This Week's State Of The Economy - What Is Ahead? - 17 November 2023

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Nov 23, 2023

This Week's State Of The Economy - What Is Ahead? - 17 November 2023

There was a slew of economic data to parse through this week. While the data came in somewhat different from anticipated, the underlying details continue to paint a picture of an economy that is gradually losing momentum. The consumer price data showed a continued deceleration in inflation with the annual growth rate on the headline index slipping by a half a percentage point to 3.2% after a 3.7% year-ago increase in September. The softening in the core index (excluding food and energy) was a bit more modest, but at a 4% annual rate in October, signals a continued slowing in inflation (chart). The softer-than-expected CPI print was an encouraging development for the Fed and reinforces our view that the FOMC has ended its hiking cycle, but is still likely a ways away from outright easing policy. Market participants had a similar reaction as the yield on the 10-year Treasury security slid by about 20 bps on the CPI release and market pricing for eventual FOMC easing was pulled forward.

Some caution was baked back into expectations, however, on Tuesday amid a solid retail sales report. While overall sales slipped 0.1% in October, the control group measure, which excludes volatile categories and aligns well with consumer spending in the GDP report, rose 0.2%, signaling a still-resilient consumer. The weak portions of retail sales were tied to categories that did well earlier in this cycle when consumers were embracing their inner home-body, but which have since languished as people have returned to experiences outside the home. Furniture & home furnishing store sales, for example, slipped 2% and sporting goods & hobby stores fell 0.8%. Consumer spending may be losing momentum after a robust first half of the year, but the fire is not yet out.

That said, we still anticipate further moderation in spending. Not only are pandemic-era support factors of excess liquidity and easy access to credit fading, but real income growth has started to come under renewed pressure amid some softening in the labor market. Initial claims for unemployment insurance ticked up to 231K in the week ending November 10. While that marked the largest weekly gain (+13K) since early August, it's not meaningfully above the year-to-date weekly average of 227K. Yet, continuing claims rose to 1,865K the week ending November 4, marking the highest number of people continuing to claim unemployment insurance since the end of 2021, which signals less ease among recently laid off workers in finding new employment than in recent months.

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