if it is more akin to recessionary levels.
The latest Producer Price Index (PPI) covering TL, LTL, and Freight Rail released on November 16th showed that this is more likely a normalization trend. Although all three PPIs fell month-over-month, each remained higher year-over-year against very difficult comparisons. All the three modes were also still trending above their ten-year averages, despite rapid deceleration. The truckload PPI was still 3.2% higher than it was last year currently, LTL was 14.4% higher and freight rail prices were 8.7% higher. The PPI is a monthly survey of users of these services, and it includes their perceptions on all prices, including fuel, contract, and spot rates.
