Confidence, Consumers, and Cowbells

Episode Summary

Executive Summary: The episode centers on the U.S. consumer outlook amid strong labor markets, elevated inflation, and abundant household balance-sheet support. The guests argue spending remains resilient thanks to jobs, wages, housing, and savings, but warn inflation could persist longer than expected and the Fed may tighten too aggressively, risking a policy mistake and a later inventory/demand hangover.

Main Topics: Consumer resilience and spending outlook (Priority: 5/5): The group agrees the consumer is still spending strongly despite negative sentiment, supported by jobs, wages, asset values, and accumulated savings. Holiday sales and broader consumer outlays are expected to remain solid. Inflation surge and Fed response (Priority: 5/5): A major focus is whether inflation is temporary or becoming more persistent. Speakers debate the role of supply chains, shelter, medical costs, and wage pressures, while warning the Fed could overshoot with rate hikes. Labor market strength and claims data (Priority: 4/5): Initial unemployment claims and other labor indicators are interpreted as evidence that job growth is reaccelerating, with possible November payroll gains in the 650k-700k range. Consumer sentiment divergence (Priority: 4/5): Michigan sentiment and Conference Board confidence are moving in different directions because households are reacting differently to inflation, gas prices, age, and employment conditions. Excess savings and balance-sheet tailwinds (Priority: 4/5): Households, especially higher-income ones, still have substantial excess savings and access to credit, which supports spending but could also fuel future dissaving and debt buildup. Inventory risk and post-demand slowdown (Priority: 3/5): Speakers warn that double ordering, supply-chain distortions, and pull-forward demand may create an inventory overhang and discounting in 2023.

Key Arguments: Strong labor markets and wage gains are still supporting consumer demand even as inflation erodes sentiment. Household balance sheets are much healthier than during 2008-09, with more net worth in housing and equities and less immediate financial stress. Excess savings accumulated during the pandemic are still large enough to sustain spending, but they may be drawn down rather than rebuilt. Inflation likely has not peaked yet, but could moderate in 2022 as supply bottlenecks ease; shelter and medical costs may keep it sticky. The Fed is at risk of overreacting; three rate hikes next year are plausible, and a policy overshoot could produce boom-bust dynamics. A return of multiple-job holding toward normal suggests some labor-market normalization and may reduce distortions in payroll data. Retailers and builders may face an inventory correction in 2023 as demand normalizes after double ordering and pull-forward purchases.

Data Points: Initial unemployment claims: down 28,000 over the last four weeks; 268,000 for the latest week - Ryan uses claims to argue the labor market is strengthening and November payrolls should be strong. Four-week moving average of initial claims: down 47,250 - Referenced as a smoother signal that still shows labor-market improvement. Expected November payroll growth: 650,000 to 700,000 jobs - Ryan’s high-frequency model suggests a strong November employment report. Thanksgiving meal cost: $53.31 - Chris cites the American Farm Bureau’s holiday meal estimate, up 14% year over year. Thanksgiving meal cost change: 14% YoY - Used to illustrate broad food inflation even as turkey prices are subdued. Turkey prices change: -0.1% month over month; +1.7% year over year - Shows turkey as an exception among food inflation categories. Multiple job holders: down 1 million since February 2020 - Diane interprets this as a sign of labor-market normalization and fewer workers needing multiple jobs. Back to Normal Index: 94.5% of normal - Mark notes the economy is close to normal but not fully there yet. Consumer confidence (University of Michigan): 66.8 - A low reading, tied to inflation sensitivity and COVID/gas price effects. Consumer confidence (Conference Board): 113.8 - Shows divergence from Michigan sentiment because it is more employment-sensitive. Saving rate: 7.5% - Markedly lower as stimulus fades and households resume spending. Excess savings: $2.5 trillion - Estimated pandemic-era savings through September, about 10% of GDP.

Pivotal Quotes: "I'm going to get you, get you one way or another." — Diane Swonk: Used to frame the Fed’s determination to bring inflation down and the debate over whether inflation is transitory or persistent. "They’re angry, but they’re spending anyways." — Diane Swonk: Summarizes the key consumer paradox: weak sentiment but strong actual consumption. "The firewall between moderation and something more persistent… is inflation expectations." — Mark Sandy: Explains the main risk threshold separating temporary inflation from a more durable wage-price problem.

Implications: Consumers still have fuel, so spending may stay strong into the holidays, but inflation and Fed tightening raise recession risk in 2022-23. Watch claims, wages, savings drawdown, and inventories for the next turn in the cycle.