Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Consumer Confidence and Spending Are Decoupling
Transcript
- Lucas: So the May CPI came in this morning at 4.2 percent annually, the highest print in three years. And it's not just headline — core CPI is also creeping up. But here's the weird thing: consumer spending is still fairly robust, even though the New York Fed's survey just showed household financial anxiety hit its highest level since July 2022. Luna: That's a real disconnect. People are clearly worried — the survey data is clear — but they're still opening their wallets. What's driving that? Lucas: I think the answer is bifurcation. If you look at the data, higher-income households — those with significant equity and home equity exposure — are sitting on pretty substantial wealth gains. The S&P 500 is at 7,300, the NASDAQ is above 25,000. Those are levels that were unthinkable a few years ago. So they feel wealthy, even if they're paying more at the grocery store. Luna: Right, the wealth effect. But for the bottom half of earners, that's not their reality. Their housing costs are up, gas is up, and wage growth is lagging the inflation they actually feel. Lucas: Exactly. Average hourly earnings are $37.50, up about 4.2 percent year-over-year, which sounds great. But if you're in a lower-wage occupation, your rent might have gone up 8 percent, and your grocery bill is up 6 percent. So you're falling behind in real terms. Yet the overall spending numbers are held up by the top quintile, who are spending freely. Luna: And the jobs market is supposed to be strong — JOLTS openings surged to 7.6 million in April, up from 6.9 million. That's a big jump. But the unemployment rate is still 4.3 percent. How do you reconcile more openings with steady joblessness? Lucas: That's the part I find most interesting. The JOLTS number rebounded sharply, but a lot of those openings are in low-wage sectors like leisure and hospitality, and they're being filled slowly because workers are being pickier. And meanwhile, we're seeing a surge in part-time work — involuntary part-time employment is up. So the labor market is healing, but not evenly. Luna: So you have a kind of K-shaped economy: the top is spending, the bottom is anxious. But the Fed is still looking at an inflation rate that's way above target. What does that mean for policy? Lucas: The Fed's in a tough spot. They've held rates steady at 3.62 percent — the effective fed funds rate — but with CPI at 4.2 percent, real rates are still negative. They can't cut without risking an inflation spiral, but they can't hike without potentially cracking the part of the economy that's already struggling. Luna: And the yield curve has been uninverting — the 10-year is at 4.54 percent, the 2-year is at 3.63 percent? Actually, the 2-year is at 3.63, so the curve is still inverted? No, wait, the 10-year is 4.54, so it's actually positively sloped again. Lucas: Right, the 10-year minus 2-year spread has turned positive — just barely. The 10-year is 4.54, the 2-year is 4.27? Actually, let me check — the 2-year yield is 4.27? No, the 5-year is 4.27. The 2-year, the 10-year, let's see: the 10-year is 4.54, the 2-year is 3.63? That can't be right. Sorry, the data says: the 10-year is 4.54, the 30-year is 5.02, the 5-year is 4.27, and the 2-year is 3.63. So the 10-year minus 2-year spread is indeed positive — about 91 basis points. That's a big swing from the deeply inverted curve we saw last year. Luna: And historically, an uninverting yield curve without a recession is rare. Usually, the curve only normalizes when the economy is weakening and the Fed cuts rates. But here we are, the curve is normalizing on its own, driven by rising term premiums. Lucas: Exactly. The market is demanding more compensation for holding long-term bonds, partly because of the persistent inflation and the larger fiscal deficits. So the curve is steepening not because the Fed is cutting, but because the long end is selling off. That's actually a mildly bearish signal for growth, because it means borrowing costs for businesses and households are staying elevated. Luna: It's a weird environment. The economy is growing — real GDP grew at 1.6 percent annualized in the first quarter — but sentiment is souring. The Michigan consumer sentiment index has been drifting lower. People are nervous. Lucas: And that's the crux of the episode: why sentiment and spending are decoupling. The answer, I think, is that sentiment reflects the average person's lived experience, while spending is heavily influenced by the top 20 percent. The top 20 percent accounts for nearly 40 percent of all consumer spending. They're fine. So the aggregate data looks okay, but the median household is feeling squeezed. Luna: That reminds me — we actually got a listener email last week asking about this exact thing. They said, 'I see the stock market at all-time highs, but my family is struggling. Am I missing something?' It's a great question. Lucas: It's the question of the year, honestly. And I think the answer is: no, you're not missing anything. The economy is genuinely good for people with assets. If you own a home and have a 401k, you're probably feeling pretty wealthy. But if you're renting and living paycheck to paycheck, inflation is eating your lunch. Luna: And this is exactly the kind of conversation that we try to unpack every day on this show. If walking through the economy with us has made something click, we'd be grateful if you considered supporting the show. Even a couple of dollars a month genuinely makes a difference — it keeps us independent and ad-free. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's the simplest way to keep these daily episodes going. We don't have a big production machine behind us — it's just Luna and me, a microphone, and a lot of data. So if you find value in it, that link is there. Luna: Okay, back to the data. So we have this decoupling. But what about the labor market signal from the surge in part-time work? I think that's a piece that often gets overlooked. Lucas: It's huge. The number of people working part-time for economic reasons — meaning they want full-time work but can't find it — has risen to over 4.5 million. That's a sign of slack in the labor market that the unemployment rate doesn't capture. The U-6 underemployment rate is probably north of 8 percent. Luna: And that's exactly the kind of slack that eventually puts downward pressure on wages. So even though average hourly earnings are up, the composition effect — more low-wage part-time jobs — could be masking weaker wage growth for existing full-time workers. Lucas: Right. The Fed pays attention to that. If underemployment is rising, they might feel more comfortable cutting rates if inflation cooperates. But inflation is not cooperating. So we're in this holding pattern. Luna: Let's talk about what's next. The ECB is meeting this week, and they're likely to cut rates again. The eurozone economy is weaker than the US, so they have more room. But the Fed is stuck. Lucas: Yeah, the ECB is probably going to cut by 25 basis points on Thursday. Meanwhile, the Fed's next meeting is in July, and the market is pricing in about a 30 percent chance of a cut. I think that's optimistic. The Fed needs to see a sustained decline in inflation, and we're not there yet. Luna: But if the economy slows further, they might have to act. The real GDP growth in Q1 was only 1.6 percent, and Q2 tracking is around 1.8 percent. That's not a recession, but it's below trend. Lucas: And the longer rates stay high, the more pressure builds in the housing market, in corporate debt markets, in the CRE sector. We haven't seen the full impact yet because many companies refinanced at lower rates during 2020-2021. But as those bonds mature, refinancing at 5-plus percent is going to be painful. Luna: So the big question is: can the Fed engineer a soft landing with inflation at 4.2 percent and the unemployment rate at 4.3 percent? That seems like a very narrow path. Lucas: It's more like a tightrope. But I think the biggest wildcard is the consumer. If the top quintile starts to pull back — maybe because the stock market corrects — then the whole picture changes. And we've had a 5-day sell-off: the S&P is down 3.8 percent in the past five days. That's not a crash, but it's a reminder that sentiment can shift quickly. Luna: Yeah, the NASDAQ is down almost 6 percent in a week. That's the kind of move that gets people's attention. If it continues, the wealth effect could reverse, and then the decoupling might resolve itself — but not in a good way. Lucas: Exactly. So we'll be watching the next few weeks closely. The May jobs report is due Friday, and the inflation data is now out. If payrolls come in weak, we might see more pressure on the Fed to pivot. But if they're strong, the Fed stays on hold. Luna: And that's what makes this show fun — every day brings new data. We'll be back tomorrow with more. Thanks for listening.