Zacks Investment Management

In today’s Steady Investor, we are taking a deeper dive into key factors that we believe are impacting the future state of this market, such as:

• U.S. consumer spending
• Fed scales down size of rate hikes
• China’s economic recovery

Is the U.S. Consumer Finally Losing Steam? The U.S. consumer pulled back from spending in December, which generally tends to be a strong month with holiday shopping. For the month, spending on services like rent, utilities, and dining out was flat, but when adjusted for inflation marked the weakest reading in 11 months. Throughout most of 2022, spending outpaced inflation by about 2% on average. As seen in the chart below, goods spending as measured by retail sales also appears to be turning over, as consumers are confronting shorter runways with pandemic-era savings¹:

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November also marked a relatively weak month, though October was strong as consumers shifted holiday shopping to earlier in the season to take advantage of steep discounts at retailers. As consumer spending accounts for some 70% of the economy, where spending goes in the months ahead will be worth watching closely.

The Fed Scales Down Size of Rate Hikes with a 25 Basis Point Increase – As largely expected, the Federal Reserve raised its benchmark fed funds rate by 25 basis points, to a range of 4.5% – 4.75%. The Fed had telegraphed plans to potentially ratchet down the size of rate hikes, as inflation has been trending in the right direction and as wage growth decelerates (though remains elevated). Earlier this week, the Fed’s preferred inflation gauge – the personal-consumption expenditures (PCE) price index – was reported to have increased by 5% year-over-year in December, a solid improvement from November’s 5.5% print and also the lightest inflation reading since September 2021. The Core PCE-price index, which measures inflation minus food and energy, rose 4.4%. While these inflation readings are still roughly double the Fed’s 2% target, they are steps in the right direction and it is worth noting that the Fed wants 2% average inflation, which may mean settling for inflation slightly higher than the target. On a month-to-month basis, the PCE price index was up 0.1% from November, also encouraging.⁴

Looking for a Boom – The Early Days of China’s Economic Recovery – China is expected to have a strong rebound year in 2023, with the country finally ending its “zero Covid” policies. January was a great start. According to official metrics measuring services, manufacturing, and construction activity, China swung back into expansion mode following a very weak end of last year. China’s nonmanufacturing PMI, which measures key services and manufacturing activity, crossed above 50 (signaling expansion) for the first time since last September – a drastic improvement from December’s 39.4 reading. Manufacturing activity was also above 50 for the first time since August, and a marked improvement from December’s 47.0 reading. Consumers also showed strong signs of getting back out and spending, despite a surge of infections. Box-office revenues were the highest on record for a Lunar New Year holiday, and train travel surged back to 83% of 2019 levels. China is still in early days of testing a light restriction approach to Covid-19, so it is too early to determine whether this rebound in activity will be sustainable in the coming months. But so far, the growth trends are promising.⁵

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