Protests in China, Shopping in the U.S.

November 28, 2022

Protests erupted in China over the weekend. Some accounts say the demonstrations are in response to an incident involving a fire and obstructed rescue efforts due to Covid controls. Others suggest frustrations were already broadly boiling over amid the latest Covid protocols and lockdown measures.

Of course, it is yet to be determined how the protests will play out and whether or not the demonstrations will have a meaningful impact on adjusting the country’s Covid protocols. Some are hopeful the government may respond with a reduction or lessening of safety restrictions. Others, however, suggest Beijing may see such?“unruly behavior”?as a precursor to flex its muscles by maintaining?policy controls and reiterating the need to protect the country as a whole.?

From an economic standpoint, China’s Zero-Covid policy has already had serious implications for growth, upping calls for adjustments. China's GDP rose?“only”?3.9% in Q3, well below the official target of 5.5% and following a 2.7% decline in Q2.?

Back in the U.S., the latest look at consumer activity suggests a relatively?robust shopping weekend following the Thanksgiving holiday. According to Adobe Analytics, while mall traffic was well below expectations, online traffic was hefty with shoppers spending a record $9.12B on Black Friday purchases online, a 2.3% increase from last year.

Additionally, according to Adobe Digital Insights, Cyber Monday sales are expected to surge by 5.1%, potentially topping the forecasted $11.2B.

Bottom Line:?The consumer remains resilient amid a further drawdown of savings, lower gas prices, additional local stimulus measures and an increased willingness to ramp up debt, particularly on credit cards. But while these measures are a welcome support to the current lower, albeit positive, spending activity, they are hardly long-term solutions or a sustainable offset to ongoing rising costs and negative real income growth, both of which have resulted in a significant loss in terms of purchasing power. Again, consumer activity still remains positive, a welcome notion for retailers, but at 1.9% this is a marked decline from an average 8.6% pace last year.

Last week, the economic calendar was shortened due to the Thanksgiving holiday. The highlights came on Wednesday, with durable goods orders rising 1.0% in October, surpassing the 0.4% increase expected and following a 0.3% gain in September. Year-over-year, headline orders rose 10.7% in October, down from the 11.5% annual increase the month prior. Capital goods orders excluding aircraft?and?defense – a proxy for business investment – rose 0.7% in October, following a 0.8% drop in September. Year-over-year, business investment increased 6.4%.

Also on Wednesday of last week, new home sales unexpectedly rose 7.5% from 588k to 632k, a two-month high. Year-over-year, sales fell 5.8%, the eighth consecutive month decline. Due to a rise in sales, the months’ supply of new homes declined from 9.4 months to 8.9 months. From a price standpoint, the median cost of a newly constructed home rose 8.2% from the month prior to $493k. Year-over-year, new home prices increased 15.4%.

Additionally, the November 2 FOMC meeting minutes were released last Wednesday, November 23. The growing debate over the Fed’s next policy move and longer-run trajectory of rates continued as the latest meeting minutes suggested the majority of officials see a slowing sometime?“soon.”?According to the November 2 FOMC meeting minutes,?“A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.”

While officials were in agreement price stability has not yet been achieved, there was also an apparent and growing concern regarding the?“lag”?of monetary policy and the real impact on the economy. As such, many officials indicated a potential need to?“look back”?and assess the impact of earlier policy initiatives before moving forward.?“The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important,”?the minutes said.

At the same time, however, most officials acknowledged that rates would ultimately push higher, well above earlier forecasts both from the Fed and the market. According to the text of the minutes,?“various”?officials concluded that?“the ultimate level of the federal funds rate that would be necessary to achieve the committee’s goals was somewhat higher than they had previously expected.”

Today on the economic calendar, the Dallas Fed manufacturing Index unexpectedly rose from -19.4 to -14.4 in November, a three-month high, albeit the seventh consecutive month of decline. According to?Bloomberg, the index was expected to decline further to -21.0.

Tomorrow a number of home price indices will be released, and on Wednesday, the October pending home sales report will be released. While home prices have slowed markedly from peak levels as housing market activity declines amid rising borrowing costs and negative real income growth, given the structural deficit of supply relative to still-positive, albeit reduced, levels of demand, housing prices remain still positive. Again, there certainly is further room for additional downward momentum, but there is likely some structural support to costs as we continue to experience this second-derivative decline, or a slower pace of still-positive accent.

On Wednesday, we will have a look at the Chicago PMI ahead of Thursday’s November release of the national ISM Index. Regional indices – while all slightly varying in region and scope – have painted a clear downward trajectory in terms of production and output around the country, reinforcing a similar downward trajectory in the national data. After a discernable upward spike in the aftermath of Covid, domestic production has slowed markedly, dropping from a peak of 63.7 in March 2021 to 50.2 last month, barely above breakeven, or a reading over 50. Come November, some on the Street expect the headline to finally pierce through into contractionary territory after bouncing along breakeven for the past two months.

Also mid-week, the latest read on the number of job openings will be released, as well as November ADP employment data. Both ahead of the key employment report which will be released on Friday. With the Fed focused on the inflation component of the Committee’s dual mandate, each employment report is increasingly vital, as any indication of less than solid conditions could shift the Fed’s focus back to establishing?“full employment.”

Last month, nonfarm payrolls rose 261k. While still positive employment growth, this was the weakest pace of hiring since December 2020. Suggesting again – just as we’ve noted in housing market activity – that second-derivative decline, or a slower pace of still positive activity. The unemployment rate, meanwhile, ticked up last month from 3.5% to 3.7%. The rise in fact was particularly disappointing as it reflected a decline in household employment rather than an increase in labor force participation.?This month, the unemployment rate is expected to remain at 3.7%. Finally, average hourly earnings are expected to rise 0.3% in November and 4.6% year-over-year after slowing somewhat from 5.0% to 4.7% in September. While down from a recent peak of 5.6% in March of this year as long as labor demand continues to outpace available supply, wages are likely to remain elevated, although not necessarily move higher from here.

Ahead of the key employment report on Friday, on Thursday, the latest read on consumer spending and income will be released.?

The latest retail sales report surprised to the upside with retail expenditures jumping 1.3%, the strongest monthly gain since February, buoying optimism that the consumer remains increasingly resilient as we head further into the key holiday season.

Overall consumption – goods and services – has risen 0.6% for two consecutive months and has slowed from a near-term peak of 1.2% in June and is excepted to rise 0.8% in the latest October report. Income is expected to rise 0.4% in October following a similar rise in September. Over the past 12 months, meanwhile, the PCE while off peak levels remains still well above the Fed’s 2% target, resulting in a rising burden for consumers and businesses. Remember, even as the pace of inflation or price growth slows, nominal prices are still rising. As of September, the PCE remained at 6.2% for the second consecutive month, down from 6.4% in July with the core PCE rising from 4.9% to 5.1%. In October, the PCE is expected to rise 0.4% and 6.0% year-over-year. Excluding food and energy, the core PCE is expected to rise 0.3% in October and 5.0% over the past 12 months.

Finally, when it comes to the Fed, this week we will hear from a number of Fed officials including New York Fed President John Williams today and Chicago Fed President Charles Evans on Friday. Mid-week, the latest Beige book will be released.

?-Lindsey Piegza, Ph.D., Chief Economist?