Chairman Jerome Powell is getting an early Christmas gift.
He is aching for people to lose their jobs and make less money. After all, this is how the Fed plans on tackling inflation. As we discussed repeatedly, the only thing the central bank can do is to crush the economy.
It looks like that might be coming.
We got the retail sales for the month of November and to quote the street, it was "ugly".
The drop of .6% was larger than expected. This topped the forecast of .1%.
We are getting closer to the point where we start to say "told you so".
The last few jobs reports were fairly strong. This is leading Powell to decide that things are going well. He repeatedly stated they are using employment as the barometer for the moves they make. When he says they are data dependent, he means the unemployment figure.
That is his only area of focus.
Unfortunately, this is going to happen. Of course, it is in line with what the Fed wants, but opposite of average people.
The problem with the recent job reports is the fact that job creation came from the lower end of the spectrum. We all know how Silicon Valley is laying people off. Those are high paying jobs and when you have the likes of Meta dumping 10K, that is a large hit.
No amount of retail jobs created is going to offset that income hit. Nevertheless, this is what the Fed is looking at.
Sadly, this is coming to an end. With retail sales declining, it means layoffs are coming. The last two months are crucial for this industry, with November and December accounting for the lion's share of many retailers sales. A drop in November is a perilous sign.
The issue is the fact that price have consistently increases at a pace that exceeded wage growth. There was never a danger of a wage spiral like many forecast, sending CPI readings into the stratosphere. This was solely a supply chain issue that is working itself out.
On one hand, products are being shipped. This is helping to ease the scarcity problem we were seeings. At the same time, since people are falling behind when it comes to the pricing situation, they are spending less. Couple this with the Fed raising rates which makes vairable credits (credit cards, adjustable loans) more expensive and we can see why demand is falling off a cliff.
People simply do not have the money to spend.
As is always the case, the solution for higher price is higher prices.
The retail sector is going to adjust once we enter the new year. It is common that layoffs of seasonal workers occurs in January. However, with such a poor start to the holiday season, it is likely that we see something more widespread.
Corporations simply are not going to allow revenues to drop without a move to equal that out on the expense side. Often that means reducing the number of workers.
This is exactly what Powell is wanting. It is also what is leading people such as myself to question how many more rate hikes the Fed has in it. The yield curve was screaming for months that the Fed was on the wrong path and now it is being proven correct.
The amount of data that is predicting a recession at this point is staggering. Employment tends to be a lagging indicator, as does CPI readings. Those which are forward looking, such as new orders, manufacturing, and inventory, tells a grim story.
It is starting to look a lot like 2018.
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