“If you believe in yourself and have dedication and pride and never quit, you’ll be a winner.”
– Paul W. “Bear” Bryant
A 38-year career coaching football culminated in a 323-85-17 record and .760 winning percentage. Paul “Bear” Bryant’s career began in 1945 at Maryland and ended in 1982 at Alabama with stops in between at Kentucky and Texas A&M. His teams participated in a total of 29 postseason bowl games, including 24 consecutively at Alabama. Bryant won 15 bowl games, including eight Sugar Bowls and he still holds the records as the youngest college football head coach to win 300 games and compile 30 winning seasons. He also left an indelible mark on football with his words. He is credited with coining the phrase, “Offense sells tickets. Defense wins championships.” Over the years, the simplicity of his logic saw this credo translate to other major sports where coaching disciples and non-disciples alike preached its value.
You might think the inflation narrative on Main Street is the farthest thing imaginable from the college football gridiron. Perhaps. But as 2022 unfolded, the action of small businesses raising prices became something of a broad-based defense. By March, a net 66% of proprietors indicated that they were increasing prices, a reading that only rivaled the 1974 peak (orange line). March also saw a record net 52% of owners planning to raise prices (olive line). The combination of small business inflation and inflation expectations was never more pervasive. By July, things reached a fever pitch as 37% of small businesses reported that inflation was their single most important problem, the highest reading since the 1970s (purple line).
Today’s National Federation of Independent Business (NFIB) Small Business Economic Trends for November will add color to its jobs report which sported dual four-point declines in current and expected compensation trends. Compensation and pricing trends have moved in lockstep; since 2015, current comp and price metrics have a .90 correlation, while that of future gauges are at .83 (not illustrated).
We dare say small businesses’ chief concern is shifting to staying alive. It’s a rare day that we cite the same website two days in a row. And yet, we were shocked to see DailyJobCuts.com posted a one-day tally of 15 closings yesterday bringing December’s total to 97. At this rate we’ll see 250 unhanging their shingle before the ball drops at midnight in Times Square.
Yesterday’s New York Fed Survey of Consumer Expectations (SCE) showed U.S. households also perceive the turn in price pressures. While still twice the long-run average of 2.8% and well north of the Federal Reserve’s 2% target, through November, one-year-ahead inflation expectations fell to 5.2%, the lowest since August 2021, well off June’s 6.8% peak (yellow line). No surprise, gasoline was the biggest driver, falling from expectations of 10% in March to 4.8%. As West Texas Intermediate approaches $70 per barrel, pump prices have followed to roughly $3.25 a gallon. Food price expectations have retreated to 8.3% from March’s 9.8% high. And rent has ticked down to 9.8% from June’s 10.9% peak. While health care and education are stickier, the SCE flagged downside in these services CPI heavyweights which will pile onto durables disinflation. The SCE’s unique three-year expectations gauge eased to 3.0% in November from 3.1% the prior month putting the 4.2% peak reached in September and October of 2021 in the rear view.
The inflation yield curve has also normalized. At the outset of the tightening campaign, 5-year yields were north of the 7-year and the 10-year yield was higher than that of the long bond (bottom left chart) challenging Federal Reserve policymakers. Ratcheting up the steep and fully negative real yield curve (bottom right chart) was integral to its success. Four unusually large rate hikes later, the inflation curve has flattened to near 2.3% across all four tenors. Restrictive real yields are key to sustaining a low and relatively stable inflation curve. The whole curve is running between 1.3% and 1.5% at present. Notably, rising out of negativity was not due to the Fed liquidating its Treasury Inflation-Protected Securities (TIPS) holdings, which were $390.8 billion in April and have nudged down to $377.4 billion through the week ended December 7.
While the Fed’s wrecking ball has normalized medium- and long-run inflation expectations, spot CPI remains uncomfortably high. By tomorrow, we’ll know which tenor Powell says is troubling him more. As tweeted out yesterday, how Nick Timiraos of the Wall Street Journal ended his FOMC blackout-interrupting article was telling. The mole acknowledged the Brainard contingency: “Doves are urging patience. They worry that the central bank might raise rates higher than needed to reduce inflation and cause an unnecessarily deep economic downturn.”
But “Nicky,” as he’s affectionately referred to on the Street, ended by quoting Powell loyalist Randall Quarles, who quit his Board position a decade before his governorship ended to protest Biden temporarily backing socialist-leaning Brainard to replace Powell: “’People really misjudge the fact that Jay is a diplomat and a genuinely good guy to mean he’s a conciliator—which is absolutely not the case,’ said Mr. Quarles, who served at the Fed from 2017 to 2021. ‘He’ll have a very clear view, and he’s committed to doing what the law requires,’ which is to lower inflation.” If his offense doesn’t unleash systemic risk, Powell’s best defense could yet win the championship of slaying the Fed Put.