Economic Perceptions vs. Reality: Navigating the Parallel Universe

Americans continue to tell pollsters that the U.S. economy is in terrible, horrible, no good, very bad shape. However, the resilient pace of their spending indicates they feel positive about their own finances. Perhaps they only think that other people are suffering.

Polls also show that a majority of the public believe inflation is raging out of control. The opposite is true. The stark disconnect between reality and perception is like living in the parallel universe in a sci-fi movie. Disinformation spread by partisan media bears much of the blame. Low-information voters don’t realize when they’re being told a lot of lies.

Here’s a fact: The economy is expanding, with unemployment near a 50-year low. What’s more, inflation is markedly falling. The U.S. Bureau of Labor Statistics (BLS) on Wednesday released the producer price index (PPI) for October, and it capped a slew of positive inflation data.

Stocks surged in response. More about consumer spending and the rise of bullish investor sentiment, in a minute. First, let’s examine the latest PPI report.

PPI in October declined 0.5% for the month, versus consensus expectations for a 0.1% increase. That was the biggest monthly decline since April 2020.

Excluding food and energy, “core” PPI came in flat, also below the forecast for a 0.3% increase. Excluding food, energy and trade services, the PPI increased 0.1%.

Core PPI rose 2.4% on a year-over-year basis, versus 2.7% expected. In the prior month, the annualized rate was 2.7%.

The PPI’s favorable reading Wednesday complemented the similarly encouraging consumer price index (CPI) report released Tuesday.

The PPI serves as a vital metric, offering insights into the cost pressures faced by producers in the U.S.

The PPI is a leading economic indicator that measures the average change over time in the selling prices received by domestic producers for their output. It encompasses a diverse array of goods and services, offering a comprehensive view of inflationary pressures upstream in the production process.

Divided into three main categories of finished goods, intermediate goods, and crude goods, the PPI provides a nuanced understanding of inflation dynamics.

The PPI plays a critical role in the fight against inflation by providing an early warning system. A declining rate of growth in the PPI indicates that producers are facing reduced cost pressures, which, if sustained, can translate into lower consumer prices down the line. For inflation fighters, this signals a potential slowdown in the inflationary momentum, offering room for strategic interventions.

The PPI is a mirror reflecting the economic health of the manufacturing sector. When the rate of growth in the PPI declines, it suggests that businesses are facing less pressure to raise prices for their goods and services. Monitoring the PPI becomes an essential tool for gauging the resilience of the production sector and, by extension, the broader economy.

With reduced inflationary pressures upstream, the Federal Reserve has justification to once again “pause” its rate tightening cycle when it meets again in December.

How strongly do investors expect the Fed to stand pat on rates at its meeting next month? Wednesday’s reading of the CME Group’s FedWatch tool puts the odds at an overwhelming 99.8%:

Source: CME Group

What’s more, Wall Street is increasingly expecting an interest rate cut sometime in mid-2024, a pivot that would be a catalyst for the sustained upward trajectory of stocks.

In response to the positive PPI report for October, the main U.S. stock market indices on Wednesday closed sharply higher, as follows:

  • DJIA: +0.47%
  • S&P 500: +0.16%
  • NASDAQ: +0.07%
  • Russell 2000: +0.16%

Stocks extended the powerful rally from the previous trading session. Wall Street also was happy to see the fractious U.S. House agree to a spending resolution that would prevent a government shutdown.

In further positive news Wednesday, retail bellwether Target (NYSE: TGT) reported third-quarter operating results that topped Wall Street’s quarterly sales expectations and crushed earnings estimates, as purchases in high-volume items such as groceries and beauty aids offset weaker spending on discretionary items.

For the second consecutive quarter, Target’s comparable sales declined. However, earnings per share came in at $2.10 versus $1.48 expected, and revenue reached $25.4 billion vs. $25.2 billion expected. The big box retailer’s stock jumped a whopping 17.75%.

The consumer continues to show resilience, albeit with a sensitivity toward prices. The Commerce Department’s advance retail sales report for October, released Wednesday, showed a monthly decline of 0.1% in the headline number vs. an expected 0.3% decline. Sales excluding auto and gas increased 0.1%, below expectations for a 0.2% increase. Online spending rose 0.2% last month.

Read This Story: Investors Cheer as Inflation Continues to Lose Its Punch

The S&P 500 now hovers well above its 50- and 200-day moving averages, which suggests the recent rally has plenty of momentum to last through the fourth quarter. The Dow Jones Industrial Average and S&P 500 have hit three-month highs; the NASDAQ has hit a three-and-a-half month high.

However, despite the stock rally and signs of economic strength, maybe you’re still spooked by market volatility. For market-thumping gains with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

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John Persinos is the editorial director of Investing Daily.

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