Market Week: March 7, 2022

The week in review

  • Light vehicle sales decreased to 14.1 million
  • Nonfarm payrolls rose by 678K vs. 423K cons.
  • Hourly earnings rose 0% m/m and 5.1% y/y
  • Unemployment rate decreased to 3.8%

The week ahead

  • CPI
  • JOLTS
  • NFIB small business survey

Thought of the week

When it comes to economic growth in the United States, the consumer is key, accounting for nearly 70%b of gross domestic product (GDP). Following the initial pandemic shock in early 2020, the consumer came back with a vengeance, as stimulus checks and enhanced unemployment benefits stabilized balance sheets across the U.S. and spending on goods accelerated meaningfully. However, with food and energy prices rising, there is a risk that the composition of consumer spending will begin to shift. Looking at energy spending as a percentage of total spending, we are able to model a scenario in which crude oil prices rise to $120 per barrel. In aggregate, however, the model forecasts energy spending would increase to 5.0%, which is only slightly above the 2021 average of 4.8%.

That said, the devil is in the details. To an extent, economic growth has been solid and inflation has been elevated due to stimulus that lined the pockets of lower-income individuals. This group has a much higher marginal propensity to consume – put differently, if they have extra money in their pocket they are more likely to spend than save. As we show in the chart of the week, this cuts both ways. If oil prices spike to $120, energy spending may rise to 13.9% of total spending compared to an average of 10.1% in 2021 for the lowest earning individuals, limiting their ability to consume other items. This could in turn lead to slower economic growth than expected, but also a more rapid decline in core inflation. While we still expect the Federal Reserve (Fed) will hike interest rates at its March meeting, this dynamic may allow the Fed to tighten more gradually than markets currently expect.

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