by Jason Norris, CFA
Executive Vice President
Rolling Stone magazine released its top 500 songs of all time this week. While some may argue that the top ten is missing several classics, they did rank Aretha Franklin’s “Respect” as the best of all time. We feel this song is also timely as we believe the U.S. consumer deserves “a little respect”. Consumer spending comprises approximately 70% of U.S. GDP and is the engine that powers our economy.
Retail sales data released this week showed continued heightened spending levels, as seen in the chart below. Meanwhile, the consumer saving rate is still above the historical average and employer demand to fill job openings with higher wages is likely to support the consumer going forward.
Source: Federal Reserve
However, we did see a shift in the composition of what people are buying. Online and grocery spending accelerated, while restaurant spending remained weak. This divergence highlights the Delta variant effect on consumption patterns. Unfortunately, the Delta variant is also having an effect on hiring in the restaurant and leisure space, with approximately 2 million fewer people working in this industry than in February 2020.
Comfortably Numb
Coming in at 179, is the underrated Pink Floyd classic, “Comfortably Numb” from the album The Wall. This phrase seems to fit the reaction to recent inflation data from bond investors. August’s consumer price index (CPI) reading was 5.3% year-over-year, slightly below estimates. Bond investors continue to view these current levels as short-term as reflected in the chart below.
Source: Bloomberg
The chart reflects inflation expectations for the next five years, and, as highlighted, investors are still expecting inflation to be under 2.2%. We believe these elevated CPI readings are short-term due to the spikes we have seen in a small part of the economy due to the reopening this summer. There are some wildcards such as wages and housing, that may lead to inflation being somewhat elevated for longer. However, for now, we agree with bond investors that inflation will be under 3% by the end of 2022.
Bad Reputation
There has been some recent commentary in the media regarding the comeback of “stagflation” and we believe these fears are misplaced. What talking heads are claiming when they mention stagflation is that inflation is higher, while economic growth is decelerating. While this may be happening, it is unrelated to stagflation. Classical economists define stagflation as “persistent inflation combined with stagnant consumer demand and relatively high unemployment.”1 We are seeing the opposite of this definition. Inflation is expected to be transitory, consumer demand is high and unemployment is close to 5%. Attempting to compare today with the stagflation of four decades ago is just giving this economic environment a bad reputation.
Takeaways for the Week
The Delta variant has altered consumer behavior, but spending remains strong
Inflation expectations signaled lower rates for longer, with mild elevated levels in the short-term
Stocks continue to tread water finishing slightly lower on the week as economic data still reflects a strong economy
1. “Stagflation,” Investopedia, https://www.investopedia.com/terms/s/stagflation.asp.