Inflation didn’t re-ignite yet. That may change.
KEY TAKEAWAYS
Consumer confidence fell sharply in December to levels last seen during the pandemic
Labor market sentiment is deteriorating even as unemployment rises gradually
Q3 GDP surprised to the upside driven primarily by consumer spending
Companies have absorbed tariff costs so far due to heightened price sensitivity
Strong consumption may give firms confidence to test higher prices in 2026
MY HOT TAKES
Confidence cracks before consumption breaks
Soft data trends matter even when hard data looks strong
Price sensitivity is the biggest hidden inflation variable right now
Strong GDP is a green light for pricing experiments
Inflation risk is delayed–not defeated
You can quote me: “If you were a corporate manager in charge of prices, this most recent GDP print was a ticket to ride; expect companies to start testing higher prices in the near future.”
Best worst. Were you one of those folks scurrying around for that last minute gift on Wednesday, Christmas eve? Don’t worry, I am not judging you–it’s been one of those years for all of us. Lots of good, some bad, but altogether busy as hell trying to stay ahead of a constant torrent of information–it has been a wild ride, indeed. Ok, so maybe you just decided to take it slow ahead of the holiday and start writing your New Year’s resolutions because the market closed early. You aren’t judged for that either. However, if you did either of the two, you might have missed two of the most important economic numbers in a while. Well, at least since that half-botched CPI release just recently. Yeah, that one made it look like inflation was on its way back out. We will get back to that in a moment, but let’s have a look back at the beginning of this week first.
I can tell you that one of my New Year’s resolutions for 2026 is not to rant less about consumption, sorry. Friends, you know that I am a self-professed junky for consumers and consumption. Plain and simple: nothing–no stock story–works if the economy is contracting. It is truly an “all boats fall with the ebbing tide” scenario. So, we have established that a healthy economy is good if we want the stocks we own to continue to go up in value, yes? Pay attention, here comes the punchline: strong consumption is paramount for economic growth. Consumption–the goods and services purchased by you and me–makes up more than ⅔ of economic growth. The other ⅓ is covered by investment (largely corporate) and government spending. Those two are separate beasts, but let’s stick with consumers today.
What drives you to buy stuff? I should say, what drives you to buy more stuff–than last year? Do you need more? Of course, you do. When it comes to “stuff” more is always good–a basic tenet of abstracted microeconomics. But what constrains you from buying more than last year? Well, that should be a simple answer: income. You need money to buy stuff. Most of us get our money from salaries and possibly investment gains and income. If your income from either or both sources is going up, you can afford to buy more. ASSUMING that prices are not growing faster, which would mean that despite your rising income, you can afford less stuff. Hence, we worry about inflation.
Inflation is high–technically above the Fed’s 2% target–we know that. That last CPI reading suggests that maybe, it is receding a tiny bit, which might be good for growth at some point, assuming it continues to fall. But let’s get back to what constrains your consumption. Income from your job. If you lose your job and your primary source of income, surely, you would cut back on consumption at some point. That is why we are constantly monitoring the country’s labor market. The last Unemployment Rate print was 4.6%, which some may consider low, but the rate itself is not as important as the trend, and that trend, my friends, is heading in the wrong direction–it is increasing. That means some people may be spending less because they are making less… um, nothing. What about the lucky folks who have jobs? For them, it’s a question of confidence. Are you worried about losing your job? Perhaps you may be concerned that your ability to move jobs may be hampered by a weakening labor market. Would that affect–constrain–your consumption decisions? I am sure the answer is “yes” at some level. Not saying you would choose Shake Shack over a Michelin Star restaurant to save a few bucks (my wife would choose $SHAK regardless of income 🍔), but you might consider holding off on some big durable goods purchases until you get a sign that things are improving.
What I am driving at here is: confidence. You know my famous saying: confident consumers consume! And the footnote: **employed consumers are confident. That’s it. It really is that simple. So, are you confident? Confident in the economy? The markets? Your job? Well, according to the latest Consumer Confidence indicator from The Conference Board, that confidence may be waning. That number just slipped more than expected to 89.1 for the month of December and below its prior print of 92.9. Except for the quick dip earlier this year (in April–no shocker), you’d have to go back to the dark days of the pandemic to find a level this low.
The Conference Board Consumer Confidence Index is based on a monthly survey of about 3,000 US households that asks standardized questions about current business conditions, labor market conditions, and expectations for the next six months. Responses are converted into diffusion indexes and normalized to a baseline of 100 (1985, the base year was 100), with separate Present Situation and Expectations components combined into the headline index. Let’s focus on labor market conditions within that index. Check out this chart and keep reading.
This is a very telling chart. Here, I have plotted two of those response series to the question of jobs. The percentage of respondents who think that “jobs are plentiful” (light blue line) and those who think that “jobs are hard to get” (green line). The former is falling like a rock, and the latter is rising at an alarming pace since the start of 2025. There is no way of interpreting this as being confidence in the labor market. Full stop.
Now, it is important to recognize that this is based on a survey, and surveys clearly have flaws. Namely, this one in particular, has been criticized as being biased, especially based on political affiliation. And it is, but the weakening trend has clearly spanned two separate administrations, so it is fair to say that the data point is notable. What’s more, because these numbers are not actual observations from economic performance and because statistically significant causation is difficult to show, many call these sentiment indicators soft numbers. I agree with them in a mathematical sense, but I think trends of these numbers are telling and extremely important, especially when they are going in the wrong direction, which they are. Will these ultimately affect consumption and ultimately GDP?
Funny, you should ask that. Earlier this week, the Bureau of Economic Statistics (BEA) released its second estimate of Q3 GDP. To clarify, we are talking about Q3 that ended in September. Also, this past release was effectively the first release–the “advance” release was skipped in the government shutdown. And yes, there is actually a “third” estimate coming soon, but before we know how well the economy is doing right now. Anyway, that first look that we just got came in above estimates and Q2’s final 3.8% reading at 4.3%. Wow, that’s growth. Impressive in a year that we all thought might be a rough one for growth! What do you suppose could have powered that growth? Well, let's have a look at my favorite Bloomberg ECAN chart for some clues. Have a look and keep reading. Be patient, we are almost there.
On this ECAN chart you can see that GDP (white line) increased from Q2 to Q3, and significantly from Q1’s decline. You can also see how it grew faster in Q3 of this year than it did in Q3 of 2024. It is clearly trending higher, so we give that a thumbs up all around. 👍 Let’s dig into the components (the colored bars). Ignore the rust and purple bars for now. They are extremely important, but messy and not part of our discussion today. Let’s focus on fixed investment (yellow bar) and personal consumption expenditures (blue bar). You will note that fixed investment–largely controlled by companies–has been declining. Not necessarily a flashing warning sign, but one which should be watched carefully, especially if it goes negative again. Now, onto consumption (blue bar). Consumption is clearly growing! If you have been paying any attention to me in the past decade or even the past few weeks, you know that this gets two thumbs up from me. 👍👍 So, it is fair to say that even though consumer confidence is waning and unemployment is rising, consumers remain strong and continue to carry the US economy.
So, is that it? Are we good? Can we now get back to our New Year’s resolutions and start working off those excessive calories we all just took in? Sorry, not so fast. Bear with me. I promised that I would come back to CPI and inflation. What gives with inflation? It was supposed to explode again this past year because of tariffs! 💥 But it didn’t. What happened? Well, it appears that those tariffs–additional taxes on US companies–have not been passed on to the consumer as would be expected by most economists. It appears that companies are eating the increased costs! Why would a rational company imperil its margins? Well, simple fear of losing customers. Prices are too damn high–prices themselves, not inflation–the growth of prices. Companies are afraid–rightly so–that consumers will simply demand less if they raise prices anymore. Flatter demand curves mean consumers are more sensitive to changes in price (elasticity of demand), meaning, consumers will substitute or stop consuming altogether with smaller increases in prices. It is highly likely that this is the case right now.
To be clear, there is no magical formula for this demand curve. For companies, it is trial and error. If they raise prices they will witness a decline in sales quantities, but how much can only be understood by observing how they behave in the wild–um, on the shelves. That is why companies move prices slowly–really slowly. If things are looking shaky for the economy, companies may choose to hold off price increases altogether.
But are things shaky in the economy? Well, I suppose it depends on who you ask and where you look for those answers. Folks are clearly nervous that the labor market is softening. BUT, according to the hard data, consumers are buying stuff at an increasing rate. This may be from the wealth effect, but it doesn’t matter, the fact is that consumption remains solid. If you were a corporate manager in charge of prices, this most recent GDP print was a ticket to ride. In other words, expect companies to start “testing” higher prices in the near future. That is not good for your wallet or prospects for lower Fed Funds rates. In other words, inflation may have some upward pressure in the new year. If consuming less stuff is part of your New Year’s resolution, it may be the easiest one to tick off the list in 2026–re-ignited inflation may help you out with this one. Going to the gym more? That’s on you. 💪
WEDNESDAY’S MARKETS
Stocks muscled to new highs on upbeat economic data and momentum from holiday spirits leading up. Bond yields slipped, Bitcoin inched higher, and Gold paused just below its all-time high.
NEXT UP
No numbers today, but next week will bring some housing numbers, weekly employment figures from ADP and the government, and the Fed’s minutes from its last FOMC meeting. All this, and an abridged trading week ahead of the birth of a new year. Don’t get complacent now after being so attentive all year! Check back in on Monday and download your very own economic calendar so you can be the life of your New Year’s Eve celebration. 🪩
Have a great weekend and please call if you have any questions.
Best regards,
Mark