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US Consumers and Companies Continue to Spend Despite High Inflation

Unique market and labor conditions sustain consumer and business spending while inflation and recession pressures weigh on the US economy.
US Consumers and Companies Continue to Spend Despite High Inflation

U.S. households boosted spending in August as high inflation spread across the economy, reports the Wall Street Journal. The Commerce Department said Friday personal-consumption expenditures—a broad measure of consumer spending on goods and services—increased a seasonally adjusted 0.4% in August from the prior month, picking up from a revised 0.2% decline in July.

U.S. Consumer Spending Rose 0.4% in August Despite High Inflation (Wall Street Journal)

Excerpt from the Wall Street Journal: The report indicated that high inflation has become more embedded in the overall economy. The personal-consumption expenditures price index, the Federal Reserve’s preferred gauge of inflation, rose 6.2% in August from a year earlier, slightly lower than in July. But core inflation, which strips out volatile food and energy costs, rose to a 4.9% year-over-year increase, from 4.7% the prior month Spending on services like rent, utilities, transportation and health care picked up strongly in August, rising 0.8% from July, while goods spending declined for the second month in a row as gasoline prices fell. Consumer spending, which accounts for roughly two-thirds of total U.S. economic output, has largely remained solid in recent months despite high inflation, though higher prices mean people are paying more for goods and services and at times getting less. Yet households continue to benefit from a strong labor market and, more recently, gasoline prices that have dropped sharply from a mid-June peak.
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In a related story, also from the Wall Street Journal, a persistent economic puzzle is why labor is still so tight amid slowing growth, high inflation and growing fears of recession.

"I don’t think we’ll see mass layoffs," said James Knightley, chief international economist at ING. "We are going to see companies prefer to hoard their labor rather than do a quick fire and then rehire because the challenges of hiring right now are incredibly intense."

Why Are Companies Still Hiring When GDP Is Shrinking? (Wall Street Journal)

Excerpt from the Wall Street Journal: Gross domestic product growth slipped into negative territory in the first half of the year. Borrowing costs have risen steeply as the Federal Reserve boosts interest rates in an attempt to reduce inflation. Even so, monthly payrolls have grown an average of 438,000 from January through August, nearly three times their 2019 pre-pandemic pace. Many employers say they continue to struggle with large staffing shortages that built up during the pandemic and are reluctant to cut head count. In many cases, they are still hiring. Some economists say the scars of the past year’s shortages—including the huge expenses of hiring and recruiting, combined with high employee turnover—could leave companies more hesitant to lay off workers if the economy falls into a mild recession. They contend that companies never fully met their hiring needs during the recovery and that businesses will likely pull openings, which are at historic highs, before they resort to cutting jobs.
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In another related story from the New York Times, stocks fell on Friday, heading toward the end of a brutal week for global markets and a loss in the third quarter of the year, which would be the first time the S&P 500 has posted three consecutive quarters of losses since the aftermath of the global financial crisis more than a decade ago.

"The conditions are not yet in place for a sustained turn in market sentiment," said Mark Haefele, chief investment officer of UBS Global Wealth Management. "In our view, such an improvement will require compelling evidence that the threat from inflation is receding."

Wall Street ends an ugly quarter with a whimper (New York Times)

Excerpt from the New York Times: The S&P 500 slipped 0.2 percent in early trading after the government released another hotter-than-expected inflation reading. The Federal Reserve is rapidly increasing interest rates as it attempts to temper the pace of rising prices, but persistent inflation raises the risk that it will need to raise rates even higher and wind up inflicting too much damage on the economy. The S&P 500 is on course for its third straight weekly fall and its third straight quarterly slump, the kinds of losses investors haven’t faced since 2009. It’s on pace to end the three months through September nearly 4 percent lower, with a year-to-date loss of almost 24 percent. By raising borrowing costs for consumers and companies, central banks around the world are trying to temper demand and slow the pace of rising prices. That’s important for the long-term health of the economy but its typically bad for stocks in the short run, as higher costs crimp earnings.
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