Last week’s income, consumption and inflation data suggest that the U.S. economy continues to muddle through, but the most interesting stories may be found beneath the headlines.
The rush of high-impact economic data likely did nothing to change consensus views of the U.S. economy. As last week’s consumption data reiterated, American households continue to eke out decent income advances and spend at a rate that is supportive of real GDP growth somewhere above 2%. But as our Bank Credit Analyst pointed out in its November edition, households have become increasingly reliant on government transfers to maintain trend-level spending even while they boost savings to repair their balance sheets. Beneath the more celebrated recent data, the slump in the employment cost index (ECI) may provide some insight into the profit margin sustainability. The momentum that appeared to be building in the ECI over the first half of this year was choked off in the third quarter, suggesting that profit margins may yet have some life in them. If inflation pressures abate as we expect they will, margins could even expand from their already robust levels. The trouble is that there’s a limit to how long corporations can keep thriving as pressure on consumers continues to accumulate, especially if the federal government attempts to withdraw some of its support of households.
Bottom line: Just a few months after the debt ceiling debate fiasco, a fractious Congress may be preparing to return to center stage. Investors should keep track of which way the wind is blowing inside the Capitol.