By Aoifinn Devitt, CFP® – Chief Investment Officer
Summer’s lease hath all too short a date.
Sonnet 18, William Shakespeare
As we near the end of official summer, the economy continues to hum along like a lazy summer afternoon. Latest indicators show that consumer spending surged in July amid easing price pressures, per the U S Commerce Department which reported household spending as rising 0.8% in July, up from 0.6% in June. The run rate of inflation is down to 2.1% annualized if we look back at the past 3 months. So far so “old normal”.
While it is true that the composition of consumer expenditure is changing – shifting more towards experiences and services and away from goods, and savings rates are falling as credit card debt is rising, a robust employment market seems to be shoring up the consumer overall. Even mortgage rates over 7% and at a 23 year high don’t seem to be breaking sentiment. Perhaps motivated by low housing inventory, applications for mortgages and refinancings have ticked upwards slightly, as adjustment to higher levels and normalizing them seems to be the name of the game.
When it comes to the future direction of interest rates, Chairman Powell seems content to do some star gazing – letting the data “stars” guide future decisions. He sprinkled an abundance of caution around when speaking about future plans this week, warning of “substantial further ground” to cover going forward, while his European counterpart, Christine Lagarde, president of the European Central Bank cautioned about changing the rules of the game halfway through.
There have been some delightful analogies drawn about “coming down mountains” in the dissection and analysis of the current macro-economic climate. Any mountaineer knows that coming down a mountain can be a treacherous time. It is a time where we naturally pick up speed. Put a foot wrong and catastrophe can occur. So it is natural that institutions will watch their footing as inflation comes down and interest rates follow behind.
One thing that has, interestingly, not come down, is the US dollar which continues to defy expectations by actually moving higher even as interest rates come down – which is not the usual relationship seen. This is perhaps a reaction to the relative strength of the US economy v. say, China or Europe where sluggish economic growth paired with persistent inflation and the ongoing tensions in Russia/Ukraine have cast a pall over the economic outlook.
Equity markets were strong in the latter part of August but had to recover some losses from earlier in the month. China had a disastrous month, as poor trade and economic data clouded that country’s emergence from their COVID shutdowns.
As we begin Labor Day weekend, it has been Labor that remains under the microscope. Jobs numbers are viewed as a barometer of the strength of the economy and all is apparently well, although the persistence of this measure has led some to question whether we are analyzing it correctly given the overall lower participation rate by certain segments such as the over 55s and women across all age groups. As markets, and the rest of us, go back to school we will all be learning the skills to navigate these new metrics. I wish all of our readers a restful and enjoyable Labor Day weekend.
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