Impacts of Imports on Core Spending and Fed Rate Cut Expectations

Jeffrey Roach (00:03):

Hi. I am Jeffrey Roach, Chief Economist for LPL Financial with three key charts to explain the current macro landscape. First, the Fed will restart rate cutting cycle in June. The stickiness of inflation, especially within the services sector, has kept the Federal Open Market Committee at a standstill with rates despite the president calling for rate cuts as soon as possible. We think Jerome Powell will use the upcoming meeting in May to prepare investors for a quarter point cut in the subsequent June meeting. According to the fed funds futures market, there is a 60.2% chance Fed funds upper bound is cut by 25 basis points. That is a quarter of one percentage point to four and a quarter percent. As the Federal Open Market Committee cuts, we should expect retail rates to also fall. The Fed will likely cut further in October and December. Second, imports account for an estimated 10% of core spending.

Jeffrey Roach (01:01):

The Fed estimates that 6% of core consumer spending, that's excluding food and energy, is directly imported, and 4% is indirectly imported. That is spending on direct and indirect imports accounts for a total of 10% of total U.S. household consumption, and that's excluding spending on food and energy. These shares have been consistent over the past two decades. Breaking it down into detailed categories is enlightening. For example, direct imports of pharmaceutical and other medical products account for 0.7% of core consumer spending. Spending on indirect imports used in the domestic production of pharmaceuticals and other medical products comprises 0.2% of core spending. Total imports, the sum of the direct and indirect components in the pharmaceutical and other medical products sector account for 0.9% of core. And this chart also highlights that some expenditure categories, such as hospital and nursing home services, may actually use a lot of indirect imports, though those services tend to be domestically produced.

Jeffrey Roach (02:09):

This granular approach also enables us to delve into the source countries of these direct and indirect imports. Third, Mexico and Canada provide more intermediate imports than any other country. In this figure, each bar depicts the spending share of direct or indirect imports coming from a given country, it shows that China provides more direct imports than indirect imports to core spending. Specifically, 1% of core spending consists of direct imports from China, whereas just 0.3% consists of indirect imports from China. Mexico and Canada, on the other hand, provide larger shares of indirect imports. Mexico is split roughly half and half. The distribution of importing activity among countries and products is helpful for building expectation on vulnerable sectors and important country negotiations. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.