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07.8.2022 by David Robinson

The Policy and Politics of Personal Disposable Income

Should States Stimulate Demand? As we all know, the Fed is on a mission to rein in inflation by reducing the demand for goods and services. In short, the Fed wants us to buy less, which will help bring down the prices in time. But not everyone is rowing their boat in the same direction. Many states, including Maine, are flush with cash, and are rebating funds to their eligible taxpayers. Axios MoneyWise Few taxpayers, enduring the sting of inflation, are going to object to having more money in their pocket. And there is a certain fiscal fairness to states returning unneeded funds to their taxpayers. But this state level stimulus is counter-productive to the need to restrain demand and will exacerbate the inflation challenge.

The Politics of Disposable Income: Most voters will understandably ask themselves if they are becoming better or worse off financially when they go to vote. That is not to say that voters are unaware of the “bigger picture” or other issues, but it is difficult for many to get beyond their pocketbooks. So, if you are a sitting governor or president, up for re-election, you have a strong incentive to put cash into a voter’s pockets. Or “a chicken in every pot” as they used to say. That’s why trends in “real personal disposable income” have such importance, politically as well as from an economic standpoint. Axios

Hints of Inflation Moderation? The Fed has long focused on the Personal Consumption Expenditure Index (“PCE”), as the best measure of intrinsic inflation. Apart from removing highly volatile food and fuel prices (I know-we have to eat and drive!) There are some other technical differences with the Consumer Price Index (“CPI”). Criticism of the methodology aside, the latest PCE was up 4.7% year over year in May, down from 4.9% in April. Month to month the increase was 0.3%. It is way too soon to draw any meaningful conclusions, but this is still a positive data trend. New York Times

Inflation As Anticipated by the Financial Markets: The financial markets are becoming more optimistic on the inflation front, as evidenced by the 5-Year Breakeven Rate falling to 2.51% mid-week. St. Louis Fed

Are We Already in a Recession? It is possible that the U.S. is already in a recession. The Atlanta Fed’s GDPNow real-time economic model currently predicts negative -2.1% U.S. growth for the second quarter. Since the 1Q was slightly negative, this would mean, if accurate, that the U.S. would have experienced two straight quarters of negative growth. But note that the Blue-Chip economic consensus for the second quarter is still strongly positive. Atlanta Fed We will see but our sense is that the U.S. economy is at an inflection point. Remember that the stock market is a leading economic indicator, and the U.S. stock market has reached bear market territory this year, which means it has fallen 20% off its peak.

Yield Curve: Also note that the 2-year/10-year Treasury Note yield curve is flat mid-week. A sustained inversion (i.e., the 2-year rate is higher than the 10-year rate) would be a recession harbinger. CNBC

Short Takes:

  • Why Optimists Live Longer: Sometimes we all must work to keep the faith. In that regard, this report of a powerful new study of the impact of optimism on longevity is worth a full read. The study focused on women, but I did not see anything that would indicate that it would not be meaningful to men too. Washington Post
  • Take the Flamingo Balance Test: As we age, a lack of balance becomes more problematic. I encourage readers to take the test, which is a longevity predictor, and see where you stand (so to speak). Balance can be improved.
  • Vitamin D Supplements Linked to Slower Epigenetic Aging: No medical advice here, but we have another report that Vitamin D supplementation slows our internal aging clocks.
  • Avoid the Expresso Before Shopping? Caffeine revs up our motor and predisposes us to action. A study showed that a complimentary cup of coffee before shopping boosted spending by 50%! Wall Street Journal
  • Who Is June Huh? June Huh is a professor of mathematics at Princeton, who just won the Fields medal, the most prestigious award in math. Huh was a high school dropout, who wanted to be a poet earlier in life. He is quirky and fascinating, almost like he lives in an alternate universe. Quanta Magazine

RSWA 7/21/22 Webinar Featuring Fritz Meyer: Watch for your invitation to join us in an update on the markets by this highly respected market strategist. The webinar is scheduled for Thursday, July 21st at 4:30pm.

A Quote to Consider:When people seem uncommonly disciplined, look for a powerful ritual hiding in plain sight.” Shane Parrish 

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