Anybody who gets to know me learns sooner or later that I have a voracious sweet tooth and See’s Candy is one of my greatest weaknesses. Growing up in Maryland, which was not privileged to have See’s Candy brick and mortar stores😝, my grandmother used to order See’s Candy during the holidays or on special occasions. Hunting in desperation, I would raid my grandma’s kitchen looking for the beautiful iconic white box with black ribbon and the famous portrait of the queen herself, Ms. Mary See. God Bless that sweet old lady! I would quickly engulf six or seven pieces of chocolate (I’m not kidding and for the record butterscotch squares are the best), the reward pathways to my brain would begin to activate, and the dopamine rush would put me in a state of bliss. After the short-lived sugar high, I would return to reality only to feel sluggish, gluttonous, and disappointed that the gratification had passed.
Which brings me to the economy. The sugar high caused by economic policymakers has not completely left the consumer and investors. So far this year investors have seen a lift in the market due to better-than-expected data points. Unemployment sits at 3.4%, a 54-year-old record low with half a million jobs added to the economy in January alone. (1) Consumer spending came in better than expected for the month of January due to warmer than usual weather, deferred gift card spending from December and a significant bump for Social Security recipients. Inflation remains elevated but displays signs of easing, particularly in home and car spendings which are highly dependent on cheap borrowing. In other goods, the improved global supply chains have helped increase inventories and has been a deflationary factor in the overall inflation saga. Spending is now shifting towards services as the injection of stimulus and free money hand-outs is still working its way through the economy, so it is no surprise inflation has remained stubbornly high.
For example, the federal reserve preferred measure of inflation, Personal Consumption Expenditures (PCE) excluding food and energy, last month increased month over month 0.6% and 4.7% year over year.(2) The biggest thorn and ongoing challenged for the Federal Reserve is inflation. Recall that the federal reserve must balance two crucial responsibilities: price stabilization and full-employment. The Fed has taken on a new slimmer measurement of PCE dubbed “Supercore” inflation (3), that could keep a heavy foot on the interest rate gas pedal for longer. The new gauge looks more closely at core services, with housing removed, as it is more responsive to interest rate hikes and labor costs. In contrast, the price of goods is more influence by global supply chains and logistics. In other words, the Fed will feel more compelled to keep marching forward with rate hikes when the pace of service inflation is high vs. goods. You may recall that this rang true in mid-2021 when inflation noticeably launched into an upward trend. The Fed attributed it to bottleneck supply chains and COVID lockdowns, which obviously impacted prices, though notably overlooked the excess savings and stimulus that funded Americans’ purchasing power. As a result, the Fed was too late increasing rates and now has been playing catch-up. Delicacy will need to be applied in order to bringing the economy to the sought after soft landing into a slow-growing state.
The sugar high of the economy will moderate, we just don’t know yet how many Sees’ Candies were consumed to delineate the extent of the sugar crash.
(1) https://www.commerce.gov/news/blog/2023/02/news-unemployment-its-lowest-level-54-years
(3) https://www.wsj.com/articles/what-is-supercore-inflation-11675195498