Getting Closer to Normal

Jeffrey Roach:

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, with an update on what's new in the macro landscape and a call to action for investors. First, consumers made a lot more money than originally thought. Inflation adjusted disposable income, which is after taxes and social insurance payments, grew much faster over the past 24 months than originally thought. And you can see in this chart that the consequence of high labor demand and plenty of job switching, workers saw their wages and salaries grow faster than inflation for the past two years. This is what consumers have left to spend on goods and services, and also to save. This explains a lot why we've seen consumers have the ability to spend despite high price levels. Second, personal savings rate is higher than originally reported. If disposable incomes grew faster than originally thought and real spending also grew, but at a slower pace, then by definition, consumers now have a larger portion of money to save.

Jeffrey Roach:

This chart shows the improved amount of savings consumers have on their balance sheets. Just take this past July, for example. The initial estimate for July personal savings rate was 2.9%, but after more complete analysis, consumer's personal savings rate was revised up to roughly 5%. This is getting close to the pre-pandemic average of 6.5%. A higher savings rate means consumers have a bit more buffer to manage any potential shock. Third, the job market is slowing in some sectors. Chairman Powell popularized the openings to unemployment ratio from a report that used to be second tier. But because of the pandemic and high labor turnover, market watchers started tracking a survey that captured hirings and firings and quittings across sectors. The economy is roughly back to normal for the openings to unemployed ratio, that blue line, but the quits rate is at a new decade low outside of the temporary shock of the government shutdowns.

Jeffrey Roach:

Now, what I think investors should be cautioned with is the quits-rate is highly concentrated in low-skilled sectors like leisure and hospitality. There's a bit more churn still for those with higher skill level. So what does this mean for markets? Expect a slow-down in hiring in the near-term. Expect interest rates to fall through the next 12 months. And finally, we should expect consumers, particularly those with middle and upper incomes, to weather through a slowdown and help the economy stick that soft landing. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.