A Personal Note To My Readers

Before we dive into this week’s economic news, I wanted to take a few moments to share some personal news with you, my loyal clients and readers. Several years ago, I was diagnosed with prostate cancer and began treatments that were successful in keeping the cancer in check.

But human cancer cells can be very resilient – and crafty. The cancer has returned, remaining virtually undetectable until recently. I’ve had a tough go of it in recent weeks, but I’m home now and resting comfortably.

I’m taking some time off to recover and get my legs back under me. Until then, I’m working with my staff to select the topics and write the economic news you have come to enjoy in my Forecasts & Trends E-Letter. Every week they have been instrumental in helping me choose topics and think through the analysis I write.

Thank you for your prayers and good wishes for me and my family.

 

FORECASTS & TRENDS E-LETTER
by Henry Rohlfs
October 31, 2023

IN THIS ISSUE:

1. U.S. Economy Surges Before Fed Meeting

2. Will The Spending Spree Continue?

3. FOMC To Meet – No Change Expected

U.S. Economy Surges Before Fed Meeting

The U.S. economy continues to stun watchers, growing faster than expected in the 3Q at a seasonally adjusted rate of 4.9% annualized, the Commerce Department reported Thursday. Many economists had predicted a 4.7% acceleration in GDP for the same July-through-September period (seasonally adjusted). This dwarfs the 2.1% increase in real GDP reported for the second quarter.

The sharp rise was due to increases in consumer spending, higher inventories, exports, residential investment and government spending.

Consumer spending, as measured by personal consumption expenditures, increased 4% for the quarter after rising just 0.8% in the 2Q, and was responsible for 2.7 percentage points of the total GDP increase, split fairly evenly between goods and services. Inventories contributed 1.3 percentage points. Gross private domestic investment surged 8.4% and government spending and investment jumped 4.6%.

“This report confirmed what we already knew: The consumer went on a shopping spree in the third quarter,” said Michael Arone, chief investment strategist at State Street Global Advisors. “I don’t think anything in this report changes the outlook for monetary policy. That’s why I don’t think you’re seeing an overreaction from markets.”

Will The Spending Spree Continue?

We continue to believe that few signs of recession are on the horizon. Although wage growth appears to be slowing and rising childcare costs further stretch household budgets impacted by high inflation, Bank of America sees consumer spending holding steady. They also believe the unemployment rate will remain at historically low levels of around 3.8%.

But I’m apt to believe reports that consumer spending should slow somewhat through the rest of this year. Regions Financial Corporation reports a decline in real disposable (after-tax) personal income by 0.1%, marking the fourth consecutive monthly decline despite growth in labor earnings that have outpaced inflation.

Of note though is a report by Forrester Research that the increase in consumer spending had slowed since last year, but “not because people are buying less but because they are paying less for what they buy.”

Then there’s the fact that just about anyone who wants to work can find a job and the unemployment rate remains stubbornly low. Housing costs are an ongoing challenge, with experts predicting high prices. Mortgage rates will continue to frustrate homebuyers through the end of the year. But that same trend means millions of households feel flush with home equity and thus more confident about discretionary spending.

All this good news will be tempered for retailers by pressure on prices and, thus, margins.

In a survey conducted by retail consulting firm First Insight, consumers said by a large margin that the most significant influence on their shopping choices will be prices and promotional deals.

Explicitly asked what type of store they prefer for holiday shopping, 58% said big box retailers like Target and Walmart. As to what they plan to buy for the holidays, 70% mentioned gift cards. Look out Amazon – consumers may be shifting from online to in-store purchasing as they look for the best deals.

FOMC To Meet – No Change Expected

The Fed Open Market Committee will almost surely leave the Fed funds rate unchanged at this week’s meeting at the current range of 5.25% to 5.5%. The CME Group’s CME FedWatch Tool shows a 98.2% probability that target rates will remain unchanged when Fed Chair Jerome Powell holds his press conference after the close of the next FOMC meeting on November 1. It also predicts only a 1-in-4 chance that rates will rise at the Fed’s final meeting of the year in December.

This could mean the funds rate has peaked and reached the “terminal rate” with interest rates beginning to fall in 2024. By contrast, the terminal rate during the bout of high inflation that started in the 1970s was 20% — and produced one of the century’s deepest recessions. Fed officials who want to avoid a repeat are hoping that holding rates steady at levels well above their eventual target of around 2.5% over the next few years will do the trick.

However, market participants may still find themselves rattled on Wednesday when the Treasury Department unveils its latest quarterly refunding needs. Last quarter’s announcement shook the markets as investors realized the expansive borrowing need of the Federal government. This may help to buoy Treasury yields over money supply concerns.

All the best,

Henry Rohlfs

 

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