As we digest the latest FOMC statement we scan the horizon for the latest economic data likely to impact the economy in the final quarter of the year. For a viewpoint into virtually every data source available, we turn to Morgan Slade, Founder and CEO of CloudQuant and alternative data expert, for insights into the complexities of the American economy.
Gary Drenik: Morgan, always a pleasure. Your last forecast pinpointed Core CPI at 4.3% year-over-year growth, which was spot on. Let’s dive into the recent surge in Headline CPI, which moved from 3.2% to 3.7%. Gasoline prices appear to be a significant driver here. What’s your take?
Morgan Slade: Thank you, Gary. Indeed, the jump in Headline CPI has been largely fueled by the significant uptick in gasoline prices, accounting for about half of the growth. This can be attributed to OPEC limiting oil supplies, strategic petroleum reserves being drawn down and government policies that are not supportive of oil supply development. The energy sector’s volatility is a key player in this CPI equation, and these moves are keeping prices elevated.
Drenik: I’m curious about the student loan forgiveness pause coming to an end. It’s been a significant source of disposable income for many. How do you see this affecting consumer spending patterns?
Slade: The resumption of student loan payments has multiple facets. On one hand, it could pull roughly $100 billion away from consumers, which has been contributing to various sectors like travel, electronics, and real estate. However, most student-loan borrowers who benefited most from the loan forgiveness policy have above-average incomes, make about 75% of the payments, and they may be able to shoulder this extra cost with less strain. It remains to be seen if consumer spending patterns will shift dramatically or if individuals will dip into their savings to maintain current levels of spending.
Drenik: How have consumers been holding up? With the opposite movements of the Headline and Core CPI, it seems like it could be going either way.
Slade: Consumers have felt the pinch of rising prices both at the pump and in grocery stores. In consumer survey data from one of our data partners, Prosper Insights & Analytics, we see that consumer confidence has declined across all income brackets. Food and energy are among the most volatile prices that consumers face and heavily influence the way they view inflation. It’s helpful to look at metrics like Core CPI to see the trend of stickier price categories that are more easily controlled by monetary policy, but it doesn’t give the full picture of what consumers are dealing with.
Drenik: Let’s switch gears to labor. The 3-month average of unemployment has been slowly rising. Despite this, Amazon is planning to add a staggering 250,000 jobs for the holiday season. How do you reconcile this?
Slade: The planned headcount additions for Amazon are strictly seasonal and speak more to Amazon’s forecasted holiday sales than the state of the workforce. The potentially troubling aspect is that the starting wages for their seasonal roles have risen almost 50% in the last five years. As always, there are conflicting data points as Walmart has recently begun lowering starting wages for some positions. The Fed, of course, is hoping to see wages start to stagnate and signal some cooling in the economy.
Drenik: Do your alternative data sources provide any extra insights into the labor market?
Slade: One of our data partners, LinkUp, collects job posting data from company websites and job boards. If you look at the net-created and deleted postings, you can see a strong downward trend for the last few months. It’s also important to note that sectors like retail, accommodation and food services, and healthcare have accounted for nearly 70% of private hiring in the last three months while only making up 30% of the workforce. These sectors are still backfilling roles most affected by Covid-19 shutdowns. Once that process has concluded, we may temper things quite a bit. The Net Jobs created does not look like a strong economy creating lots of new jobs.
Drenik: How do you interpret the differences in public and private data surrounding the jobs market?
Slade: Recently they’ve been starting to agree, although the private data seemed to reach the conclusion a bit faster. The initial release of an economic data point can move markets, but not as many people watch for the revisions that come out weeks or months later. The number of jobs added over the last six months, for example, has been revised down by around 250,000 total jobs. When you take the revisions into account, it’s a bit easier to reconcile the 18-month high unemployment rate of 3.8% with both the public and private data. It also could be a sign to the Fed that the economy is trending in the right direction for a soft landing.
Drenik: We’ve often covered the cost of home ownership and rentals, but there’s been a lot of talk about the commercial real estate market lately as well. Can you dive into what’s going on there?
Slade: The situation is precarious; businesses and investors became accustomed to a very low cost of borrowing in the pre-pandemic period. Now there’s $1.5 trillion in commercial property loans that will come due by 2025 which will need to be refinanced at higher rates. We also saw an increase in owners who opted for floating-rate loans during the pandemic. Refinancing these loans at higher rates could easily lead to bankruptcy for some and will significantly erode the profits of others. It adds another layer of vulnerability to an already intricate economic landscape.
Drenik: Credit card debt is another looming specter, recently hitting the $1 trillion mark. How does this play into the broader economic narrative?
Slade: Credit card debt is a double-edged sword. On one side, increased limits have facilitated consumer spending, but on the other, we’ve seen a rise in delinquencies. The percentage of consumers over 90 days delinquent on a credit card payment increased from 4.57% in Q1 to 5.08% in Q2, and the number of people who regularly carry a balance now surpasses those who pay their bills in full. The general trend is for consumers to spend about 8% of their total available credit, and this has continued even as banks have given out unrequested credit increases. This is a worrying trend and could potentially exacerbate economic fissures.
Drenik: Given the multiple variables at play, do you think the Fed’s tightening cycle might be reaching its end, especially if we don’t see a reacceleration in core inflation?
Slade: The Fed is walking a tightrope. They’re balancing the need to control inflation with the risk of destabilizing the economy. In Wednesday’s FOMC meeting, the rate was held steady, but the language used implied the possibility of another hike before the end of the year. Officials also expect to keep rates around their current level further into next year than previously anticipated. It takes time for rate changes to show their full impact on the economy, and it appears that the Fed wants to make sure they don’t declare victory too early.
Drenik: Lastly, what is CloudQuant’s Core CPI prediction for this month?
Slade: Our research team’s model is forecasting year-over-year growth of 3.95%, or down a bit over .3% from last month. So far we’re seeing some conflicting expectations out there, so it’ll be interesting to see how it all plays out when the BLS releases September’s numbers on October 12th
Drenik: Morgan, as always, your insights are invaluable. Thank you for sharing your expertise.
Slade: My pleasure, Gary. The economic landscape is incredibly complex, and discussions like these are crucial for understanding the road ahead.
Drenik: Navigating the economic labyrinth of 2023 requires a deep understanding of multiple, often conflicting, indicators. As we move forward, the interplay between these factors will shape the future of the U.S. economy, making expert insights like those from Morgan Slade indispensable.
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