Investment Comment
8th July 2022
Does leave mean leave?
Sterling is beginning to recover with the prospect of a change in leadership in Downing Street as Boris is set to leave all his (t)roubles behind. Whilst the politics may capture the headlines, the change may result in an easier fiscal policy to improve the standing of the Government in opinion polls. One potential example is the recent tax relief in California, as much as $1,050 per family, to provide help with rising prices. A less likely alternative could be the nationalisation of energy companies, as in France. In either case, more active fiscal policy could result in an improvement in household income, or at least prevent a significant deterioration come the Autumn energy price increase. In turn, the Bank of England may feel able to raise interest rates to dampen inflation, which would be supportive of sterling. Despite the weakening in economic activity in the UK, the Bank of England’s Chief Economist, Huw Pill, gave a speech in which he indicated his willingness to see higher interest rates in coming months.
Dismal science but not dismal times
Economics is known as the dismal science, according to the Philosopher Thomas Carlyle. It is fitting that the dismal science has combined the unemployment rate and inflation rate into the Misery Index. Given the low rate of unemployment the rise of Misery has been driven by the increase of inflation of late.
US consumer spending accounts for around 68% of the US economy. To gauge the real risk of a US recession in coming months we turn to the health of the US consumer. Sentiment indicators suggest that the US consumer is in a recession.
When and to what extent lower sentiment from these sources feeds through to developments in consumer spending is perhaps less clear than in historical cases of lower consumer sentiment. Just like in the UK, the less well off are likely to be hit hardest, as shown by this chart from KKR.
According to Bank of America credit and debit card data, average gas spending as a share of total card spending per household surged to 9.8% for lower-income households (annual income $50K) from around 7% in December 2021. Higher income households (>$125k) also saw a notable increase in gas spending share, to 6.1% for the 28-day period ending June 30th from around 4% at the end of 2021.
However, in terms of actual spending the bottom 20% (quintile) of households by income almost don’t matter economically, although they do politically and in sentiment surveys. The households that account for the top 20% by income drive 46% of US household consumption, and these households continue to see real income increases.
Maybe this is why despite the recessionary levels of US consumer sentiment, actual consumer spending continues to be robust, especially in those areas where higher income households spend. US Transportation Security Administration (TSA) checkpoint data shows the headcount of travellers at US airports. The TSA checkpoint data is now close to the pre-COVID peak. If personal consumption comprises 70% of the US economy, and Americans are travelling with gusto, how close can they be to a recession?
Overall, the Bank of America aggregated credit and debit card spending was up 11% year-over-year (YoY) in June. Meanwhile aggregated card spending per household was up 3.3% YoY in the 28-days ending June 30th, down from 4.0% YoY at the end of May.
Gerard Lane Chief Investment Officer
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