Monthly Market Report

Posted December 6, 2022

November 2022’s Market Highlights

Domestic markets improved at month-end but were still underwater year-to-date. The 10-year Treasury yield curve declined -34 basis points, gold increased to mid-summer prices, and oil and gasoline drained noticeably as European and Asian markets showed autumn gains yet remained below par compared with the start of the year.

U.S. Markets

Enjoying a second consecutive month of increasing value, the Dow Jones Industrial Average rose +1,857 points and smacked its Thanksgiving lips at 34,589, -4.8% YTD. Ending the holiday weekend at 4,080, the S&P 500 loosened its belt with a gain of +209 points, but -13% YTD. Remembering better feasts, the NASDAQ added a decent +480 points and continued to nap at 11,468, -27% YTD. Stuck with the messy dishes, the Russell 2000 gained +40 points for a close of 1,886, -16% YTD.

Fixed Income:

The 10-year Treasury yield curve rate was 3.68 at month-end, down -.34 basis points compared with last month, but +157.3% since one year ago.

“The Federal Reserve is preparing to slow the rapid pace of its interest rate hikes but will probably keep borrowing costs higher for longer than previously expected to get the economy on stable footing,” the central bank’s chief said on Wednesday.

In a speech at the Brookings Institution, Fed Chair Jerome H. Powell said that the central bank saw some signs that inflation was easing in the costs of goods and housing, but that the tight labor market remained a problem for controlling prices. The Fed has made huge moves to get interest rates high enough to slow the economy. And Powell said it makes sense for officials to “moderate the pace” of those increases as early as the central bank’s meeting in mid-December. More important, though, will be how much further rates climb next year, and how long it will be necessary to hold them high enough to slash inflation and bring the labor market into sync with the broader economy’s needs.

“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Powell said. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Powell has said that the Fed’s inflation fight will inflict some pain on households and businesses. But a long-feared recession has yet to arrive, and key pillars of the economy remain remarkably resilient to higher rates. The widely held expectation is that the economy will slow drastically next year, and inflation has brought tremendous uncertainty to every sector. But there is no precedent for this economy after the worst of the pandemic, and Powell’s job is to give some insight into his thinking while acknowledging how confounding the outlook remains. “It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Powell said. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done. “The truth is that the path ahead for inflation remains highly uncertain,” Powell said.

Much of the uncertainty stems from the fact that the pandemic has repeatedly thwarted economic models and forecasts. Taking questions after his speech, Powell said he and his colleagues will have to be “humble and skeptical about forecasts for some time” as they manage risks from all sides. “We have a risk management balance to strike,” he said. “We think slowing down at this point is a good way to balance the risks.”

Powell said that for the Fed to win its inflation fight, production bottlenecks must keep easing, and he acknowledged that they’re already on the right path. Inflation on new leases — a crucial housing market indicator — must continue to fall next year. And the labor market must cool down, with wages falling to more sustainable levels. “Despite some promising developments, we have a long way to go in restoring price stability,” Powell said.

Powell put particular emphasis on the labor market, which has been transformed by the pandemic in ways economists still struggle to understand. When asked about whether the workforce participation rate could get back to pre-pandemic levels, Powell said few gains had been made this year, adding, “It’s been very disappointing and a little surprising.”

The number of job openings also far exceeds the number of people looking for work, and Powell said that the shortfall in labor supply “appears unlikely to fully close anytime soon.” He specifically pointed to the high number of excess retirements that makes up a bulk of the 3.5 million people missing from the labor force. The Fed cannot bring more people back into the labor market, so its goal is to get borrowing costs high enough that businesses pull back on hiring and investing, thus cooling demand for new workers.

Some Fed watchers speculate that Powell’s speech Wednesday was meant to reassure markets that while the Fed will slow its hikes, it has not yet regained control of inflation, which remains near 40-year highs despite signs of easing and affects nearly every part of Americans’ daily lives.

The Fed’s likely plan is to raise rates by half a percentage point in two weeks, marking the seventh rate hike in a historic year. The central bank increased rates by three-quarters of a percentage point at each of its last four meetings, moving at the most aggressive pace in decades. Since March, the Fed has lifted its policy rate from near zero to between 3.75 and 4 percent, and expectations are growing among Fed watchers and economists that rates could eclipse 5 percent next year. When officials convene in two weeks for their final meeting of the year, they will compile new economic projections likely showing that rates stay higher for longer than previously expected — and that any rate cuts are still well off in the future.

That approach is difficult to get right. The Fed does not want to signal that smaller hikes mean officials are seeing enough progress on inflation. And in a similar way, the Fed does not want the markets or Wall Street analysts to misinterpret an eventual pause in rate increases. Hikes operate with a lag, and it will take months for the full weight of the Fed’s decisions to seep through the economy. Sometime in 2023, the Fed’s goal will shift from raising rates to holding them at a sufficiently high level and letting the economy continue to slow — ideally, without contracting altogether.

Commodities

Comex gold ended a 7-month downward trend that extended from $1,907 to $1,637 per ounce, ending November at $1,768, up +$131 and -3.3% YTD from the start of the year at $1,827. West Texas Intermediate Crude oil returned the gains it made during October, losing -$8.16 per barrel and settling at $79.74, down from a month-end high of $118.80 at the end of May, and now +5.7% YTD. The national average for a retail gallon of unleaded gasoline was $3.49, down -26 cents from October but up +6% YTD when an unleaded gallon cost $3.28.

The U.S. Economy

GDP, Second Estimate, Third Quarter: “Real gross domestic product (GDP) increased at an annual rate of 2.9 percent in the third quarter of 2022 (table 1), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.6 percent.

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.6 percent. The second estimate primarily reflected upward revisions to consumer spending and nonresidential fixed investment that were partly offset by a downward revision to private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased more than previously estimated.

The increase in real GDP reflected increases in exports, consumer spending, nonresidential fixed investment, state and local government spending, and federal government spending, that were partly offset by decreases in residential fixed investment and private inventory investment. Imports decreased.

The increase in exports reflected increases in both goods and services. Within exports of goods, the leading contributors to the increase were industrial supplies and materials (notably nondurable goods), “other” exports of goods, and nonautomotive capital goods. Within exports of services, the increase was led by travel and “other” business services (mainly financial services).

Within consumer spending, an increase in services (led by health care and “other” services) was partly offset by a decrease in goods (led by motor vehicles and parts as well as food and beverages). Within nonresidential fixed investment, increases in equipment and intellectual property products were partly offset by a decrease in structures. The increase in state and local government spending was led by increases in compensation of state and local government employees and investment in structures. The increase in federal government spending was led by defense spending.

The decrease in residential fixed investment was led by new single-family construction and brokers’ commissions. Within private inventory investment, the decrease was led by retail trade (mainly clothing and accessory stores as well as “other” retailers). Within imports, a decrease in imports of goods (notably consumer goods) was partly offset by an increase in imports of services (mainly travel).

Real GDP turned up in the third quarter, increasing 2.9 percent after decreasing 0.6 percent in the second quarter. The upturn primarily reflected a smaller decrease in private inventory investment, an acceleration in nonresidential fixed investment, and upturns in federal as well as state and local government spending that were partly offset by a larger decrease in residential fixed investment and a deceleration in consumer spending. Imports turned down.

Disposable personal income increased $235.8 billion, or 5.2 percent, in the third quarter, a downward revision of $32.6 billion from the previous estimate. Real disposable personal income increased 0.9 percent, a downward revision of 0.8 percentage point.

Personal saving was $520.6 billion in the third quarter, a downward revision of $67.6 billion from the previous estimate. The personal saving rate —personal saving as a percentage of disposable personal income—was 2.8 percent in the third quarter, a downward revision of 0.5 percentage point.” (Bureau of Economic Activity, November 30, 2022)

Industrial Production: “Industrial production decreased 0.1 percent in October, and its gain in September was revised down to 0.1 percent. Manufacturing output edged up 0.1 percent in October, and its increases in July, August, and September were all lower than previously reported. In October, the index for mining stepped down 0.4 percent, and the index for utilities fell 1.5 percent. At 104.7 percent of its 2017 average, total industrial production in October was 3.3 percent above its year-earlier reading. Capacity utilization decreased 0.2 percentage point in October to 79.9 percent, a rate that is 0.3 percentage point above its long-run (1972–2021) average. 

Manufacturing output moved up 0.1 percent in October and was 2.4 percent above its year-earlier level. The index for durable manufacturing rose 0.5 percent, the index for nondurable manufacturing fell 0.3 percent, and the index for other manufacturing (publishing and logging) was unchanged. Within durables, increases of at least 1.5 percent were recorded by electrical equipment, appliances, and components; aerospace and miscellaneous transportation equipment; and motor vehicles and parts. Within nondurables, gains for printing and support, plastics and rubber products, and apparel and leather products were outweighed by losses elsewhere, especially for petroleum and coal products, textile and product mills, and paper.

Mining output declined 0.4 percent in October: A drop in oil and gas extraction outweighed improvements in oil and gas well drilling and in coal mining. The output for utilities fell 1.5 percent, as a decrease for electric utilities more than offset an increase for natural gas utilities.

Capacity utilization for manufacturing was unchanged in October at 79.5 percent, a rate that is 1.3 percentage points above its long-run average. The operating rate for mining fell 0.5 percentage point to 88.4 percent, while the operating rate for utilities declined 1.2 percentage points to 72.1 percent. Capacity utilization for mining was 2.1 percentage points above its long-run average, but the rate for utilities remained substantially below its long-run average of 84.7 percent.” (Federal Reserve Board, November 16, 2022)

Exports and Imports: “The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $73.3 billion in September, up $7.6 billion from $65.7 billion in August, revised. 

Exports, Imports, and Balance:September exports were $258.0 billion, $2.8 billion less than August exports. September imports were $331.3 billion, $4.8 billion more than August imports. The September increase in the goods and services deficit reflected an increase in the goods deficit of $6.6 billion to $92.7 billion and a decrease in the services surplus of $1.0 billion to $19.5 billion. Year-to-date, the goods and services deficit increased $125.6 billion, or 20.2 percent, from the same period in 2021. Exports increased $378.1 billion or 20.2 percent. Imports increased $503.6 billion or 20.2 percent.

Three-Month Moving Averages: The average goods and services deficit decreased $2.5 billion to $69.8 billion for the three months ending in September.

• Average exports decreased $0.3 billion to $259.5 billion in September.

• Average imports decreased $2.8 billion to $329.3 billion in September.

Year-over-year, the average goods and services deficit decreased $3.2 billion from the three months ending in September 2021.

• Average exports increased $45.6 billion from September 2021.

• Average imports increased $42.4 billion from September 2021.

Exports: Exports of goods decreased $3.7 billion to $180.2 billion in September. Exports of goods on a Census basis decreased $3.4 billion.

Exports of services increased $0.9 billion to $77.8 billion in September.

Imports: Imports of goods increased $2.9 billion to $272.9 billion in September. Imports of goods on a Census basis increased $2.8 billion.

(The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, November 3, 2022)

Job Growth: “Job growth was stronger than expected in October despite Federal Reserve interest rate increases aimed at slowing what is still a relatively strong labor market. Nonfarm payrolls grew by 261,000 for the month while the unemployment rate moved higher to 3.7%, the Labor Department reported Friday. Those payroll numbers were better than the Dow Jones estimate for 205,000 more jobs, but worse than the 3.5% estimate for the unemployment rate. Although the number was better than expected, it still marked the slowest pace of job gains since December 2020.

Average hourly earnings grew 4.7% from a year ago and 0.4% for the month, indicating that wage growth is still likely to serve as a price pressure as worker pay is still well short of the rate of inflation. The yearly growth met expectations while the monthly gain was slightly ahead of the 0.3% estimate.

Market pricing shifted slightly toward a 0.5 percentage point Fed rate hike in December, which would be less aggressive than the pace that began in June with 0.75 percentage point moves at each meeting. Traders expect the Fed to enact another 0.5 percentage point increase in February.

Biggest Growth Area: Health care led job gains, adding 53,000 positions, while professional and technical services contributed 43,000, and manufacturing grew by 32,000.

Leisure and hospitality also posted solid growth, up 35,000 jobs, though the pace of increases has slowed considerably from the gains posted in 2021. The group, which includes hotel, restaurant and bar jobs along with related sectors, is averaging gains of 78,000 a month this year, compared with 196,000 last year.

Heading into the holiday shopping season, retail posted only a modest gain of 7,200 jobs. Wholesale trade added 15,000, while transportation and warehousing was up 8,000.

The unemployment rate rose 0.2 percentage point even though the labor force participation rate declined by one-tenth of a point to 62.2%. An alternative measure of unemployment, which includes discouraged workers and those holding part-time jobs for economic reasons, also edged higher to 6.8%.

September’s jobs number was revised higher, to 315,000, an increase of 52,000 from the original estimate. August’s number moved lower by 23,000 to 292,000.

The new figures come as the Fed is on a campaign to bring down inflation running at an annual rate of 8.2%, according to one government gauge. On November 22, the central bank approved its fourth consecutive 0.75 percentage point interest rate increase, taking benchmark borrowing rates to a range of 3.75%-4%.

Signs of Slowing: Those hikes are aimed in part at cooling a labor market where there are still nearly two jobs for every available unemployed worker. Even with the reduced pace, job growth has been well ahead of its pre-pandemic level, in which monthly payroll growth averaged 164,000 in 2019.But Tom Porcelli, chief U.S. economist at RBC Capital Markets, said the broader picture is of a slowly deteriorating labor market. “This thing doesn’t fall off a cliff. It’s a grind into a slower backdrop,” he said. “It works this way every time. So the fact that people want to hang their hat on this lagging indicator to determine where we are going is sort of laughable.”

Indeed, there have been signs of cracks lately. Amazon on Thursday said it is pausing hiring for roles in its corporate workforce, an announcement that came after the online retail behemoth said it was halting new hires for its corporate retail jobs. Also, Apple said it will be freezing new hires except for research and development. Ride-hailing company Lyft reported it will be slicing 13% of its workforce, while online payments company Stripe said it is cutting 14% of its workers.

Fed Chairman Jerome Powell on Wednesday characterized the labor market as “overheated” and said the current pace of wage gains is “well above” what would be consistent with the central bank’s 2% inflation target.

Existing Home Sales: “NAR released a summary of existing-home sales data showing that housing market activity this October faded 5.9% from September 2022. October’s existing home sales reached a 4.43 million seasonally adjusted annual rate. October’s sales of existing homes declined 28.4% from October 2021.

The national median existing-home price for all housing types reached $379,100 in October, up 6.6% from a year ago. Home prices have continued to climb, marking the 128th consecutive month of year-over-year gains.

Regionally, in October, all four regions showed steady price growth from a year ago. The Northeast and the South shared the largest gain of 8.0%, followed by the Midwest, with an increase of 5.9%. The West had the smallest price gain of 5.3% from October 2021.

October’s inventory of unsold listings as of the end of the month fell 0.8% from last month, standing at 1,220,000 homes for sale. Compared with October 2021, inventory levels were down 0.8%. It will take 3.3 months to move the current inventory level at the current sales pace, well below the desired pace of 6 months. Demand remains strong as home buyers are snatching listings quickly off the MLS, and it takes approximately 21 days for a home to go from listing to a contract in the current housing market. A year ago, it took 18 days.

From a year ago, all four regions had double-digit declines in sales in October. The West had the most significant dip at 37.5%, followed by the South, which fell 27.2%. The Midwest decreased by 25.5%, followed by the Northeast, down 23.0%. Compared to September 2022, all four regions showed sales reductions. The West region had the most significant decline of 9.1%, followed by the Northeast with a decrease of 6.6%. The Midwest region had the smallest fall, 5.3%, followed by the South, with a dip in sales of 4.8%.

The South led all regions in percentage of national sales, accounting for 44.7% of the total, while the Northeast had the smallest share at 12.9%.

In October, single-family sales decreased by 6.4%, and condominium sales fell by 2.0% compared to last month. Single-family home sales were down 28.2%, while condominium sales fell to 30.4% compared to a year ago. The median sales price of single-family homes rose to 6.2% at $384,900 from October 2021, while the median sales price of condominiums rose 10.1% at $331,000.” (National Association of Realtors, November 22, 2022)

New Home Sales: “Sales of new single‐family houses in October 2022 were at a seasonally adjusted annual rate of 632,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.5 percent above the revised September rate of 588,000, but is 5.8 percent below the October 2021 estimate of 671,000.

Sales Price: The median sales price of new houses sold in October 2022 was $493,000. The average sales price was $544,000.

For Sale Inventory and Months’ Supply: The seasonally‐adjusted estimate of new houses for sale at the end of October was 470,000. This represents a supply of 8.9 months at the current sales rate.” (The U.S. Census Bureau and the U.S. Department of Housing and Urban Development, November 23, 2022)

Retail Sales: “Advance estimates of U.S. retail and food services sales for October 2022, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $694.5 billion, up 1.3 percent (±0.5 percent) from the previous month, and 8.3 percent (±0.7 percent) above October 2021.  Total sales for the August 2022 through October 2022 period were up 8.9 percent (±0.5 percent) from the same period a year ago.  The August 2022 to September 2022 percent change was unrevised from virtually unchanged (±0.2 percent)*.  Retail trade sales were up 1.2 percent (±0.5 percent) from September 2022, and up 7.5 percent (±0.7 percent) above last year. Gasoline stations were up 17.8 percent (±1.6 percent) from October 2021, while food services and drinking places were up 14.1 percent (±3.2 percent) from last year.” (U.S. Census Bureau, November 16, 2022)

Producer Price Index: “U.S. producer prices increased less than expected in October as services fell for the first time in nearly two years, offering more evidence that inflation was starting to subside, potentially allowing the Federal Reserve to slow its aggressive pace of interest rate hikes.

The report from the Labor Department on Tuesday also showed a decline in the cost of wholesale goods excluding food and energy, reflecting improved supply chains as well as slowing demand from higher borrowing costs. This supports economists’ views that goods disinflation was underway.

Data last week showed consumer prices rose less than expected in October, pushing the annual increase below 8% for the first time in eight months. “This report will add to the narrative that inflation has peaked and, in particular, that pressures from the goods sector may be easing,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

The producer price index for final demand rose 0.2% last month. Data for September was revised lower to show the PPI rebounding 0.2% instead of 0.4% as previously reported. In the 12 months through October, the PPI increased 8.0%. That was the smallest year-on-year increase since July 2021 and followed an 8.4% advance in September.

Economists polled by Reuters had forecast the PPI rising 0.4% and advancing 8.3% year-on-year. A 0.6% increase in the price of goods accounted for the increase in the PPI last month. Goods prices rose 0.3% in September. Gasoline jumped 5.7%, making up 60% of the rise in goods prices. Food prices rose 0.5%, lifted by fresh and dry vegetables as well as eggs.

Excluding food and energy, goods prices dipped 0.1%. That was the first decrease in the so-called core goods prices since May 2020 and followed an unchanged reading in September. The department’s consumer inflation report last week showed consumer core goods prices also declined in October.

Core goods disinflation has been at the center of economists expectations for a significant moderation in inflation next year. Goldman Sachs on Sunday said it expected underlying inflation to slowdown considerably, with goods prices falling.

The rotation of spending back to labor-intensive services and a still-tight jobs market will, however, likely keep inflation above the Fed’s 2% target.

The U.S. central bank early this month delivered a fourth consecutive 75-basis-point interest rate hike, but signaled it may be nearing an inflection point in what has become the fastest rate hiking cycle since the 1980s.

Financial markets are betting that the Fed would shift to a half-point rate hike at the Dec. 13-14 policy meeting, according to the CME FedWatch Tool.

Stocks on Wall Street rallied. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.

Services fell 0.1%, the first decline since November 2020, after rising 0.2% in September. There were decreases in trade services, which measure changes in profits received by wholesalers and retailers. Prices for transportation and warehousing services fell 0.2%. The costs of portfolio management, long-distance motor carrying, automobile retailing as well as professional and commercial equipment wholesaling also declined. But prices for hospital inpatient care increased 0.8%. There were also increases in prices for securities brokerage and dealing, apparel wholesaling and airline passenger services. Airline tickets rose 2.1%. Services excluding trade, transportation and warehousing increased 0.2%. Core services shot up 0.5% in September.

Excluding the volatile food, energy and trade services components, producer prices rose 0.2% in October. The core PPI advanced 0.3% in September. In the 12 months through October, the core PPI rose 5.4% after increasing 5.6% in September.

With the CPI and PPI data in hand, economists estimate that the core personal consumption expenditures (PCE) price index gained between 0.2% and 0.3% in October after climbing 0.5% in September. The core PCE price index is forecast rising 5.0% on a year-on-year basis after increasing 5.1% in September. The Fed tracks the PCE price indexes for its inflation target.

Some worried about the rise in most medical services components in October, which they said were driven by wages. “This could be an even more concerning inflation dynamic for Fed officials that have been hesitant to acknowledge wages as a driver of strong price inflation,” said Veronica Clark, an economist at Citigroup in New York.” (Reuters, November 15, 2022)

Consumer Price Index: “Fresh economic data released Thursday showed that inflation cooled more than expected in October, a hopeful development for American consumers and welcome news for the Federal Reserve and White House after months of stubbornly persistent price increases.

While inflation is still rapid and painful for many households, it is finally beginning to show signs of turning a corner. The Consumer Price Index slowed to a 7.7 percent gain in the year through October, less than the 7.9 percent that analysts had expected and down from 8.2 percent in the year through September.

After stripping out food and fuel costs, both of which jump around, prices rose by 6.3 percent on an annual basis, down from 6.6 percent in the prior reading. And that core inflation measure pulled back sharply on a monthly basis, posting its slowest increase in more than a year. The report provides early evidence that the Fed’s campaign to slow rapid inflation may be helping to ease price pressures, working alongside recent healing in supply chains. The central bank has lifted interest rates from near zero to nearly 4 percent this year as it tries to slow consumer and business demand and give supply a chance to catch up.

“This morning’s C.P.I. data were a welcome relief,” Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, said in a speech shortly after the report was released. “But there is still a long way to go.” While Fed officials regularly emphasize that they are dedicated to wrestling inflation down even if that process proves painful, President Biden has expressed optimism that the central bank can slow down the economy without tipping it in to an outright recession. On Thursday, he heralded the data as evidence that his and the Fed’s policies are working.

“Today’s report shows that we are making progress on bringing inflation down, without giving up all of the progress we have made on economic growth and job creation,” Mr. Biden said. The fresh report capped a good week for the president and his party, after midterm elections showed that Republicans had failed to turn popular angst over rising prices into widespread victories at the ballot box.

Republicans tried to use the new data to emphasize that inflation remains rapid, and faster than pay growth. “With persistent and high inflation for the foreseeable future, American workers saw yet another pay cut in their real wages last month,” Representative Kevin Brady, Republican of Texas and the ranking member of the Ways and Means Committee, said in a statement.

While Fed officials welcomed the inflation slowdown, they did so in a far more muted way than the White House: A single month of moderate improvement in the data was not enough to make central bankers confident that still-rapid price increases will quickly fade, especially after more than a year and a half of stubborn inflation and frequent false dawns.

The new data are still “far from a victory,” Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, said during a question-and-answer session in a webcast with the European Economics & Financial Centre. She and her colleagues made clear that the path back to normal is a long and uncertain one. Central bankers have signaled that they would like to slow their rate increases soon, and investors heavily expected that step-down to come in December after the new inflation figures.

The Fed aims for 2 percent inflation on average over time, using a measure that is related to the Consumer Price Index but comes out later in the month. Price increases remain far faster than that — and are expected to remain abnormally brisk through the end of 2022.

Still, the underlying details of Thursday’s C.P.I. report showed encouraging trends that, if they continue, could help inflation cool down more meaningfully in 2023. A slowdown in goods inflation that economists have long anticipated finally showed up, with prices for clothing and used cars falling markedly.

Housing inflation remains rapid for now, but that is expected to change next year. Economists at firms including T.D. Securities and J.P. Morgan predict that rent inflation could begin to slow notably as early as the first three months of 2023. Health insurance, which has been slightly adding to inflation, is now beginning to slightly subtract from it because of the way it is calculated, and that is expected to continue. That health insurance decline only matters for C.P.I., though: It will not feed into the Personal Consumption Expenditures inflation index that the Fed officially targets.

While Fed officials do not want to tighten policy so much that they unnecessarily harm growth and cost American jobs, they are also wary of doing too little. The central bank has learned from the experience of the 1970s, when officials were never resolute enough in raising interest rates to fully stamp out price increases. As inflation remained high for years, businesses and consumers came to expect it and adjusted their behavior in ways that made inflation even harder to control. Back then, “the Fed said: ‘well, OK, we’ve got it coming down, so now we’ll stop raising rates, stop trying to fight it back,’ and then it sort of reared its ugly head again, and got embedded in psychology,” Ms. Daly said. “I’m not prepared to make that mistake.” (New York Times, November 10, 2022)

Consumer Sentiment: “The Conference Board Consumer Confidence Index® decreased in November after also losing ground in October. The Index now stands at 100.2 (1985=100), down from 102.2 in October. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—decreased to 137.4 from 138.7 last month. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—declined to 75.4 from 77.9. 

“Consumer confidence declined again in November, most likely prompted by the recent rise in gas prices,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index moderated further and continues to suggest the economy has lost momentum as the year winds down. Consumers’ expectations regarding the short-term outlook remained gloomy. Indeed, the Expectations Index is below a reading of 80, which suggests the likelihood of a recession remains elevated.”

“Inflation expectations increased to their highest level since July, with both gas and food prices as the main culprits. Intentions to purchase homes, automobiles, and big-ticket appliances all cooled. The combination of inflation and interest rate hikes will continue to pose challenges to confidence and economic growth into early 2023.”

Present Situation

Consumers’ assessment of current business conditions was mixed in November.

  • 18.2% of consumers said business conditions were “good,” up   from 17.7%.

• On the other hand, more consumers, 26.7%, said business conditions were “bad,” up from 24.0%.

Consumers’ appraisal of the labor market was somewhat more favorable.

• 45.8% of consumers said jobs were “plentiful,” up from 44.8%.

• 13.0% of consumers said jobs were “hard to get,” unchanged from last month.

Expectations Six Months Hence: Consumers remain pessimistic about the short-term business conditions outlook in November.

·                    19.9% of consumers expect business conditions to improve, up slightly from 19.6%.

·                    22.7% expect business conditions to worsen, down from 24.3%.

(The Conference Board, November 29, 2022)

Final Reflections

The holiday season is in full bloom as retailers busily ply us with attractive discounts and special deals. This is a good time to contribute to the health of our economy, but ever better is remembering the virtues of our strong affectionate ties with those who are close to us, as well as those who can benefit from a kind heart.

Everyone here wishes you and your loved ones a holiday filled with grace and peace, the joy of shared moments, a plenitude of laughter, the warmth of happy satisfaction, and a wealth of good health in the New Year!

Joe Maas, CIO | CFA, CFP®, ChFC, CLU®, MSFS, CVA, ABAR, CM&AA, CCIM
David Stryzewski, CEO | CSA, NSSA