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The Penta Podcast Channel is home to all of Penta's podcasts, including the Macrocast and What's At Stake: A Penta Podcast. The Macrocast, produced by Penta and Markets Policy Partners, features weekly insight and analysis on the latest macroeconomic trends. What's at Stake: a Penta Podcast features in-house experts and often special guests for analysis on the biggest issues shaping business and public policy.
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Macrocast: The ripple effects of rising consumer confidence
This week on the Macrocast, Ylan Mui, Brendan Walsh, John Fagan, and Robert Dewey are joined by John Dick, CEO and founder of Civic Science, to dive into the latest economic sentiment index (ESI). The group offers their insights on the subtle shifts in the labor market, the dilemma of return-to-office mandates, and the decline in job changes since the peak of the "Great Resignation." And after an active summer for labor, our experts grapple with the potential economic ripple effects of the United Auto Workers strike. You won't want to miss it!
Read the latest ESI analysis here.
Hello and thanks for tuning in to today's episode of the macrocast. I'm your host, elon Mui, a managing director at Penta. John Fagan and Brendan Walsh, with Market's Policy Partners, are my co-hosts and joining our crew today is John Dick, founder and CEO of Civic Science. Hey guys, Morning.
Speaker 2:Good morning Elon.
Speaker 1:Good morning. Well, a lot has happened over the past week, including this historic union strike against the big three automakers. We're going to talk about that today. But there's also been just a giant pile of economic data the consumer price index, the producer price index, our own economic sentiment index. So, john Dick, I'd like to start there, because I feel like the thread that ties all of these disparate things together could be what does it all mean for the consumer, who's been incredibly resilient throughout the post pandemic period, as well as what does it mean for workers, who have really been leveraging the benefits of a historically tight labor market?
Speaker 3:Well, I mean, if you see a thread through all of this, you're the only one who does.
Speaker 1:I'm seeing signs where there may not be any.
Speaker 3:Yeah, I think I coined the term on this podcast several months ago that we're in the sort of long island iced tea economy. It's just like a bunch of stuff thrown in, indiscernible from each other. But yeah, I mean the economic sentiment index was up this week, which was the first time in almost two months that it wasn't falling. Hard to know exactly why. The biggest driver of the various component metrics was just overall confidence for the economy at sort of a six month forward view, which again, where's that coming from with the consumer? An economist might say it has something to do with the revised optimism of GDP, but I don't think the consumer pays that much attention to that. So there's that on one side. There's sort of like this kind of retention of hope I guess that consumers have. But then you look like a little bit further underneath the covers and there's a lot of other kind of soft things. We see Consumers are reporting dipping into their retirement funds early. We're seeing, of course, continued concerns about the return of student loan payments coming back next month. The concern over repaying those loans has been pretty steady since the date was announced in July and we're already seeing sort of intended cutbacks from those consumers in areas like dining out and apparel, which the second one in particular is in great going into the holiday season.
Speaker 3:You mentioned the job market which, yes, has been largely, of course, positive, but we also were noticing really two things the percentage of workers who say they've changed jobs over the last year, that has dipped about three percentage points then, from what we saw in 2022 and 2021.
Speaker 3:And then, sort of almost like almost too conveniently, the same increase of people saying they're actively looking for a job is up three, exactly that same 3%. So they haven't changed jobs, maybe because they couldn't, even though they really want to. There's signs in the data that what's driving that interest in looking for a new job is people being required to go back to the office, which is, as we all know, has been sort of ramping up pretty steadily this year. And because, when we look at sort of the main reason people are looking for a new job, it's not as much about better pay, it's about more flexibility, which suggests maybe they've lost some flexibility. So, yeah, it's a hodgepodge of ups and downs and good and bad, and I think let's celebrate a small win that consumer confidence stopped its freefall this last couple of weeks and hope that that's a sign of better things to come.
Speaker 1:Yeah, I was struck by the increase as well, because the Economic Sentiment Index, which is something that both Pentate and Civic Science compile and put out every two weeks, I believe that the previous reading that we had gotten was the lowest level of the entire year, maybe even longer than 2023. So I wasn't sure of what we were seeing in this muted increase. Was the dead-cap bounce that we see sometimes in the markets, or if there's maybe some level of stabilization, like have we hit the bottom?
Speaker 3:I mean it's certainly possible that it's just a modest correction against sort of a precipitous gloom and doom over the last few months. Well, I think we'll know a little bit better about that at the next reading. If we see two of these in a row, it's a little bit more of a trend. We could see some just bottom bouncing for a bit, although keep it in perspective we're nowhere near as low as we were this time a year ago. So net year over year we're still better than heading into holiday retail season this time last year. It's just the recent trend isn't as positive.
Speaker 1:I also think what you said about the sort of maybe dynamism in the labor market was interesting, that people are not as many people are leaving their jobs, but there's still an uptick in the number of people who are looking.
Speaker 1:And we've talked before on the podcast about this idea that folks were sort of locked into their jobs. So many people made life changes during the great resignation right after the pandemic and then folks have kind of been where they want to be post that, after that period, and maybe we're starting to see some of that movement sort of unlock again. As workers now have been in their jobs for a while, they're maybe looking to make changes and, as you say, that the conditions of their employment are changing. And so I wonder how much we're entering a period in which the power that workers have had when the job market was so incredibly tight and there were vacancies all over the place, the power that workers were able to amass during that period, is it going to last? And maybe we're seeing that play out too as well with this auto worker strike.
Speaker 3:Well, I mean, first of all, yes, the workers definitely has less leverage than they did 18 months ago, two years ago. That's just evident. And it's hard to know. You know anecdotally what kind of baiting and switching happened with people who were brought into those new jobs under the auspice that they would have a remote lifestyle and then all of a sudden leadership or management decided to change their tune on that and now they feel like and there's still enough opportunity. Well, I don't know if it's opportunity, but there's enough instances out there of companies that have remained remote and you sort of look at the grass, the green grass, on the other side of the fence of where you might be sitting if you don't have that same flexibility. And so people you know actively looking for a new job might be wishful thinking because there aren't, you know, quite as plentiful jobs as there were before. Interesting.
Speaker 3:You mentioned the auto strike. You know consumers are concerned about it. It's interesting how the concerns vary pretty strongly based on what type of car people plan to buy. We see people who are intending for their next purchase to be an American made vehicle are much more concerned about a strike than those who are maybe considering a foreign made vehicle which makes makes a lot of a lot of sense. But there's a lot driving the look. I think a lot of unions look and look at what happened of how UPS workers sort of came out on the other side of their, their, their labor dispute and say, wow, there's, there's, there's a better opportunities out there. It doesn't surprise me that there's a bit of a contagion effect of something like that. So this may not be the last one of these we see in the near term either.
Speaker 1:Donna and Brendan, do you guys see a potential economic impact from the strike? I mean right now, where we, where we're sort of at as we record this, it's extremely limited, just a couple of plants, but certainly the UAW chief has said that this could affect all of the factories where there are 150,000 members are employed.
Speaker 2:Yeah, it's definitely a potential drag, but it really is about that duration and you know we will get into that same kind of conversation when we talk about the government.
Speaker 2:You know potential government shutdown that the US is facing and you know we've seen the Biden administration be pretty proactive in trying to broker these, these compromises, obviously with President Biden's union credentials he's he's in a in a position, you know, maybe to to better communicate with with labor than than other presidents.
Speaker 2:And you know we'll see, but the likelihood right now is that you know this, the the assumption is that this is probably going to go the way that we've seen the rail workers strike. It's not, you know, weighing on economic expectations to the extent you could see it in treasury, treasury yields or any of the other sort of traditional areas in financial markets where you know where you would see economic concerns really coming. You know, coming through. The Fed may be watching it, but nobody's expecting the Fed to hike next week or anyway. I mean it's certainly not the base case. So for now it's it's sort of watchful, watchful weariness and the baseline assumption is that it gets resolved in, you know, a reasonable timeline that doesn't leave a big divot in the US economy and and certainly the White House is incentivized to, to try to get something compromised sooner rather than later.
Speaker 1:You know, what I realize would be really, really awful is if we're in a government shutdown, an auto worker strike and a Hollywood strike all at the same time, I mean the job numbers would be horrible and and and also be horrible for all the workers involved. But I mean I just can't even almost imagine that that would do to some of the data. Hopefully the auto worker strike does not last that long, because then I think, to your point, john, we'd be in a situation where we're seeing some real economic impact if it lasted, you know, through the through the course, through past December, september 30th and into October. But you know that's not a, it's not an implausible scenario.
Speaker 2:Right, and something like this is from a broader macro perspective. This is not a disinflationary dynamic, right. I mean this is in that category of drivers of a potentially higher for longer structural inflation story. That doesn't mean hyperinflation or anything too dramatic. But it is on that side of the ledger the pendulum swinging back toward labor, even if it's not quite as far as it was during the height of the pandemic that we're clearly seeing a rebalancing of the power dynamic between management, labor, and that is maybe how you look at it.
Speaker 2:On one side maybe that's good for inequality and we've seen over the years the capital over labor and that sort of stuff driving an inequality dynamic. On the other side, it's, to the extent that management still has pricing power to pass along to the consumers, it's inflationary and that doesn't ultimately lead to increase in wealth that you'd expect. It's a very nuanced kind of argument and where you come down on the political spectrum usually dictates what sort of lens you view this dynamic with. But we put it in some of these other, with these other broader dynamics like the rollback of globalization, the French shoring, diversifying ways, supply chains from China that's expensive, additional insurance and that sort of stuff in the sort of disaster prone world that we live in these days geopolitics and so forth and so these are dynamics that tend to push prices higher, and we're certainly seeing that in oil and gasoline these days. We'll talk a little bit more about that in a minute.
Speaker 3:But, john, isn't that sorry to take over the interview alone, but isn't that your point earlier about the inflationary impact of these things, or potential inflationary impact of these things? Isn't that exactly why these unions are taking up these, these fights right now? I mean, I think they're looking and seeing. They have not only they, they have some leverage as workers, but they have some leverage against the negative PR and real economic impact of prolonged strikes, so they're in a better position to play, to play chicken with management and ultimately with the administration.
Speaker 2:Yeah, well, I mean, that's the heart of the wage price spiral. I mean, we're not there, we're not in a wage price spiral, but that is kind of just just what you've identified is the dynamic where cost of living going up, the workers push for higher wages, the management passes it along, the price of goods goes up, and you know, and you merrily go your way into the 1970s dynamic. But that is looking at the average hourly inflation, I mean average hourly earnings that we've seen in recent months and even through the worst moments of the, the inflationary spike. It doesn't appear that this is sort of a broad based dynamic and weakness, and you know, incremental weakening or softening of other parts of the labor market may offset that. So but yeah, it's a really good point.
Speaker 3:Well, it's interesting in our data when we look at so the Hollywood strikes kind of the exception. That proves the rule a bit. Consumers are generally have been much more concerned about a railway strike, a teamster strike, an auto worker strike than they've been about a Hollywood strike, and I think part of that is there's maybe less empathy for the perceived sort of Hollywood types compared to, say, an auto worker or or you know anybody, and more of a labor oriented kind of job. And that's that also kind of feeds the PR pressure a bit to resolve these things, because because the consumers just take it a lot more personally, I guess.
Speaker 1:Yeah, I've been curious about the wage price spiral theory because I feel like it's been what a year or more I've lost track now of inflationary, our inflationary period, and worker wages simply have not kept up. I mean, if I don't know that wages have been able to rise to the point where it's pushing up inflation because wages real wages haven't really risen.
Speaker 2:Yeah, and that is where the Fed wants it right. That's exactly what the Fed wants and the sort of clinical language that the Fed uses about. We'll need some incremental loosening of the labor market. That's putting people out of work and that's what they intend to do. That's a feature, not a bug. We're seeing right now that, at least from the macro sense, the Fed has achieved some degree of balance here. The CPI and the consumer price and producer price indexes that came out earlier this week. Brendan can give a little more detail on that, but it was a real dichotomy between the headline number, which was sort of driven by gasoline and energy prices, and then the underlying, which was just a lot tamer and continuing on that downtrend that the Fed really wants to see.
Speaker 4:Yeah, and even deeper. So the PCE price index is the measure that the Fed focus on, especially the core index and basically almost all of the components of the PCE price index come from the CPI and PCE PPI, but they just weight them different. So you can compute what the PCE is going to be pretty accurately. And while the core CPI came out at 0.3, the core PCE is going to come out at 0.1 on a month or more than a month, or more than a month, or more than a month, or more than a month, or a month or more than a month. So it's going to drop the overall rate to 3.8. So the narrative that the CPI and PPI showed is kind of opposite of what the PCE is going to show.
Speaker 1:How long, brendan, do you think that gas prices are going to be a problem here? I mean, Saudi has said that they're going to extend the oil production cuts, so are we going to be in a period where headline inflation is going to appear elevated for an extended period of time just because consumers are having to pay more at the pump?
Speaker 4:Yeah, I mean I think there's not a huge reason to expect that oil prices are going to drop precipitously. But I also think that we probably are kind of finding a ceiling here in the 90s and the gas prices lag it a little bit by a few weeks. So gas prices are going to continue to rise. So we'll probably get to about $4 a gallon in terms of averages throughout the country, but then I think we'll stay there. So it will stop contributing on a month-over-month basis, but it will, in terms of how much you have to spend out of your pocket each week to drive to work will stay elevated.
Speaker 2:And that really goes to the sort of viewpoint that Brendan and I share about the consumer, which is there doesn't appear to be like a knockout punch coming, but it's sort of like in boxing terms, it's like bodywork right. Elevated gasoline prices, thud a government shutdown. Thud auto workers strike, thud they're covering up, they're not taking the shot.
Speaker 4:Yeah, student loan repayments. Thud the cost of childcare is going up because that subsidy ran off.
Speaker 3:So there's a lot of they're not really little things.
Speaker 4:They're decent things that are being kept and while the labor market is still strong, you still have your job. You're just spending more for things where you have the money, but you're going to have to cut back on some other things to make these new unexpected payments.
Speaker 1:Don Dick, you mentioned earlier that you guys have seen some data showing that more people are pulling money out of their retirement plans in order to fund their daily purchases and maybe some special one-off costs. Do you expect that? What are you seeing with that? Maybe what? Where are people spending that money? Why are they pulling down their 401Ks?
Speaker 3:Well, I mean, interestingly, it's like that group skews younger too, which is so like yeah, I mean, people are.
Speaker 3:This is like older, gen Z, younger, millennial people are dipping and that's not shocking.
Speaker 3:I mean it's shocking if you step back and think about it long term, but it's not terribly surprising because that's the same group that's getting hit hardest with things like returning student loan payments and rising credit card debt. And you know, look, it's just a group of people that are trying every way they can to maintain the level of spending they've enjoyed over the last couple of years. I don't know how else to put it. I mean, when we look at I know we've talked about this before when I've been with you when we look at categories like travel and prestige, beauty, things that typically suffer when we see economic headwinds, consumers are just prioritizing these what we call sort of like well-being categories, like things that just make them feel better, and I just don't think consumers are ready to let go of that. Yet. You know, we even saw, in the wake of intent and interest around the new iPhone that was announced on Tuesday, like purchase intent, for that phone is consistent with things we've seen in years past.
Speaker 1:It's like you know. I think it's $1,200 this time.
Speaker 3:And they're like. I care a lot about the phone in my pocket and the battery life that it has, and you know I'm willing to sacrifice other things to maintain that. You know the chickens will come home to roost at some point, but that's where we are at.
Speaker 1:Do you think that part of this could be? I think back to the period when interest rates were really low remember that period and mortgages were really cheap and everyone had so much equity in their home and they were using their houses like a credit card. And so if that avenue is no longer available to them, they are trying to find another credit card, and maybe the 401k plan is it.
Speaker 3:For sure. Well, in that and we're watching buy now, pay later programs accelerating, but then, but look, the consumers also making some tradeoffs in that we're watching, like purchase of private label, you know, store name brands is rising. There are certainly other categories where we don't see spending increasing as much, where consumers are making tradeoff things like household products, like cleaning products for their kitchens, things like that. So there is some some again some tradeoff and trade down that's occurring, but net, they're like look, I'm going to find any way I can to continue to spend on the categories I care about, the same way I did in 2021 and 2022.
Speaker 1:Brenton, I think we saw some of that too and the retail sales numbers that came out this week, which blew past the consensus, consumers were still spending on clothing, I believe. They were still spending on food and drinking places. They're still going out, but they're also having to trade down on some other bigger ticket items.
Speaker 4:Yeah, so you saw especially a car sales. They kind of slowed down, but you know the everyday things that you do. You know for fun. Consumers are still spending on that. It'll be interesting now, as gas prices have gone up in September, to see how much you know the consumer now that you know you're back at work, you're back at school if they pull back.
Speaker 1:Going forward now, and I would just like to point out that Virginia got rid of its back to school sales tax holiday, which I was very disappointed about. I'm not sure why they made that decision, but that had been a big driver for, I would say, the Muay family household purchases in previous years, so I was disappointed to see that go away. So maybe that's a factor as well. So, even with the consumer spending numbers up headline, inflation increasing, the Fed is going to have to make some tough decisions. But, john, as you mentioned, it seems like they are going to be on pause, if not for just September, maybe even for the rest of the year, according to the market forecast.
Speaker 2:Yeah, the Fed is sort of like in this. You know, in this mindset of like don't make me turn this car around. You know I could hike again, but you know it's a lot of verbiage. You know the expectation is that this next meeting is going to be another hawkish hold. So that's almost certain to be the case.
Speaker 2:The Fed has not been in the business of surprising the markets and being data dependent. There's really nothing in the data that you would see, given where the sort of burden of proof we think has shifted to the hawks. You have to see something like really outsized in terms of a, you know, a turnaround to the upside in inflation or a retightening of labor markets or something like that to get them really back in hiking mode. So we think that they're going to be, you know, hitting it right down the fairway again in terms of where expectations are. They're going to hold rates and say you know we could certainly hike again, and you've got a lot of committee members with that.
Speaker 2:You know diversity of opinion of whether another hike is needed or whether they've done enough. At this point, you know our guess is that they've they're done, but they're going to continue to talk tough. But looking out, you know there's still lots of the. We think that ultimately, the Fed is going to try to dissuade the market from its expectations of rate cuts next year rather than hiking. That's also a tightening If they're able to talk financial markets and Fed fund futures out of expectations that they're going to be in, you know, relatively aggressive hiking mode. They're like 100 to you know, plus basis points of cuts priced in next year and to the extent that they can, you know, even if they keep the policy rate level, if they talk markets out of that, that's a tightening of financial conditions that they can achieve going forward. And so we think that that messaging is going to be consistent, higher for longer and incrementally it's getting through to markets, sort of backed up by the data that people see.
Speaker 1:It's not just the Fed that might be done here. It could also be the ECB. They implemented the 10th consecutive rate high rates there, now at 4 percent, but it sounds like Lagarde suggested that this could be it that if you hold rates for a sufficiently long duration at a high level, that's tightening as well.
Speaker 2:Absolutely. It's really the stick-to-itiveness of central banks that's probably going to be the centerpiece of their policy from here. There were some howls from Italian officials about this last hike being gratuitous, saying that Lagarde was living on Mars. When you look at economic data out of the eurozone, it doesn't look that great. The reality is in practice, certainly for financial markets, the difference between the ECB staying on hold and threatening to potentially do more or hiking as they did. Hiking and basically giving that last kiss goodbye, I guess, to the hiking cycle had a very dovish impact on financial markets. The euro swooned, the yields on regional sovereign bonds went down and it's been good for EU equities.
Speaker 2:We think the European Central Bank is done. We think the Fed is done. We think the Bank of Japan despite some messaging about potential hikes, maybe way down the road, they actually just walked that back overnight. We think they're pretty much on hold. Bank of England, though they've got a meeting next week and they've still got about as bad a stagflationary problem as you can find in the developed world. We think that they alone will still be on a hiking path, a lonely, increasingly lonely, arduous and glum hiking path.
Speaker 1:You know, what's idiosyncratic is what's happening in China. I mean, they're on the very lonely path of trying to ease policy right now in order to stimulate the economy. Brendan, are we seeing any impact from that? I know we talked a lot last week about some of the challenges coming out of China, but maybe there's some glimmers of hope as well.
Speaker 4:Well, they keep trying, but it's a tough issue because you have so much of the problem with the imbalance in the Chinese economy is the housing they just built too much. So you have to kind of fix that. But before the way that they would stimulate the economy is by building more stuff and people buying houses. So you're not going to fix it with the cause of the root problem. So things aren't getting terribly worse, but all of these efforts to simulate it isn't really massively increasing growth. So you're kind of just stuck in this bit of a malaise.
Speaker 2:Yeah, the data that came out overnight was slightly better than expected. Right, this was August data and you got a little bit of upside in industrial production, but still subdued at 4.5% Year over year. That, for China, really isn't that hot, but better than the sort of mid three range that we'd gotten and slightly better than expectations. Similarly, with retail sales 4.6% year over year again not shooting the lights out in terms of what China could potentially be doing, but it's better than estimated, and July's 2.5% was just awful. So that's maybe some glimmers of hope.
Speaker 2:And it got financial markets a little bit kickier overnight. But notably the mainland Chinese equity index has sat out the rally, which shows that maybe there's a lot of doubt, and some of that doubt is probably centered in the fact that fixed asset investment, which is, as Brendan said, where property resides, was still really lousy, and the property investment component there was negative 8.8% Eight is a lucky number in China, but not negative 8.8% and so that's where the locus of pain still resides. And so the Chinese currency got a little bit firmer overnight, but it's still hovering near its weakest level since 2007. So against the dollar, or so it's not exactly a great shape.
Speaker 1:And doesn't seem like enough of a development in order for the Fed to make any different decision next week when it meets. Seems like, as you said, that they're on hold and none of the data points that we've seen coming out of the US, or coming out of international countries as well, seems like it's going to throw the Fed off course, we're going to be looking ahead to see whether or not there's any progress toward averting a government shutdown over the next week or so, but, brendan, john, dick John, anything else that's on your radar screen that you're going to be looking for.
Speaker 2:Well, next week we do get purchasing managers indexes for the preliminary ones for September. That's going to be interesting and see where global growth is. We've mentioned the Federal Reserve will obviously be in the spotlight, but Bank of Japan, Bank of England and others will be having decisions. The only other thing we're notable today is the 15th anniversary of Lehman's bankruptcy, and for those of us Brendan and myself, the folks that were in financial markets, working in financial markets at the time it was a very, very challenging period, and that is a few days that I will never forget.
Speaker 3:You should have tried to start and finance a startup during that exact period of time, like somebody else on this call.
Speaker 4:Perfect timing.
Speaker 2:Bob, where were you? That was. This is our colleague Bob Dewey.
Speaker 5:Yes, I had started a research firm and we were trying to hire Wall Street analysts and that was the beginning of a whole lot of people that were very interested in joining our company. But for TARP that rescued the incomes of those who were going to join us. We would have started strong with a lot of analysts, but we had several in particular that got big cash guarantees when they said they were going to join us. Very interesting problem. I was pretty upset that the government didn't put the constraints on the compensation of those at the investment banks. They had in Southview.
Speaker 2:It was an astounding period and it just felt like the chessboard had been thrown up in the air and everything was in a shambles and nobody knew it was coming next. It was tremendously uncertain and to be at a hedge fund like Brenda and I were at the time you felt like a sailboat in a typhoon. But that created the fantastical monetary magicianship that was sort of born from. The Lehman crisis was created this era that we're now. This is the bookend of the Lehman moment, with structurally higher interest rates and the Fed had never intended rates to be at zero negative and have these QE, asset purchase and all these other funky programs going for over a decade. But that's kind of where we were and it's interesting to see era's finish and maybe this is the COVID inflationary spikes or close the book on the Rockstar central banker low for longer. Free money era forever. We'll see.
Speaker 1:I remember I had a hat that had a logo on it that said QE infinity. It was one of my favorite baseball caps. They only have like one or two, so I can say that. But yeah, that is. It's definitely a relic of a different time and it's good to be past that right. Right now we're facing a whole other slew of issues that we will continue to talk about right here on the macrocast for the weeks and months to come. So that does it for us today. Guys, I'm Elan Moy with Penta. My co-hosts are Brendan and John from Markets Policy Partners. You also heard from John Dick of Civic Science, as well as Bob Dewey of Markets Policy Partners, so we hope that you enjoyed our show. Please remember to like and subscribe to the macrocast wherever you get your podcasts. Thanks for listening.