Essential Economics

— Mark Frears

Stress meter

What things get your blood pressure up? Is it driving (people on phones!), the economy, your kids, your job, too much debt, not enough hours in the day or possibly the high cost of living? A wise man once told me that worry doesn’t solve anything, but that is easier said than done. If you hang onto stress, it can come out in different ways. Mentally you might snap, probably at the worst time, and physically it will wear you down.

What is worrying the consumer? They are two-thirds of the strength of our economy, so we should pay attention.

Current picture

The Federal Reserve Bank of New York’s Center for Microeconomic Data just released the December 2024 Survey of Consumer Expectations. Their three main findings concerned inflation, labor market and household finance. These are what keep the consumer’s attention.

On the inflation front, while we are seeing some components improve, the overall levels for food, medical care and rent are all above 4%, as you can see below.

The labor market is very important, especially in the middle- to lower-income households, as their budgets are being stretched by the higher costs outlined above. As you see below, there has been a dip in the expectations for easily finding another job if needed. 

When households look at their financial picture, there is an uptick in expected inability to make debt payments. As you can see below, all household sectors are experiencing this stress.

Price improvement not as good as it looks

The Producer Price Index (PPI) and Consumer Price Index (CPI) this past week showed improvement, if you listened to some media channels. On a year-over-year basis, they were 3.3% and 2.9%, respectively. If you take out the volatile Food and Energy sectors, as the FOMC likes to do, they came in at 3.5% and 3.2%, respectively. The FOMC target is 2% for their preferred target, Personal Consumption Expenditure (PCE), which most recently came in at 2.4% year over year in November, and excluding Food and Energy, 2.8%.

Bottom line, while we are better than we were in the pandemic, these are still at elevated levels from target and from what the consumer was experiencing prior to the breakout.

The chart below shows CPI on an annualized change basis. This emphasizes that while the change in prices has slowed, they are still at higher levels, causing stress in household’s budgets.

Source: Bianco Research

Who is feeling this stress the most? The chart below shows the most stress is felt by people under the age of 55. They are the ones having to adjust to this higher level of prices without appreciating assets to support their spending. In addition, higher housing costs are having a large impact.

Offsetting income

One argument for winning the battle against inflation is that wages and salaries are keeping up with higher prices. The Strategas Common Man CPI measure, seen below, is not in line with that theory.
 

The price component of this chart covers basic needs for households, and you can see the recent trend is actually getting worse. Inflation, by whatever name you call it, is still a major concern, and the stress associated with it will continue to have an impact.

Economic releases 

Last week was mostly inflation-focused, with PPI and CPI the headliners. Both came in around expectations, but the trend is not a continuing improvement. Retail sales showed the consumer finished 2024 strong, and housing numbers showed surprising strength

This week’s calendar is lighter with Leading Index, and consumer sentiment in focus. The FOMC members will be in their blackout period for speaking, ahead of the FOMC meeting on January 28–29. See below for other releases.