Consumption Ends 2022 on Sour Note as Services Inflation Overtakes Goods Inflation
Economic news and commentary for January 27, 2023
US Personal Income and Outlays
Following the release of Q4 2022 GDP, we see that consumption ended on a sour note in 2022. While personal income grew 0.2% MoM, real personal consumption fell -0.3% MoM to make for two consecutive monthly declines. The drop came on the back of a contraction in goods spending (-1.6% MoM) which was partially offset by an increase in services spending (+0.5% MoM). While inflation has certainly started to pull back, there is a sense that consumers are still in a defensive stance as excess savings becomes less of a factor in household financial positions. Speaking of inflation, the Fed’s favored indicators of price dynamics were also updated. The headline PCE price index edged up just 0.1% MoM and was up 5.0% YoY, a deceleration from the previous reading of 5.5% YoY in November. Similar to recent CPI releases, we see a large deflationary impulse in energy prices in the PCE index, down -5.1% MoM, hiding small gains in other categories. The core PCE price index grew at a slightly quicker pace, up 0.3% MoM, and the annual pace decelerated at a slower rate, from 4.7% YoY to 4.4% YoY.
What sticks out as the main force against core deflation is the 0.5% MoM increase in services price which was the largest out of the three Q4 months. The decline in goods prices and the rise in services prices resulted in annual services inflation (5.2% YoY) topping annual goods inflation (4.6% YoY) for the first time since the initial surge in prices started a year and a half ago. Because of the underlying PCE price dynamics, it's unlikely that slower inflation will be a large support for consumption in Q1 2023. The inelasticity of gas and electricity spending means that even though those prices are falling, energy consumption will be more or less the same. Be prepared for weak US growth figures to start 2023.
Still to come…
10:00 am (EST) - US Consumer Sentiment
10:00 am - US Pending Home Sales Index
Morning Reading List
Other Data Releases Today
Australia PPI grew 0.7% QoQ and 5.8% YoY in Q4 2022, down from 6.4% YoY in Q3 2022. Manufacturing input prices fell -0.3% QoQ but were still up 10.8% YoY, and manufacturing output prices grew 1.0% QoQ and 10.9% YoY. Accommodation prices up 22.9% YoY.
The annual growth rate of the M3 money supply in the euro area was 4.1% YoY in December, down from 4.8% YoY in November. Household loan growth fell to 3.8% YoY (prev 4.1% YoY), and corporate loan growth fell to 6.3% YoY (prev 8.3% YoY).
Household real consumption per capita in the euro area grew 0.5% QoQ in Q3 2022. Household real income per capita increased 0.4% QoQ, and nominal household gross disposable income grew 2.4% QoQ.
The euro area net saving decreased to €678 bil in the year to Q3 2022, compared with €731 bil in Q2 2022. The Household debt-to-income ratio declined to 94.7% in third quarter of 2022 from 96.0% one year earlier.
France's consumer confidence index edged down -1 pt to 80 in January. The future financial situation index edged down -1 pt to -33, and the future major purchase intentions index fell -1 pt to-42.
Q4 GDP
Solid GDP Growth in Q4-2022, But Q1 Set To Be Weak (Wells Fargo) - Real GDP grew at an annualized rate of 2.9% in the fourth quarter relative to Q3-2022. The outturn was a bit stronger than the consensus expectation, and it represents the second consecutive quarter of above-trend GDP growth. That noted, the underlying spending components were not quite as impressive.
U.S. Q4 GDP: Still Growing But Soft Underbelly (BMO) - The U.S. economy isn't falling off a cliff but it is losing stamina and risks contracting early this year. That should limit the Fed to just two more small rate increases in coming months.
US Q4 GDP - The details are less encouraging than the headline (ABN AMRO) - Q4 GDP grew somewhat stronger than expected, at 2.9% q/q annualised, while Q3 GDP was also upwardly revised, to 3.2% from 2.6% in the 3rd estimate. However, the strength was driven by volatile components such as inventories and government spending, with underlying domestic demand – consumption and investment – comparatively weak.
US GDP (Q4): Economy caps 2022 on a strong note, but enters 2023 with doubts (EY Parthenon) - The economy capped 2022 on a strong note with real GDP advancing a solid 2.9% in Q4 — in line with expectations. Final sales rose a modest 1.4% while increased inventory accumulation contributed a very strong 1.5 percentage points (ppt) to growth. Consumer spending was the main engine of growth in Q4, rising 2.1%, while residential investment remained severely constrained, down 26.7%, and business investment rose a modest 0.7%. Net international trade added 0.6ppt to GDP growth.
Real GDP (Q4-2022, advance estimate) (TD Bank) - Economic growth appeared to end 2022 on a relatively firm footing, though the headline number was somewhat flattered by a sizeable (and unsustainable) contribution from inventory investment. Moreover, sales to private domestic purchasers – the best gauge of underlying domestic activity – rose by only 0.2% q/q (annualized). This was a sharp deceleration from Q3's gain of 1.1% and was weighed down by both softening business investment and another outsized decline in residential investment.
Economic Growth and Signs of Cooling Inflation End 2022 (NAHB) - The U.S. economy continued to grow in the fourth quarter of 2022. As consumer spending and private inventory investment helped increase GDP, residential fixed investment dragged down the contribution to percent change in real GDP by 1.29 percentage points.
US Q4 GDP: Slowing beneath the headlines (CIBC) - The US economy grew at an impressive 2.9% annualized pace in Q4, in line with our forecast, and a touch above the 2.6% expected by the consensus. The growth was driven by inventory restocking as supply chain issues faded, and consumption, with both services and goods gaining ground.
Real GDP Increased at a 2.9% Annual Rate in Q4 (First Trust Portfolios) - Don’t get used to the solid real GDP report for the fourth quarter; it’s probably the strongest we will see for a while. More recent data for December – including ISM reports, retail sales, industrial production, and housing starts – showed the quarter ended on a sour note and signaled that the first quarter could be negative. Real GDP rose at a 2.9% annual rate in Q4, which is superficially good news.
Mixed Data Unlikely to Sway Fed Members (HilltopSecurities) - Business inventories and net exports combined to add two full percentage points to the headline. These are both volatile categories that are expected to retreat in subsequent quarters as the global economy slows.
Durable Goods Orders
Drop in Demand for Capital Goods Piles on to Manufacturing Recession (Wells Fargo) - Look past the aircraft boost in today's durable goods report to see the pivot from slowing capital goods orders to outright declines. Taken in tandem with the contraction in equipment spending in today's GDP report, this is further evidence that the manufacturing recession is underway.
New Orders for Durable Goods Rose 5.6% in December (First Trust Portfolios) - New orders for durable goods rose 5.6% in December, easily beating consensus expectations, while previous months were revised higher. But don’t let that headline number fool you; the surge in new orders was due to the volatile commercial aircraft category, which after plummeting 30.7% in November, rebounded 115% in December.
New Home Sales
New Home Sales End 2022 On A Positive Note (Wells Fargo) - New home sales improved 2.3% in December to a 616K annual pace. The increase comes on the heals of downward revisions over the prior three months, taking some shine out of the recent upturn. That said, builder incentives look to be bolstering new home sales, which are gradually rising from the low point reached in September.
New Single-Family Home Sales Increased 2.3% in December (First Trust Portfolios) - New home sales fell 26.6% in the twelve months ending in December 2022, the largest calendar-year drop since the 2008 housing bust. However, the recent trend in sales has been modestly positive, with activity rising for the third consecutive month in December and signaling that sales activity may have hit a temporary bottom.
New Home Sales Uptick in December But Market Weakness Remains (NAHB) - While new home sales posted a modest gain in December, elevated mortgage rates and higher construction costs continue to hinder housing affordability and put a damper on consumer demand.
Debt Ceiling
US debt ceiling torture heightens recession risk (ING) - Debt ceiling deals always happen, eventually. But this time it will be especially challenging given a split Congress and politicians willing to go to any extreme to score political points. The best outcome would still see volatile markets and insecurity for government workers, while worst case we see a debt default and the prospect of a deeper recession.
ECB
Eurozone monetary developments show transmission is working (ING) - Sharp declines in private sector borrowing in December show that the ECB's sharp interest rate rises are starting to have the desired effect. In an already weak economy, this is another dampening effect for 2023 growth, but don’t expect it to be enough to sway next week’s ECB decision on rates. We expect another 50 basis point hike.
ECB Watch: Hawkish views continue to dominate (Nordea) - We expect the ECB to raise rates by 50bp next week and confirm that another such step in March remains a reasonable baseline. We think the overall message continues to be hawkish, though there are also risks of a slightly softer tone.
ECB Preview: Set for another 50bp rate hike (Danske Bank) - For next week’s ECB meeting, another 50bp rate hike has been well-telegraphed and fully priced by markets. We expect the ECB to continue to sound very hawkish and signal that further rate hikes are coming, in particular giving guidance for another 50bp hike in March.
Federal Reserve
Federal Reserve: Back to 25bp hikes as slowdown fears mount (ING) - Last year saw the most aggressive policy tightening path in four decades, but Fed officials have laid the groundwork for more modest 25bp hikes in February and March. Recessionary forces are building though and inflation looks set to slow sharply from here, implying rates cuts will be on the agenda later in the year.
Bank of England
Four Bank of England scenarios for February’s meeting (ING) - Persistently high wage and service-sector price inflation points to another 50bp rate hike from the Bank of England next Thursday. If we're right, then we expect one final 25bp rate hike in March, marking the top of this tightening cycle.
US
Can State Unemployment Rates Predict a National Downturn? (Wells Fargo) - Historically, the likelihood of a national recession increases when unemployment rates trend up in at least 34 states. The United States crossed this threshold in November 2022, when trend unemployment rates rose in 35 states. The count increased further in December to 39.
Europe
Eurozone industry holds up better than expected in the pandemic aftermath (ING) - Despite a huge energy shock in the economy, production has held up well. There are no miracles here, though. Currently, the post-pandemic catch-up has simply outweighed the negative impact of higher energy prices. For now.
Spanish economy shows resilience in fourth quarter (ING) - The Spanish economy grew by 0.2% on a quarterly basis, which was better than expected. The strong numbers, however, also mask some underlying weakness.
Canada
BMO Business Activity Index — A Cold December (BMO) - With policy rates now sitting at a restrictive level of 4.5%, economic activity is likely to weaken further and contract modestly in the first half of the year, as the effect of the considerable cumulative rise in interest rates cascades through the economy.
Small business confidence improves modestly in January (TD Bank) - The CFIB Business Barometer, a measure of small business confidence about the next 12 months, edged up by 0.5 points to 51.4 in January. The more immediate 3-month ahead outlook also improved, gaining 7.1 points, however at 47.1 it remains in contractionary territory.
The Greying of Canada's Population (TD Bank) - Canada's aging population will challenge firms' ability to maintain their workforce. This slow-moving train has been underway for many years, but the willingness and ability for workers to extend their careers has provided an important buffer.
Inflation
Commodity prices rise on chemical market strength (S&P Global) - The Material Price Index (MPI) increased 0.4% last week. The increase was mixed with six out of the ten subcomponents rising. The MPI sits 10% lower year on year (y/y). Prices, however, remain far higher (50%) than the pre-pandemic levels of the fourth quarter 2019.
Wealth and Consumption
Consumption: what’s wealth got to do with it? (Allianz) - With the cash cushion that was built during the pandemic losing its fluff, it is a good time to revisit consumption behavior, which is starting to lose steam in Europe and the US. The wealth effect is a behavioral economic theory that suggests that asset-price fluctuations affect household spending. However, we find that the income effect overshadows the wealth effect in France, Germany, Spain and the US. The marginal propensity to consume (MPC) per 1% difference in disposable income is 0.21% for France, 0.71% for Germany, 0.78% for Spain and 0.35% for the US. This highlights the importance of supporting household income as a tailwind to attain the much-desired economic soft landing.
Global Economy
Global Economic Uncertainty Remains Elevated, Weighing on Growth (IMF) - The shocks that have shaken the global economy in recent years have introduced a new normal for turbulence, driven in some cases by political fragmentation between countries. These episodes have also lifted uncertainty to exceptionally high levels, which in turn hurts economic growth as our research shows.
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