1/ Income and spending are two sides of the same coin, with one person’s spending powering another person’s income.This relationship isn’t necessarily 1:1, as consumers can save income. Nonetheless, the pass-through is large:
2/ Currently, aggregate income remains supported by a high level of nominal wages and heightened employment. We see this in today’s economic data, where nominal personal income grew primarily as a function of increasing employee compensation:
3/ Employee compensation accounted for 51% of monthly income growth, which remains in line with its one-year trend. On an annual basis, employee compensation continues to power nominal income growth, and the drop-off in government benefits continues to drag on growth:
4/ However, these marginal increases in income were not allocated to spending but rather saved. We show the composition of the monthly change in income and its uses:
5/ In May, 51% of income increases were saved by consumers, effectively canceling out the growth in employee compensation. The impact of these increased savings was a decline in monthly outlays, i.e., a drag on personal spending, with 60% of sub-categories turning lower in May.
6/ Over the last year, Real Consumption has been in a downtrend though the latest print breaks this trend. This sequential acceleration was due to the drop-off of last May’s data, which showed a decline of -0.5%. We offer the monthly trend:
7/ This print disappointed expectations with a monthly change of -0.4% versus expectations of -0.3%. Motor Vehicles & Parts has been the most significant driver of these moves with a weighted year-over-year growth of -8.3%.
8/These weak areas of the economy tend to be highly responsive to the business cycle, i.e., they swing ahead of major inflections in the business cycle. They bode I’ll for the business cycle. We use these components to get a sense of the direction of GDP growth to come:
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The Fed has tightened policy to levels not seen in decades. Yet, the economy has stayed strong & equity markets are at highs. Is the traditional recession template useless?
1/30 We explore the mechanics & share our outlook.
2/ This set of circumstances is largely inconsistent with the archetypical progression of business cycles. Before we dive into our assessment of current conditions, we outline the mechanics that drive a typical recessionary process.
3/ The recession process typically begins with a Fed that reacts to strong nominal activity by raising interest rates. The increase of these interest rates is not felt instantaneously through the economy but is immediately reflected in asset prices and new borrowing.
The economy is “Slowing, But Growing”— a significant change for markets. These dynamics continue to support stocks, increase support for bonds, and reduce support for commodities.
1/25 We share a wide range of data we use to triangulate these views.
2/25 Our growth monitor continues to point to positive GDP conditions, though we have begun to see some weakness in our sequential tracking of conditions.
3/25 Our inflation monitor tells us that inflationary pressures remain muted, suggesting little change in the inflation outlook.
1. Markets continue to price outcomes consistent with an economy in expansion with rising liquidity. These conditions remain consistent with ongoing fundamental conditions which indicate regime stability.
2. Over the last week macro asset markets were flat in aggregate. Stocks showed the smoothest path of gains. Commodities and gold followed. Treasuries fell prey to concentrated losses.
3. Economic data momentum declined further this week. Data was mixed, with PMI, home sales, and inventory data weighing on momentum while manufacturing orders, jobless claims and personal income adding to data momentum.
We recently had a brief dialogue with @dampedspring about the potential for bonds to be a better part of 60/40 portfolios in the future than recently. Andy disagreed. As ever, he was on to something.
1/11 We share our assessment of bonds prompted by this conversation....
2/ Bonds are the present value of future cash flows whose price represents:
i) Current policy rates
ii) NGDP expectations (growth & inflation)
iii) Expected Policy Rates
iv) Term premium
The biggest mathematical driver is 3, but all components matter.
3/ At the highest level, bonds are assets that prefer stable inflation conditions, which prevents the rise of policy expectations. Further, as real growth rises significantly, bonds start to be an opportunity cost relative to equities.....
1. Stocks continue to look attractive in an environment where nominal growth remains resilient. While alpha opportunities are not abundant, beta is a suitable exposure to this environment.
2. Re-Stocks: Risk control is imperative to maintaining continued exposure, particularly with the recent pricing of inflationary market regime odds.
3. Commodities face a confluence of mixed signals. On the positive side, we see elevated nominal conditions and liquidity. On the negative side, we continue to see slowdown industrial activity. This combination keeps signal strength muted relative to history.
1. Growth conditions have begun to slow across the breadth of our tracking, but not in a manner where the weighted average outcomes will result in a negative growth spiral. A slowing but growing economy.
2. There has been a modest increase in the inflation gauge. However, the level of these readings tells us that inflationary pressures remain muted, suggesting little change in the inflation outlook.
3. Our liquidity measures suggest that liquidity conditions remain ample, however, we may be at a local top in liquidity growth. This does not mean contracting liquidity but slowing liquidity conditions.