A simple bag of potato chips
Moderating core inflation doesn't ease consumer concerns about everyday prices.
This week I traveled to Norfolk, Va., accompanied by beloved D.C.-based daughter, to deliver two of my favorite presentations, one about me and the other about us. Lunch on day one was meager, but delicious. Just a bag of potato chips. A simple bag of chips is a marvel of engineering: the bag alone typically uses three kinds of hydrocarbon-based petrochemicals. Nitrogen keeps the bag inflated for longer shelf life, and natural gas and water are indispensable in the production process. I spoke to a group of women bankers about my personal journey—Lean in, Yinzer girl’s style. It’s a laugh riot and a tearjerker, complete with a picture of the shack I grew up in. Simple life, simple pleasures, a wonderful childhood. On day two, I spoke to the Financial Planning Association of Norfolk, and our host was a fellow baby boomer who grew up in my small PA hometown! The Revenge of the Boomers is a guaranteed hit, if you are a fellow boomer, that is. But enough about me. BTW, in the past year, a typical 1.5-oz. bag of chips has shot up to 61 cents, 50% above its 2014-2020 average and almost double the increase in average earnings over the same period. An entirely discretionary food item, chips are excluded by central bankers in their ruminations on so-called core inflation. But it’s a good bet their cost is discussed at kitchen tables. Gas, too (more below). Eroding purchasing power continues to be a drag on consumer sentiment.
Today’s UAW strike is the smallest of three developments Goldman Sachs thinks may curb growth in Q4. It expects the resumption of student loan payments to trim half a percentage from quarterly annualized GDP, a government shutdown at month’s end to pare another two-tenths of a point each week it lasts and the auto strike to cut annualized growth by 0.05-0.10 points each week it lasts, only if all three companies are shut down. This reflects the industry and union’s diminished impact on the broader economy, as motor vehicle production now represents about 2.8% of GDP, about half of that from unionized sites, vs. almost 5% in the early 1970s. Still, Wolfe Research thinks the “no recession” consensus has it wrong and is misreading the Fed’s tightening lag. Unlike the early ’70s through early ’00s, when the impact started to hit six to 12 months out, consumers over the past 20 years haven’t started to feel the pinch from rate hikes until 18 to 24 months. About now. Consumer spending has started to slow, and the manufacturing PMI is contracting. On the other hand, retail sales remain solid (more below), depleted inventories are due for a rebuild (Empire’s gauge jumped sharply this month), and household balance sheets are in as healthy a place as they’ve ever been. Record-high net worth. Household debt-to-income ratios at multi-decade lows. Excess Covid savings still declining; Renaissance Macro estimates that will last until mid-’24. Excess savings, excess schmavings. When you’re “loaded,’’ Renaissance sees few reasons to save. Besides, the consumer is unlikely to suddenly fall off the cliff unless the job market does. No sign of that. Job growth has decelerated but household employment is rising, as are new business formations. Layoffs are at pre-pandemic lows. Not really a worry here.
It's still September, so … the market’s remains in a seasonally challenging period. Then again, Leuthold Group recalls the words of Mark Twain: “[October] is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” S&P’s range-bound pattern remains intact but momentum and breadth have worsened in recent weeks. Despite Tech’s strength over the rolling 1-month period (Tech was the second-best performing sector behind Energy over the last month), other sectors have not been acting well, with Financials experiencing pronounced weakness within the regional bank space. Still, if Tech can hold up and maintain relative uptrends, Fundstrat thinks it’s likely any market sell-off will prove short-lived, particularly if action broadens to include Health Care and Financials, which combined account for more than a quarter of the S&P. Deutsche Bank wonders what does it say about the economy that the equal-weighted S&P has been flat since April 2021, even as consumer prices have risen 16.7% the same time. Maybe it says inflation worries were a drag, as were earnings, which bottomed in Q2. Both are improving now. Oh, don’t count the consumer out prematurely. He’s quite willing to pay up for his potato chips.
Positives
- Don’t count the consumer out prematurely August retail sales easily beat estimates, rising 0.6% m/m after July’s 0.7% burst. Higher gas prices were a big reason as sales ex-gas rose only 0.2%, though the gains were broad (clothing, electronics, restaurants and general merchandise) and were up a solid 3.3% annualized over the last three months.
- None and done? Possibly, as August reports showed core inflation trending toward the Fed’s target. Should get some clarity next week in the dot plot and projections. While headline CPI and PPI came in a little higher than expected, it was all due to energy, where prices shot up at a 92% annual rate. Core CPI has grown at a 2.4% annual rate over the last three months. And owners’ equivalent rent could soon turn negative as rents keep declining on an apartment boom. PPI services prices also moderated.
- On the rise down under Record migration is fueling a boom in Australia, with its 26.5 million population projected to grow 1.2% annually through 2050, vs. a slowdown and some outright declines in other advanced economies over the same period. Fast migration also is reversing Aussies’ aging. By 2050, the median age of Australians is expected to be 41.8 years, roughly 5 years younger than the OECD average.
Negatives
- The downturn in wage inflation is far from certain UPS drivers’ ginormous pay increases, a UAW strike that almost certainly will end with a significant boost to autoworkers’ pay and plans by NFIB survey respondents to raise compensation over the next three months suggest wages are more likely to climb than fall in coming months. All this helps boost the wealth effect, which supports the economy. But it also means inflation and rates are likely to stay higher for longer.
- East beats (up) West Europe’s woes arguably start in large part on its dependence on a sputtering China. Piper Sandler views Japan’s past as China’s prologue, with a lost decade likely to follow China’s early century boom. Causes span from the unwinding of bubbles in capex/investment and debt, bleak demographics and weakening employment to a propensity among households to save. Even if Beijing unleashes more stimulus, Piper doubts it will be enough over the intermediate to long term to change the narrative.
- Voters don’t like high gasoline prices Consumption may be far less sensitive to gas prices than in the past—gasoline & other energy goods as a % of total PCE has fallen to 3% vs. 12% in 1959. But gas prices play a big psychological role in consumers’ lives and are highly correlated with favorability ratings. Their continuing run-up has coincided with a big drop in President Biden’s already low approval ratings (more below).
What else
Better batteries not included … yet Tesla cars can drive for 300-400 miles on a charge, but even better batteries are in the works. One Chinese battery manufacturer has built a “semi-solid-state” battery that provides an SUV with 578-miles of range on one charge; were it a lighter, more aerodynamic passenger car, it could reach 621 miles. Most low-cost EVs have a range closer to 100-200 miles.
“Smart” toilets can solve this dilemma Bank of America shares that 40% of Gen Zs consider Wi-Fi to be more important than bathrooms.
Maybe it’s uncomfortable to watch President Biden often responds to questions about his vitality with “watch me.” The direction of the polls suggests voters are becoming increasingly concerned with what they see. In the latest CNN poll, only 28% said he inspires confidence. And while his 35% favorable rating ties Trump, his unfavorable rating has moved above the former president’s to an all-time high of 58%.