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-Scott
Same Data, New Perspective
We titled this week’s post “Sunny Side Up” because, even though the economic data hasn’t changed since the Fed lowered interest rates, the Fed’s action is nudging us to look at the economy through a more optimistic lens.
Whereas a few weeks ago we would have been concerned about a slowing economy, this week the same data is somewhat less impactful because the Fed has made it clear that it will support the economy if any slowdown continues, particularly in labor markets.
Fed Governor Adriana Kruger summed up this perspective in comments that she made this week when she said, "We should now also shift attention to the maximum-employment side of the FOMC's dual mandate…I strongly supported last week's decision and, if progress on inflation continues as I expect, I will support additional cuts in the federal funds rate going forward.” The Fed is clearly watching labor markets closely and is prepared to act if there is any weakness.
With the Fed supporting the economy, US consumers may begin to swing in a more positive direction too. The consumer is stretched thin but employment is still high. As long as high employment is maintained, consumers have an income buffer to keep spending resilient. Additionally, real wages are rising because inflation has fallen and wages have continued to grow. As Autozone’s CFO pointed out, “You've got wage growth at 4%, so wage growth is finally keeping up or outpacing inflation.”
Consumers may already be beginning to use this increase in purchasing power to trade back up. Costco noted that “as inflation has dissipated, our members have started to spend more on non-food items, which is really encouraging in our mind.”
Still, there are certainly reasons to question our rose-colored outlook. The low-income consumer remains beaten up, and even though real wages are rising, the pace is slow compared to how much prices rose during inflation. As Governor Kruger put it, “It may take some time for it to feel as though prices are back to normal.”
Real wage growth may also itself be a driver of renewed inflation if there is a wage/price spiral. This seems somewhat unlikely, but Autozone did say that it expects to see slightly more inflation next year.
Chinese Stimulus
A few weeks ago we noted that sentiment on China was getting so weak that it may be a sign of a capitulation mentality.
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