The Most Important Number of the Week Is 115.8
(Bloomberg Opinion) -- When it comes to the economy and financial markets, there’s theory and there’s reality. Choose wisely.
The theory is that inflation punishes consumers, eroding their purchasing power and causing sentiment to disintegrate. All this would naturally have a detrimental effect on the economy as more people feel like they just can’t keep up with rising prices.
The reality — at least at the moment — is that the highest inflation rate in 40 years is having little effect on U.S. consumers. The best evidence comes from Conference Board, which said Thursday that its consumer confidence index soared to 115.8 for December from 111.9 in November. The gain was the biggest since June and exceeded the forecasts of all 57 economists surveyed by Bloomberg.
What’s encouraging is that the surge in confidence came solely from consumers’ outlook, rather than their assessment of the current situation. The proportion of consumers planning to purchase homes, automobiles, major appliances and vacations over the next six months all increased. In short, they see better times ahead, which is the exact opposite of what happened in the late 1970s, the last time inflated rapidly accelerated.
The Conference Board report is no outlier. More than 109 million Americans are forecast to hit the road this holiday season, driving 50 miles or more between Dec. 23 and Jan. 2, according to the AAA auto club. That’s an almost 34% increase from 2020 and amounts to 92% of 2019 levels, despite gasoline prices hovering around seven-year highs.
Bloomberg Economics this week predicted that holiday sales will rise 7.5% from last year, the strongest gain in at least three decades “despite higher inflation and a downside retail-sales surprise in November.” Excluding new vehicles — which make up about 20% of what Bloomberg Economics defines as holiday sales — shopping is expected to rise 11.0% from a year ago. Here’s how Bloomberg Economics put it:
Such results would be consistent with our broader economic assessment that consumer spending continues to run hot, in line with falling unemployment, accelerating wage growth and the unprecedented level of savings accumulated over the course of the crisis.
The reason why consumers are feeling pretty good has to do with the swift and unprecedented response by the government and Federal Reserve last year to support the economy during the early days of the pandemic. Those moves are still paying dividends. Americans have built up a record $2.7 trillion in excess savings, and companies are looking to fill an all-time high 11 million job openings, far exceeding the 7.4 million people who are unemployed, according to the Labor Department.
That’s underscored another big difference between now and the late 1970s – Americans are highly confident in their ability to get a job. The part of the Conference Board index that surveys consumers on whether jobs are plentiful is at a record high of around 55, double what it was 40 to 45 years ago. No wonder the Labor Department’s Job Openings and Labor Turnover Survey shows Americans are quitting their jobs at a record rate and taking advantage of higher pay elsewhere.
The primary risk in all this is that a buoyant labor market leads to a dreaded wage-price spiral that causes the current high rates of inflation to stick around long after the supply-chain disruptions are cleared up. That predicament couldn’t be reversed by the Fed without forcing the economy into a recession. It’s certainly a concern that the Labor Department’s Employment Cost Index posted the biggest increase in decades in the third quarter, underscoring the higher wages employers are having to dish out to retain and attract workers.
The thing is, as the chart above shows, workers had gone a long time without much in the way of wage growth, contributing the slowest economic recovery in history following the financial crisis. And it isn’t like the trends that gave leverage to employers, such as increased automation, are going away. It’s even likely that rising employment costs will prompt companies to find new ways of doing more with less.
This isn’t about downplaying the negative consequences of faster inflation, which most hurts those at the lower end of the income and wealth spectrum — a group that has only grown since the financial crisis more than a decade ago — and the elderly, who are likely on fixed incomes and living off savings. Indeed, Commerce Department data released Thursday show consumer spending, adjusted for inflation, stagnated in November.
What gets lost in the breathless commentary about inflation is context. Consumers are in much better shape financially to weather a jump in prices than 40 or 50 years ago, which will limit the damage to the broader economy. That’s reality, not theory.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the executive editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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