Trend watch and what’s new this week
First, the dining reservations data is temporarily unavailable since OpenTable is refreshing the index. Accordingly, we have substituted the Back-to-Work Barometer Index on slide 6.
The activity-based data continues to remain stronger than expected (slides 5 and 6). The last week of March is typically soft, though it’s wholly dependent on timing of the spring holidays (Easter and the start of both Passover and Ramadan). Nonetheless, weekly air passenger counts have stayed above 16.3 million for three straight weeks for the first time since mid-October 2019.
The Fed’s favorite inflation gauge cooled in February
The Federal Reserves’ (Fed) favorite inflation gauge—the price index of core personal consumption expenditures—cooled in February (slide 7). While it has been moving in the right direction, it remains uncomfortably high and well above the Fed’s 2% target, meaning the Fed will likely keep its focus on inflation.
Big 4 remains solid – no recession yet
We also received real personal income and spending figures for February. Both of those are part of the so-called “big 4” indicators of economic activity used to determine a recession (slide 8). While they have flattened out, which shows that the economy is slowing, the big 4 don’t indicate the U.S. is currently in a recession.
Retail and wholesale inventories continue to reset
On slide 9, we show retail and wholesale inventories, which have fallen sharply since peaking last summer. We view these as a healthy reset of inventories to be more in-line with goods sales, which have been normalizing for roughly a year as consumers shifted spending back towards services.
Consumer confidence mixed signals
Given all the cross currents, consumers don’t seem very confident based on two recent surveys. That said, there are some positives, including inflation expectations and their view of jobs.
The University of Michigan Consumer Sentiment Survey final reading for March dipped to 62.0, below the preliminary 63.3 and down from 67.0 in February. Yet, 1-year inflation expectations dropped to a nearly two-year low.
Meanwhile, on slide 10, we show the Conference Board’s Consumer Confidence Survey, which ticked up in March after declining during the prior two months. The 1-year Inflation expectations ticked up to 6.3%, though remain well-below the peak of 7.9% in June ’22. Meanwhile, consumers view that it’s fairly easy to get a job (officially known as “Jobs Plentiful”).
Our take
We’re back in a situation where there isn’t a clear view of the economy. The trend of economic data remains mixed, many times even within the same report. That was certainly the case with the two main consumer sentiment surveys for March. By the way, both captured at least part of consumers’ reaction following the recent bank failures.
Thus, we’d caution not to get overly fixated on one “good” or “bad” economic data point. Nonetheless, the economic slowdown we expected in 2023 has materialized. Whether activity slides enough to be officially categorized as a recession is less important in our view.
The business cycle had been gradually slowing in late 2022 and into early 2023 due to the ramp up in inflation and higher interest rates. However, credit conditions have tightened dramatically in recent weeks, pinching many businesses just when they may need credit most. This pulls forward our recession expectations. That said, there are some positive economic offsets; most notably, continued solid labor market dynamics. Moreover, consumer and business balance sheets don’t typically look “this good” at the onset of a recession.
With respect to inflation, it has been moving in the right direction, but it remains uncomfortably high and well above the Fed’s 2% target, meaning the Fed will rightly remain focused on curbing inflation, aka price stability. As the past two years have illustrated, once the inflation toothpaste is out of the tube, it’s extremely difficult to regain control. Historically, it has taken years and required a recession to do so.
We maintain our view that Fed policy is being guided by scar tissue—from prematurely loosening policy in the past. More importantly, the Fed is hamstrung by inflation. Cutting rates to support the economy appear unlikely in the near term, especially with still-solid employment trends. While deeper rate cuts are plausible in the event of a sharper recession, we maintain our view that the coming economic slowdown will be relatively mild. Hence, we believe that the Fed rate tightening cycle is effectively over, though wouldn’t rule out that the Fed could do one more hike rate if inflation persists.
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