Hanging in there

In a nice chance of pace, consumer confidence increased for the first time this year in March, but still remains below levels from last year as (unsurprisingly) consumers are pretty unsettled by what’s happening in Ukraine as well as the resulting “pain at the pump” (anyone else being bombarded by this political slogan?!). Consumers are expecting inflation to be 7.9% in the next 12 months, which is the highest level ever recorded, but confidence is holding in there because of the strength of the labor market (and its accompanying wage growth).

Moral of the story: As long as consumers feel confident about their job prospects, the chances are that our economy is going to hang in there. At the same time, the number of headwinds continues to increase, so it’s not surprising that the yield curve officially inverted this past week. Remember from last week – this has been one of the best predictors of an economic recession out there.

Onward and upward

Speaking of that labor market, we added 431k new jobs in March, slightly below expectations and well below February’s 750k number. Looking under the hood, there were a lot of really encouraging data points in this report – the labor force participation rate increased to 62.4%, which is within 1% of the pre-COVID level and the labor force increased to 418k, which is only 174k below pre-COVID levels. All in all, this pushed the unemployment rate down to 3.6%, which is lower than Wall Street’s expectations.

Moral of the story: This was a pretty vanilla report, nothing really unexpected. With this report, we closed out the first quarter with 1.685m new jobs created and there are 5m more job openings than people looking for jobs (so if you’re looking for a new job, this might be the time to find one out there).

But gas is just too expensive

We finally got a look at February consumer spending, which slowed to a measly 0.2% pace in February, down from the 2.7% growth we saw in January, because…inflation. Even though incomes grew slightly in the month, income growth hasn’t been keeping pace with inflation – income after taxes and adjusted for inflation decreased for the seventh month in a row.

Moral of the story: The higher gas prices as a result of the war in Ukraine are going to bring down the consumer spending number for March even more. Remember consumer spending accounts for two-thirds of the US economy – consumers haven’t stopped spending quite yet but at some point, the higher food and gas prices are going to force consumers to cut back on discretionary spending, which means the economy starts to slow (remember that inverted yield curve telling us a recession is probably coming?). So, now, all eyes are on the Federal Reserve’s ability to tamper inflation before inflation runs the economy into the ground.

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