Macro & Market Musings are weekly insights on Growth, Inflation, Policy and Looking Ahead from Annex Wealth Management’s Chief Economist, Brian Jacobsen. Brian, a frequent contributor on CNBC and Fox Business News, hosts regular updates on the economy and markets. Check our events page for Brian’s next live event.
Growth: Good Growth Versus Bad
Personal income rose 0.6% m/m in October while consumption expenditures increased 0.4%. Those are good numbers. The most encouraging thing was that real personal income excluding transfer receipts increased 0.3% m/m. This adjusts income for inflation and it excludes from income transfers from the government. Growth in this form of income has been flat since June. One data point doesn’t indicate a trend, but it would be nice if it was the start of one.
Inflation: Mission Accomplished?
The Fed targets a measure of inflation from the personal consumption expenditure (PCE) data. It’s a broad-based measure of what people spend their money on and it changes with consumer behavior. As a result, it’s considered a “better” measure of inflation than the consumer price index, which is narrower and a fixed basket. The Fed is targeting 2% and in the third quarter it came in at 1.5%. Does that mean the Fed’s job is done? No. Excluding some of the more volatile components of the index, inflation is still running a little hot at 2.1%. But that’s close. The trick will be to get it to stick at the target, not to bounce off it and move higher again.
Policy: The Journey Versus The Destination
Fed minutes indicated that officials really have no idea where they want to end up with rates. However, they do think they’re headed in the right direction. If you’re walking in the dark you take small steps slowly instead of bounding confidently forward. That’s a pretty good visual of Fed policy might look like over the next year.
Looking ahead: There’s No Accounting For Taste
Simple indicators of value based on market multiples like price-to-earnings, cash-flows, sales, and book value are elevated for major segments of the market. That obscures the great diversity of multiples within those market segments, though. Also, investors are more interested in growth of earnings than simply what last year’s earnings, or even next year’s earnings, might be. This is one of many reasons why simple metrics aren’t the final judgment on what is or isn’t attractive in the markets.
