Let us take a look at how consumers are thinking about the economy and reacting to what they see.
Consumer sentiment is changing and consumer behavior is changing. Inflation is going up. Disposable income is pressured. Sentiment has gone quite negative given sustained price increases and inelasticity in the supply chain.
The University of Michigan consumer survey shows significant lows:
We are looking at 2011 levels.
I continue to hear the Fed talk about the "strength" of the U.S. economy. Retail sales are up and spending is going up.
Retail sales are up but sentiment is down. Why are consumers spending so much while so pessimistic about the economic environment? What is going on?
Look at the far right part of the below retail sales graph. February to March month-over-month gasoline store sales rose 9.6%, but the CPI says that gasoline prices went up 18.3% month-over-month. Americans paid quite a bit more money to get less gasoline:
And this is where we are seeing signs of an oncoming recession where we will see reflected in GDP. Consumers are paying a lot more and getting a lot less than fast year. The tradeoff in consumption is at the expense of spending on services that does not show up in retail sales.
Less services. Less goods. Higher prices. Lower sentiment.
Will this impact nominal spending on good as it has in real terms? When will we see that?
What are the impacts of moves to the Federal funds rate? Well...I am not so sure that is where the action is.
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