Unveiling the Economic Puzzle

Estimated reading time: 4 minutes

Unlocking Labor Market Insights

Perhaps the most supportive economic data is that of the labor market. Things are cooling, but there’s been no big breakdown. The labor market matters for two very big reasons: 1) consumers will keep spending as long as they’re not worried about their jobs, and 2) it’s the second part of the Fed’s dual mandate.

Part of the problem that began in 2021 was an overheating labor market with too many job openings and not enough employees to fill them. The ratio of job openings to unemployed workers reached a high of 2.0 in March 2022. That ratio has come down to 1.3, which takes some of the pressure off of wage costs for companies yet keeps the job market attractive for available workers. 

There are positives, to be sure. Momentum in the stock market and a broadening of the rally into year-end is all the confirmation many need to declare a soft landing almost a lock. 

A Bet on a Soft Landing is a Bet on the Consumer

Consumer Powerhouse

There is no such thing as a strong U.S. economy without the U.S. consumer. Therefore, if we are to avert recession and muscle through a slowdown without stopping, the consumer must hold up. Personal disposable income is a critical component that drives the consumer’s ability to spend, and it’s up 6.2% this year, outpacing the latest CPI print at 3.1%. Moreover, average gasoline prices are down from $4.36/gal in September to $3.68/gal as of December 12.

It’s true that inflation has slowed down, but it hasn’t turned negative, it’s simply growing at a slower pace. That means the cumulative effect of inflation over time is still rising, which is ok as long as wages are also rising to absorb those higher costs. Wages have risen considerably since inflation began in earnest, but the increases in non-negotiable costs for consumers have risen as much if not more.

Unveiling the Hidden Strains Amidst Solid Retail Growth

To this point, consumers haven’t slowed spending in any concerning way. Retail sales growth remains solid year-over-year, and holiday shopping has posted good results thus far. But over time, the cumulative effects of increasing costs are taking a toll and consumers are feeling the pinch. 

One of the ways we can monitor how extended consumers are is by looking at how they’re paying for their spending. The story had been for a long time that pent-up savings was able to support much more spending without putting consumer balance sheets under stress. That may be true in some cases, but if there’s so much cash sloshing around, why have delinquencies started to tick up?

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