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US Consumer Data and Potential for Economic Downturn

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Tomorrow could see the release of the data that could clear up some inconsistencies in US economic performance as well as provide some guidance for the Fed. Recent data trends have shown that the US consumer has remained surprisingly resilient, even as indicators of productivity, such as Empire Manufacturing and PMIs, have turned downward.

Part of this can be explained by reports from major US banks, including Bank of America and JPMorgan, that have shown that Americans are increasingly spending more with debt. Credit card balances have been increasing while savings have diminished. Of course, that isn’t sustainable, and it also doesn’t explain the very low unemployment rate as inflation rises.

Diving into the data

One of the key points to be released tomorrow on consumer behavior is Personal Spending vs Personal income. Spending, of course, drives demand for products which could help improve productivity – but if productivity isn’t increasing, it could drive demand. Businesses facing challenges to get workers in order to increase productivity will opt to raise prices in the face of higher demand.

Personal Income is expected to slow its monthly growth to 0.4% from 0.6% in January. Note that these figures are not adjusted for inflation. Meanwhile, personal spending is also expected to come down, but remain higher than income at 0.5% compared to 1.8% registered in January. This implies consumers are still delving into their savings and credit capacity in order to keep spending.

The Fed’s big problem

More than “a” problem, the Fed is facing three issues that oppose each other. High inflation against growth against banking stability. Addressing one of those issues causes problems in the other two. This makes it not only hard for the Fed to navigate the landscape, but for investors to figure out what it will do in order to price that action in. Right now, money markets and the Fed are at odds. The Fed insists rates will be high for the rest of the year, while the markets are pricing in rate cuts near the end of the year. The Conference Board projects negative growth for the next three quarters.

So far, the Fed has been prioritizing getting inflation under control since it’s part of its mandate. But the collapse of three regional banks has led to an expectation of a pause in hikes. That might help banks but could let inflation get out of hand and ultimately hurt the economy. Yesterday, a congressman revealed that Fed Chair Powell had privately said there would only be one more hike for this cycle.

What the data says

Core PCE is the Fed’s favored inflation measure for determining policy. As long as it keeps going down, the Fed might be in a better position to ease up on the hiking. Core monthly PCE is expected to come down to 0.4% compared to 0.6% prior, but the annualized rate is forecast to remain the same at 4.7%.

Meanwhile, the University of Michigan’s survey of consumer sentiment is expected to show a rapid deterioration of confidence in March, falling to 63.2 from 67.0 prior.

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