"Q4 2022 - One Cool Cat: The Consumer"
By: Joseph R. Tranchini, CFA
GROSS DOMESTIC PRODUCT
- Aggregate GDP expanded at a pace of 2.9% (SAAR) in Q4 2022, marking the second consecutive quarter of above average growth for the U.S. Economy. Over the past 12 months, the U.S. Economy has experienced a positive expansion of 1.0%, despite 2 of the last 4 quarters witnessing temporary economic contractions (Q1 & Q2 22’). From a conceptual standpoint, this means that the U.S. Economy actually experienced an expansion in calendar year 2022 despite containing a Technical Recession.1,2
- The Consumption component of GDP continued to expand at above average levels of growth, coming in at a rate of 2.1% in Q4 2022. This is roughly in line with the prior quarter’s rate of 2.3%, and also marks the 3rd consecutive quarter of above trend growth for the Consumption component. Consumer spending on Goods expanded at a pace of 1.1%, a large reversal which broke a 3 consecutive quarter contractionary period in Goods spending. Within Goods spending, both Durable Goods and Non-Durable Goods experienced positive growth, coming in at a pace of 0.5% and 1.5% respectively. Durable Goods Spending was bolstered by a pickup in activity in Motor Vehicle sales, as price moderation brought along with-it increased demand. Non-Durable Goods spending was supported by a pickup in consumer spending on Gasoline, as lower prices here also witnessed a commensurate increase in demand. Consumer spending on Services also increased at an above trend level of growth, coming in at a rate of 2.6%. Service spending moderated from the prior 2 quarters’ levels of 3.7% and 4.6%, however this moderation largely represents a reversion to more normal spending growth levels rather than a structural decline in baseline fundamentals. Household spending on Services was positive across all sub-categories of Service spending, garnering larger boosts from Healthcare, Recreation Services, and Transportation Services specifically.1,2
- The Private Investment component of GDP snapped a 2 consecutive quarter contractionary streak in Q4 2022, expanding at a rate of 1.4%. Despite the overall expansion in Private Investment, business investment in the Residential and Non-Residential sub-categories remains a significant weak spot. Residential Investment contracted for the 7th consecutive quarter, declining by a substantial amount of -26.7% in the quarter as higher interest rates drastically impacted residential home affordability. Inventory additions are largely responsible for the positive growth in Private Investment in Q4 2022. Businesses added 130B worth of provisions to inventory in Q4 2022, up considerably from the prior quarter’s addition of 39B. This marks the 5th consecutive quarter of positive inventory additions, an indication that supply chains have substantially improved from the previously experienced difficulties. Within private inventory spending, Motor Vehicle inventory additions remain a standout, experiencing 5 consecutive quarters of positive inventory growth.1,2
- Net Exports
- The U.S. Trade Deficit contracted by -11.6% (SAAR) in Q4 2022, contributing positively to economic growth. A decrease in U.S Exports was more than offset by a decrease in U.S. Imports in the quarter. U.S. Exports contracted modestly at a pace of -1.3%, while U.S. Imports contracted by -4.6%. Exports of Goods fell by -7.0%, while exports of Services expanded at a pace of 12.4%. U.S. Imports of Goods fell by -5.6%, while imports of Services were largely unchanged from the prior quarter. Q4 2022 marks the 3rd consecutive quarter of an improving U.S. Trade Deficit despite facing significant headwinds from an abnormally strong U.S. Dollar. 1,2
- The Government spending component of GDP expanded at a pace of 3.7%, continuing is rate of growth from the prior quarter which also came in at 3.7%. Federal Government spending accelerated significantly in the quarter, increasing at a rate of 6.2%, up from the previous quarter’s rate of 3.7%. State & Local Government spending increased at a pace of 2.3%, a modest deceleration from the prior quarter’s rate of 3.7%. Across Federal and State & Local government spending, two areas of significant strength included spending on Structures, as well as Software. Federal Government Structure and Software spending came in at a level of 50.4% and 20.8%, whereas State & Local government spending in those categories was 2.7% and 11.6% repectively1,2
- The Unemployment Rate for the U.S. Economy is currently at a level of 3.4%. This level of Unemployment is largely considered by the Federal Reserve as representing Maximum Employment levels for the Economy
- The Unemployment Rate is currently at a multi-decade low point, indicating an abnormally strong Labor Market1,3
- The U.S. Labor Force has rebounded moderately over the past few months. The Labor Force now stands at a level of 266M, up from 263.3M at the start of 20221,3
- Upwards pressure on Wage Growth has been a key factor in driving more people to re-enter the Labor Market1,3
- However, the Labor Force Participation Ratio is largely unchanged from the start of 2022 at a level of 62.4%1,3
- The number of Employed Individuals has risen over that past year to a level of 160.1M, up from 157.6M at the start of 20221,3
- The number of Job Openings in the Labor Market continues to be historically high, now at a level of roughly 11M1,3
- There is now 1.92 Job Openings available for every currently Unemployed Individual1,3
- The number of Unemployed Individuals currently stands at 5.7M1,3
- Average Weekly Earnings have continued to rise over the past year by about 4.4%, a sign of a strong Labor Market1,3
- Over the past year, Average Weekly Earnings increases have been entirely attributed to increases in Wage Growth as opposed to Hours Worked1,3
- Elevated Wage Growth has been an instrumental factor in allowing U.S. consumers to partially offset the effects of higher Inflation1,3
- Headline PCE Inflation has moderated significantly since November 2022, coming in at a level of just 0.6% in December 2022. Core PCE Inflation has also experienced a significant degree of moderation in the past few months, coming in at a level of 3.6% in December 2022, north of the Federal Reserve’s 2.0% target1,4
- Headline Inflation has decelerated in the past 2 months from a level of 4.6% to 0.6%1,4
- Core Inflation accelerated in December to a pace of 3.6%, up from the prior month’s reading of 1.9%1,4
- In recent months, a material divergence has manifested between Goods Inflation and Services Inflation1,4
- In 5 of the last 6 months, Goods Inflation experienced contractions. December Goods Inflation contracted at a pace of -8.5%, which represented the largest contractionary month of Goods Inflation since the Pandemic Lockdowns in April 20201,4
- Within Goods, Durable Goods prices have contracted for 3 consecutive months, coming in at a level of -3.5% in December 2022. Durable Goods deflation has largely been driven by contractions in prices for Autos1,4
- Non-Durable Goods have also contracted in the past 2 months, deflating at a rate of 11.3% in December. Non-Durable Goods deflation has been almost entirely driven by contractions in Gasoline prices1,4
- Services Inflation has remained stubbornly elevated over the past 5 months, clocking-in at a level of 5.6% in December. This marks the 5th consecutive month that Services Inflation remained above 4.0%1,4
- Within Services Inflation, a constellation of price increases have been responsible for the stubbornly high pricing pressures. These factors include abnormally high Rent prices, Transportation Service prices, and Food Service & Accomadations1,4
- Rent Inflation remains elevated at a level of 9.9%, Food Service & Accommodations came in at a pace of 6.6%, and Transportation Services Inflation was 34.8% in December which was driven by large increases in Air Transportation costs1,4
- Market Expectations for future inflation have continued to moderate over the past year, and are now roughly consistent with historically normal levels5,6
- Market Expectations for future Inflation on a 5yr forward looking basis are now at a level of about 2.3%, declining consistently from the previous high of 3.5% in March 20225,6
- Market Expectations for future Inflation on a 10yr forward looking basis are now also at a level of about 2.3%, which have also declined from the previous highs achieved in March 20225,6
FORWARD LOOKING ASSESSMENT
Cool under pressure.
In many ways, this simple three-word phrase pretty much sums up the state of the U.S. Economy over the past year. Looking back over the past 12 months of economic and financial market developments feels more like an exercise in staving off stomach ulcers rather than an exercise in financial analysis. Even still, despite the twists and turns and loop-de-loops we have seen and experienced along the way one concept remains everlasting, the U.S. Economy is stronger today than it was a year ago. Understandably, it feels weird to make such a proclamation given how much has happened over the past year, and in light of the fact that 2 of the past 4 quarters of economic activity were actually recessionary, and yet… here we are.
One of the major highlights of the past year has been the uncanny resiliency of the U.S. consumer. While filling up a gas tank when prices are north of $4.00 is enough to make one seriously consider reverting back to the good ole’ horse-and-buggy days, the consumer continued to press on, innovating new ways to make household budgets work despite higher costs across the board. Additionally, an overly strong labor market provided workers with the ability to revisit their compensation arrangements in a beneficial way which manifested itself in one of the strongest years on record for wage growth. Wage growth, in tandem with consumer substitution effects, provided just enough insulation against the cold, harsh effects of inflation to allow people to maintain, and in many cases increase, their standard of living. All-in-all what this most likely suggests is the following: you can raise prices, but you can’t make people take-it. Moving forward into 2023, many of the factors that lead consumers to find success in the past year are still present. The labor market continues to be strong, and consumers continue to be gainfully employed. The wage growth of last year is most likely to be a ‘sticky’ effect, as would be suggested by classical economics. Finally, a brand-new trend is emerging that has the potential to significantly alter the state of the consumer for the better… Disinflation.
Making this observation almost feels like coming back to shore after being lost at sea for many days but… inflation has come down significantly. In the past 3-4 months overall inflation levels have all but receded close to 0% (See Notes in Above Section). Depending on what good or service one is analyzing, disinflationary developments have been either non-existent, or remarkably strong. A general rule of thumb to the current landscape regarding what prices have gone up or down can be summarized as the following: if it is dependent on interest rates, it has probably decreased in price. So, what does that mean exactly from a economic surveyor’s standpoint? It means the ‘medicine’ administered by the Fed is working. As a reference, two of the most interest-rate sensitive realms of the economy have experienced pronounced price contractions, housing and autos. Home prices, as measured by the S&P/Case-Shiller 20-City Home Price Index, have contracted every month since the high in June 2022, dropping -4.2% cumulatively over this time (roughly -10% annualized). Used Auto prices have decreased by -10.6% since January 2022, and New Auto Prices have completely stagnated since September 2022. Higher interest rates are likely to stick around for the duration of 2023, as the Fed remains committed to bringing inflation sustainably down, so the concept of these contractionary price effects reversing themselves by way of a policy pivot to outright accommodative monetary policy seems out of reach.
There is a great deal of power in having choices, and there is no one with more choices than the U.S. consumer. The choice to buy a different mix of groceries, the choice to opt-out of buying a home or car, the choice to pursue a higher paying occupation or role, these are all invaluable tools that the U.S. consumer used, in full, over the past year to stave-off the effects of higher prices, and it was (and continues to be) the primary source of strength for the U.S. Economy. As time goes on, the level of choice available to consumers is likely to continue to increase and bring along with it more economic power and abilities that will only serve to further increase the standard of living for U.S. consumers. Since it is very unlikely to experience increases in the standard of living without ensuring economic growth, the outlook remains as favorable now as it ever has.
[See Below for Disclosures & Annotations]
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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- FactSet. “Economics – Country/Region – United States”. February 2, 2022.
- Bureau of Economic Analysis. “Gross Domestic Product, 4th Quarter and Year 2022 (Advance Estimate)”. February 2, 2022.
- Bureau of Economic Analysis. “Labor Force Statistics from the Current Population Survey”. February 2, 2022.
- Bureau of Economic Analysis. “Personal Income”. February 2, 2022.
- FRED. “5-Year Breakeven Inflation Rate”. February 2, 2022.
- FRED. “10-Year Breakeven Inflation Rate”. February 2, 2022.