“Small business owners remain cynical (and negative) about future business conditions”
- NFIB Chief Economist Bill Dunkelberg, 2/14/23
We featured the graphic below in last quarters Macro Themes deck.
It’s a pseudo-stylized version that doesn’t capture all the nuance at play but it satisfices with respect to embodying the core conundrum.
The labor imbalance-inflation angst arc remains a lead protagonist in the macro-policy narrative.
And the cameos in the high-frequency macro soap opera occur daily.
Back to the Global Macro Grind . . .
Let’s recontextualize it through the lens of the latest CPI, Consumer and NFIB data.
CPI: I won’t clutter your prefrontal cortex with yet another CPI review but trudging disinflation continues to define the trajectory of underlying price pressure and the associated higher-for-longer policy Rx. Meanwhile, real earnings growth remained negative for a record 22-consecutive months.
NY FED Survey: Households' Expected Income Growth (NY Fed Consumer Survey) logged the largest one month drop ever in January.
Is that good or bad?
To the extent the specter of a wage-price spiral and any associated un-anchoring in expectations remains the locus of concern for policy makers, a marked rebasing lower in workers' anticipated wage growth would be viewed as a positive.
But with respect to the outlook for real income growth and real consumption - both already mired in stagnation/contraction - it’s not particularly inspiring.
We’ve highlighted this previously, but its worth quickly revisiting …
To the extent income grows at a discount to inflation growth, then the spread between the rate of change of “transitory” inflation and wages represents a loss of purchasing power. While the rate of change of inflation may moderate and prove transitory, the loss of purchasing power is permanent.
Compounded over multiple cycles and you have yourself a tinderbox of inequality, social unrest and generational frictions.
The dystopian irony for households over the last 18+ months is that even as wage inflation was historically elevated, real income growth was still negative and purchasing power was mostly contracting.
With respect to the expected deceleration in Household Income Growth, if wage growth mean reverts lower without running at a premium to nominal price growth, that lost purchasing power gets etched into standard of living eternity for many.
*An Aside: The +18.3% M/M increase in Auto Sales (reminder: Auto’s = ~20% of Headline Retail Sales) will help juice the sequential reading (not so much the Y/Y as the same M/M dynamic occurred last January) for January Retail Sales. Unseasonably warm January weather and a prospective re-acceleration in credit card spending also augur favorably. So the goods consumption data (and, really, anything that takes the January Employment data as input) will reflect solidity in January even while the broader trend in Goods Consumption and Goods Prices disinflation/deflation remains in motion.
NFIB: The superficially paradoxical interplay between tight labor and deteriorating macro and profit conditions remained on discrete display to jumpstart the New Year.
- 9 out of 10 owners who tried to hire last month found ‘few or no qualified applicants’.
- Compensation rose +2pts to a 6-month high, while ….
- Output Prices fell and Inventory levels rose, and ….
- The net percentage reporting higher nominal sales remained negative while ‘expected real sales’ declined further.
So the collective read-though from small businesses to jumpstart the year is that: Labor costs are increasing and inventory levels are rising while sales/demand and output prices are falling.
The shifts weren’t huge and the NFIB data can be noisy/incongruous on a month-to-month basis but there is no favorable or rose-colored profit cycle framing for that condition set above.
So, generalizing, imbalances are relative and if the supply of and demand for something are both falling but supply is falling faster then the read-through to the price of that thing becomes increasing challenging – particularly if the demand side (labor demand) is mired in pandemic catalyzed PTSD .
A parallel dynamic exists with respect to policy and inflation.
Restrictive rates and tighter credit conditions serve to curtail hiring (b/c activity is slowing) and investment (b/c cost of capital is hiring and why would you ramp spending into negative demand growth).
If the capacity to make stuff is falling faster than the demand for that stuff, then the disinflationary impact may be less than ‘ideal’ and real (& potential) output will suffer.
Housing sits as the immediate and accessible microcosm for a variant of this dynamic.
The collapse in affordability has clearly catalyzed demand destruction. But its similarly catalyzed supply destruction (why move when it’s going to cost you 50% more and there is no inventory to choose from anyway).
That relative imbalance suggests that while HPI will likely continue to decelerate off of all-time RoC highs, some kind of dramatic collapse in home values is not imminent.
Remember, amigos, in Macro, everything is obvious and nothing is what it seems!
And attempting to disentangle the current set of countervailing trends and counterintuitions cultivates some existential’ish macro musings ….
I mean, if 5% rates are all good, it at least partially implies that a decade+ of Global ZIRP, NIRP and trillions in global QE were somehow unnecessary. And if so, why exactly? And is all the current macro & policy dramatics just spurious activity serving to time-shift the same inevitability?
That is, if we get a soft landing and/or idiosyncratic and structural shifts keep inflation elevated then rates won’t go down. But if rates don’t go down does that just mean we get a harder landing later in a kind of different roads are really all the same road with the same ultimate destination.
Anyway, lets wrap this bad boy with a refreshing quantum of 4th Turning, cypher punk, diamond handed, crypto stoicism ….
The number of BTC addresses with a nonzero balance and the percent of supply last active 1+ years ago (HODLers) are now both at fresh ATHs.
Cynical …. and Hopeful?
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.52-3.90% (bullish)
UST 10yr Yield 3.40-3.85% (bullish)
UST 2yr Yield 4.22-4.72% (bullish)
High Yield (HYG) 74.20-77.00 (bearish)
SPX 3 (bearish)
NASDAQ 11,262-12,228 (bearish)
RUT 1 (bearish)
Tech (XLK) 132-145 (bearish)
Defense (ITA) 114-118 (bullish)
Gold Miners (GDX) 28.51-32.10 (bullish)
Shanghai Comp 3 (bullish)
Nikkei 27,205-27,810 (bearish)
VIX 17.91-21.44 (bullish)
USD 101.52-104.54 (bullish)
Oil (WTI) 72.70-80.85 (bearish)
Nat Gas 2.32-2.70 (bearish)
Gold 1 (bullish)
Copper 3.99-4.18 (bullish)
Silver 21.22-23.41 (bullish)
Bitcoin 20,192-23,996 (bearish)
Best of luck out there today,
Christian B. Drake
