Economic Data Tracker –
Animal spirits stirring as inflation slips

Trend watch and what’s new this week

Frigid temperatures and ice storms last week crippled parts of the South, Midwest, and Northeast. Those are rippling through some activity-based data (slides 5 and 6). For instance, dining reservations fell sharply week-over-week along with softer hotel occupancy in parts of the U.S.

The weather disruptions also caused a pullback in the back-to-office index, which had just broken 50 (pre-pandemic indexed to 100) during the prior week for the first time since the pandemic. In Austin and Dallas, the index plunged 26 and 23 percentage points, respectively, compared to the prior week.

However, last week’s wave of flight cancellations helped push a 4.3% rise in air passenger counts this week as airlines scrambled to get people to their destinations and reset the system.

Consumer sentiment jumped to 13-month high

Consumer sentiment, as measured by the University of Michigan Consumer Sentiment Index, increased to a 13-month high in February (slide 7) and the 7^th increase in 8 months. Given the steady improvement, we have changed the trend indicator for consumer sentiment to “neutral” (slide 4).

Within the survey, inflation expectations for the coming year ticked higher to 4.2%, while longer-term inflation expectations held steady at 2.9% for the third straight month. Inflation expectations are key indicators for the Federal Reserve, which is laser-focused on reining in inflation expectations.

Egg prices crack, though still sizzling

On slide 8, we spotlight egg prices, as the monthly price spiked 127% year-over-year in December due to a bird flu outbreak. Recent weekly data shows that warehouse egg prices have dropped roughly 45% since their mid-December peak. Still, weekly egg prices remain about 50% above the same week last year.

Gasoline prices complete roundtrip, flat from a year ago

On slide 9, the nationwide average price for gasoline has steadily declined since the peak just above $5 in June. It is now a just few pennies above the price a year ago, thanks to a surge in the U.S. crude oil production. Still, U.S. gasoline prices remain more than 30% above the pre-pandemic level of $2.58.

Used car prices rose again in January, but down sharply YoY

On slide 10, we revisit the price index of used vehicles, which rose 2.5% in January. That was the second straight monthly rise after an ugly streak during which prices dropped in 9 of 10 months (Feb. ’22 to Nov. ’22). Prices declined 12.8% on a year-over-year basis, which is a far cry from the 54% spike in April ’21. Luxury cars and SUVs continue to see the biggest price declines on a year-over-year basis. 

Our take

Last week’s weather disruptions will continue to cycle through the economic data in coming weeks. While our daffodils are already in full bloom, they certainly aren’t blooming everywhere. It’s likely best to stay prepared for another winter weather event since it’s barely mid-February.

That’s probably a good metaphor for the U.S. economy generally. Indeed, we are encouraged by some of the recent data, including the strong January jobs report and the rebound in the ISM Service Index for January, which expanded. The latter is important insofar as services account for the largest portion of the U.S. economy.

Those green shoots, among others, have triggered the animal spirits in markets, which now appear to be discounting the chances of a recession. While there are encouraging green shoots, we recommend caution lest we prematurely celebrate.

We may be in an environment where the economy remains solid, perhaps triggering more inflation (like used car prices in January), forcing the Federal Reserve (Fed) and other central banks to continue hiking interest rates. Or, the economy weakens further, taming inflation but also dinging corporate profits, spurring more layoffs and challenging asset prices. Our Co-Chief Investment Officer Keith Lerner has dubbed it the “reverse Tepper trade,” a nod to the opposition scenario hedge-fund titan David Tepper outlined in September 2010.

To wit, Fed Chair Jay Powell and number of other Fed officials have been reiterating their laser focus on inflation and strong likelihood of maintaining higher rates for longer. The chances that the Fed will take the Fed funds target above 5% during this cycle has quickly become the consensus. Conversely, market expectations of multiple rate cuts in 2023 are becoming less likely.

In our view, higher interest rates have dramatically increased borrowing costs for consumers and businesses alike, which is referred to as tightening financial conditions. For instance, credit card balances for many consumers are hovering near 20%, which crimps a lot of economic activity. Furthermore, credit cards are the only financing for many of the smallest businesses, which aren’t big enough to get credit to finance inventory or other short-term expenses. Thus, higher interest rates are a tremendous headwind for the U.S. economy.

To clarify, the possibility for “no landing” are growing as the chances of soft landing have increased. Yet, a recession in the coming 12 months remains our base case due to those tighter financial conditions. 

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