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Thoughts From Last Week
We recognize the headwinds to the economy next year, but expect consumer spending will be able to grow at a gradual pace as incomes are supported by government spending and a tight labor market.
Headlines have been dominated by the better-than-expected October CPI report, but this improvement in inflation will likely be overshadowed by a deteriorating growth outlook in the coming months. Looking at the basic building blocks of gross domestic product (GDP), we see weakness across a variety of sectors, with homebuilding set to slow significantly and higher rates to weigh on inventories, business investment and exports.
That being said, we do expect the economy to find some near term support from consumption, which accounts for 68% of GDP. The key driver of consumer spending is disposable income, which over the last two years has been boosted by fiscal stimulus and the surge in payroll employment. With the former completely gone and the latter fading as the demand for labor wanes, slower growth in disposable income combined with a negative wealth effect look set to weigh on overall spending. However, these headwinds should be partially offset by the 8.7% social security cost-of-living adjustment that eligible consumers will receive next year. This adjustment is the highest increase in 40 years, and comes on the heels of record levels of inflation over the last 12 months. Disposable income should also be buoyed by the Biden Administration’s decision to extend the student loan moratorium to June 30, 2023 if no resolution is reached on the loan forgiveness lawsuits. Overall, we recognize the headwinds to the economy next year, but expect consumer spending will be able to grow at a gradual pace as incomes are supported by government spending and a tight labor market.
Source: SSA, J.P. Morgan Asset Management.