US Macro Outlook - insights from alternative data
Macro Insight
Insights into US Macro Outlook
To assess the current state of the US economy and the effectiveness of the monetary tightening policy recently introduced by the Fed, QuantCube has been closely monitoring a number of real-time alternative data sources such as consumer prices, job openings and textual data.
Inflation: CPI continues to cool in February, but price pressure still exists
The QuantCube CPI Nowcast tracks consumer prices on a daily basis leveraging real-time alternative data, therefore, it provides timely insights into inflationary pressure. Our observation suggests that US CPI has resumed a downward path during the month of February as shown in Exhibit 1. The indicator currently stands at +6.3 % as of February 27, one of the lowest annual inflation readings since October 2021. The drop in US inflation was recorded after it reached a peak of above +9% year-on-year on June 30 last year. US inflation then started to decrease significantly during the last quarter of 2022. Most likely this is a reaction to the Federal Reserve’s aggressive monetary tightening policy. During the month of January, the disinflationary trend seemed to have stabilised - the QuantCube US CPI indicator remained stable at around +6.5% year-on-year (YoY).
So, what is driving the slight drop in US CPI over the month of February? To answer this question, we analysed QuantCube CPI Nowcast components, which suggest that several factors are contributing to the development. Firstly, inflation in the Food and Beverage component decreased from +10% year-on-year on January 31 to +9.8% as of February 27. Secondly, Transport price inflation has also cooled, dropping from +0.2% to –0.1% YoY. We also observe a slight decrease in the “Other goods and services component”, mainly driven by a drop in medical care inflation, which fell from +3.9% to +2.8% YoY. On the other hand, Housing price inflation increased by 0.1 % as demonstrated in Exhibit 2.
Although headline CPI inflation is cooling, this does not necessarily mean that price pressures have eased. For example, when we look at the oil price component of the QuantCube CPI Nowcast, we observe a gradual increase in prices since the beginning of 2023. As of February 27, this year, oil prices increased by 2.6% month-on-month. Compared to the level in December last year, it rose 5.5% in February. On the back of this, the Federal Reserve will most likely keep raising interest rates in the coming months aiming to contain excessive consumer demand and tame inflation. In our view the effectiveness of these monetary policies will depend on both external and domestic factors. Outside the U.S., China’s reopening from Covid shutdowns might put upward pressure on prices around the world. Russia recently announced a cut in oil production, as a reaction to the sanctions imposed by the G7 and EU for Russian crude and its refined products. As such, the ongoing war in Ukraine and the possibility of a further escalation of the conflict is also increasing uncertainty over energy prices.
Consumer confidence and discretionary spending supported by disinflation
Domestic dynamics are also challenging the Fed’s fight against inflation. QuantCube analysed information on consumption and job openings in real-time to gain insights from these key variables on the outlook for inflation.
Based on real-time alternative data, we track private consumption at country and sectoral levels. The results are updated daily to provide insights into current consumption trends, up to three months in advance of the publication of official numbers.
The QuantCube Consumption Nowcast indicators for the US suggest that domestic demand for discretionary goods (vehicles) and services (restaurants, hotels) has been trending upward since December 2022, most likely reflecting improving consumer confidence. The US consumer, who for now retains the status of “the world’s consumer of last resort”, has been somewhat stimulated by easing inflation. However, with the cost of living remaining elevated and a slump in household savings stimulated by the pandemic, discretionary purchases are probably underpinned by a credit card borrowing binge. Recent tax cuts might also be contributing to rising spending and consumption. In the last few weeks, increases in consumption seem to have stabilised, reflecting the possible end of the recent upward trend.
Labour market - remains strong overall, but with wider differences between sectors
The recent rise in the demand for consumer goods might also be explained by the US labour market. Using the QuantCube Job Openings Nowcast, we examined the current labour market situation in key sectors of the US economy. To provide timely insights, QuantCube aggregates thousands of online job offers on a daily basis to track the evolution of official job openings at country and sectoral levels. As demonstrated in Exhibit 4, U.S. job openings remained elevated overall, highlighting the US labour market resilience to interest rate hikes and mounting fears of a recession. This could keep the Federal Reserve on a hawkish stance.
QuantCube Job Openings Nowcast indicators also suggest that the situation across sectors is rather diverse, depending on the sector at stake. Exhibit 5 shows the evolution of the QuantCube Job Openings Nowcast over the last year in three key economic sectors: Technology, Financial and Consumer Discretionary. Not surprisingly, interest-rate sensitive sectors such as Technology and Financial are the most impacted by the current monetary tightening.
As regards to the Technology sector, we observed a significant drop in job openings from April 2022, anticipating the recent decisions by Tech companies to freeze hiring and keep headcounts down. As Exhibit 6 shows, top S&P 500 companies such as Microsoft, Applied Materials and Lumen are leading this trend with the weak level of job openings.
Job openings published by companies in the Financial sector have also been weakening. This is reflecting the low profits reported by major banks as they increased their provisions for bad loans to prepare for a possible recession. The Financial Services firms that contributed most to the drop in the QuantCube Job Openings Nowcast are Citigroup and American Express. Their job openings have nearly halved compared to May 2022 as Exhibit 7 indicates. Although we observe a slight upward trend from February this year, job openings at these companies remain weak compared to one year ago.
On the other hand, the indicators suggest that demand for workers is rising in Consumer Discretionary sectors such as cars, household appliances, specialty items, luxury, and leisure. This supports the observation in consumption trends. So far, the Consumer Discretionary sector and other sectors including Healthcare and Energy have remained resilient and are posting a steady stream of job openings. This in return is more than offsetting the weak hiring by the Technology and Financial sectors.
US Economy – recession or soft landing?
Despite some signs of weakness, the US economy has so far been resilient to the effect of the Federal Reserve’s monetary tightening. Overall, it seems employers continue to hire, and American consumers are on a borrowing and spending spree on the back of easing inflation. However, there might be a limit to how far inflation can fall. This may then potentially force policymakers to respond more aggressively.
Persisting monetary tightening has a trade-off; on the one hand it helps to reduce price pressures by limiting excess demand, on the other hand it has a negative effect on growth. The main challenge for the Federal Reserve is, therefore, to find the right balance to tame inflation without triggering a recession. This balancing act is also challenged by other factors such as supply constraints for global commodities which cannot be influenced by monetary policy.
QuantCube will continue to monitor US inflation trends leveraging the insights from real-time alternative data, especially to see if the US economy is facing imminent recession or is heading towards a so called “soft landing”. At this stage, the die is not cast.
