This Week's State Of The Economy - What Is Ahead? - 18 November 2022

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Nov 21, 2022

This Week's State Of The Economy - What Is Ahead? - 18 November 2022

On balance, this week's indicator performance came in slightly better than expected, supporting economic resilience so far through the fourth quarter even as the headwinds of elevated inflation, tightening monetary policy and heightened uncertainty about the outlook remain firmly intact. While supportive to the sustainability of the economic expansion, the stronger-than-expected performance makes the Fed's job of taming inflation that much more difficult.

The first piece of encouraging news this week was the lower-than-expected gain in producer prices. In line with last week's CPI performance, the headline PPI increased 0.2% sequentially, two-tenths below expectations. The more moderate pace of price gains cooled the year-over-year rate for the fourth straight month, dropping 0.5 percentage points to a still elevated 8.0%. October's headline increase reflected a 0.6% rise in final demand goods prices (about 60% of this increase can be traced to a 5.7% gain in gasoline) as final demand services prices slipped 0.1%, marking the first monthly drop since November 2020. While showing prices are beginning to head in the right direction, inflation is still running at an unacceptably high pace for the Fed. Yet another similar, downward trending performance from the November CPI report next month may provide enough evidence for the Fed to pull back on the pace of rate hikes as it seeks to bring down inflation markedly.

Highlighting the resiliency of the U.S. consumer, total retail sales increased a stronger-than-expected 1.3% in October, boosted, in part, by a 1.3% jump in motor vehicles & parts and a 4.1% rise at gasoline stations. Excluding the aforementioned and building materials and food, control group sales—which feed into the personal consumption expenditures component of GDP—increased by a strong 0.7% last month, on top of upward revisions to September and August. It is clear consumers are willing to run down savings and accumulate credit card debt in order to maintain their current pace of spending. The strong start to the current quarter suggests upside risk to our 6% year-over-year holiday shopping spending call and, in turn, Q4 consumer spending and GDP growth. Indeed, the Atlanta Fed GDPNow model currently projects Q4 U.S. real GDP growth at a 4.2% annualized rate.




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