Forex Trading Library

US Consumer Spending Data and the Threat of Stagflation

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Immediately after the release of weekly jobs data from the US yesterday, a prominent analyst exclaimed: “it smells like stagflation”.

He later somewhat qualified that statement, but the unprompted comment is likely a reflection of the underlying feelings of a lot of economists. In fact, the US economic recovery post-pandemic has not matched the rosy outlook at the start of the year.

Crucially, the expectation of a temporary spike in inflation hinged, in large part, on fast economic recovery and return to pre-pandemic conditions.

A bout of inflation isn’t good, of course, but the economy can handle it.  However, if inflation settles in for the long term, it generally contributes to poor economic performance, as spenders and investors reevaluate their habits.

One man’s trash is another’s fortune

The consensus among policymakers is that a little bit of inflation is good for the economy because it encourages people to spend.

That said, a lot of inflation can lead to panic “investment”. This is when people are not spending money on goods and services, but rather on things they hope to offset the deteriorating value of their currency. And it can be anything from stocks, to housing, to collectibles, to precious metals.

The shift in spending habits can significantly disrupt the economy. And consumers then shy away from “luxury” goods out of fear that their salary isn’t keeping pace with rising costs.

The influx of hedges against inflation generally helps support equities and in particular the housing market. In the case of the stock market, though, the influx of retail traders usually translates into higher volatility.

Both could be attractive investment opportunities for traders but could also increase the risk of investing in the markets. That’s a somewhat ironic result for people looking to secure some of their wealth.

What to look out for

Consumers drive the US economy. And the bulk of the government’s stimulus spending has been oriented towards supporting increased demand.

Higher personal income supposedly translates into an increased willingness to spend. Now that the US saving rates are starting to return to pre-pandemic levels, that should imply more spending. If supply isn’t keeping up with demand though, ordinarily that means higher inflation.

One of the clues to see if inflation will stay elevated is to see if consumers are still buying. If consumers are feeling discouraged ahead of the crucial Christmas spending season, it might be a warning that the US economy is heading into a bit of a rough patch.

Today’s data

Economists expect the US personal income to slip back into contraction at -0.2% compared to 0.2% registered in the prior month. Unsurprisingly then, there is a projection of an equivalent drop in personal spending to a 0.5% increase from 0.7% growth in the prior month.

Consumer spending growth is still outpacing consumer income. In fact, this has been a theme throughout most of the year, coinciding with higher inflation.

Later we have the University of Michigan Consumer Sentiment for October. Economists anticipate that it will continue to decline to 71.4 from 72.8 prior. That would bring it back to just 0.4 off the worst portion of the pandemic.

Overall, consumers are spending more, but it appears that it’s not out of enthusiasm.

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