'The grinch will not steal Christmas' despite supply crunch: Economist

Steven Ricchiuto, Mizuho Securities Chief Economist, discusses the ongoing supply chain crisis as the holiday shopping season begins.

Video Transcript

- Let's turn our attention to economic data we got out this morning. September retail sales rising to a seasonally adjusted 0.7% in September from the previous month. The Commerce Department pointing to a near 14% increase from the same month a year ago.

Let's bring in Steven Ricchiuto, he is Mizuho Securities Chief economist. And Steven, we can of course break down where the spending happened, right now gas, of course, one that a lot of people are focused on with prices going up even further. What stood out to you here, and what does that tell you about where things are headed?

STEVEN RICCHIUTO: Well I think there are a number of aspects to consider here. One is that some of this upward movement in the retail sales numbers is a nominal aspect, in that you know prices have been going up, and that gets reflected in the retail sales number because it is a nominal measure of underlying consumer related activity. On a real sector basis we know things like automobile unit volume sales actually went down during the month.

So some of the upward gains that we saw there, some of the upward gains we saw in gasoline service station sales, some of the upward gains we saw in food services all seem to be related to the inflation story. But when you strip down, get to what we call the control group, which is the component that goes directly into GDP, and we take out that component in the CPI to adjust it, it's still up on a real basis. And it's telling you basically that people who have been downgrading their third quarter GDP numbers, it probably pushed them too low. And then it's likely to be a healthy fourth quarter because we've got a very, very nice start in the month of September, sending a relatively nice base going into the fourth quarter of the year.

- Yeah pretty broad base, 11 to 13 categories posting increases for the month of September. And I guess expectations may have been low just because for the last few months, we've been dealing with Delta. But as we've seen earlier in the pandemic, people shift to goods and buying things like that, but restaurants and bars also seeing a little bit of a pop. I mean, when you try and project the strength of the consumer now based off this report and other data points we've gotten in a few weeks, timeline here, what are you hearing when you piece the story together about what Q4 looks like?

STEVEN RICCHIUTO: Well our estimate for Q3 and Q4 is 5% and 4%. If we rotate those two and go 4% or 5%, they're still very, very healthy numbers. The Congressional Budget Office suggests the underlying trend rate of growth in the economy is 1.6%, 1.75%. So we're clearly well above the underlying potential rate of growth in the economy. And I think that's going to continue into the first part of next year.

As we get into the second part of next year is when we're expecting to see a bit more of an underlying decline in the economy, back to more trend-like growth numbers. But keep in mind, all that trend growth is going to be supplied primarily by the consumer because the consumer is the major driver of the US economy. It's by far the largest category, and it drives the economy completely, and it will continue to drive the economy because balance sheets are very, very healthy.

One of the messages that we got out of the banking reports, the earnings reports that have come out in the last couple of days, is really that the consumer's balance sheet is healthy. Consumer performance on loans were healthy, they were willing to take a lot of the reserves that they had held in abeyance for non-performance, and as a result of COVID have been able to be put right back into the earnings numbers. And I think that's important, it shows you household balance sheets are healthy.

They've been deleveraging for 14 years, they've been leveraging long, and they have a very low debt servicing cost. In fact, for the aggregate household space, the debt servicing cost is back to about 1979 levels. I'd like your viewers to ask themselves how many of them were alive in 1979?

- Steven to what extent do you think the supply concerns over the next few months-- how big of a risk do you see that in the sectors that are likely to be affected? And we've heard so much about buy early, the possibility of prices going up even higher because potentially there may not be enough products on the shelves. How do you look at that dynamic going into year end, and how that's going to affect the consumer?

STEVEN RICCHIUTO: Yeah, I mean, Santa Claus will arrive. The Grinch will not steal Christmas. You may have to pay more to have Santa Claus under your tree, that is the unfortunate reality.

That is going to be a problem because of the nature of the pandemic, the way we shut down production but then we juiced demand, eliminated all the inventory. The inventory is basically the grease that allows the wheels of commerce to run smoothly. That has been eliminated, and therefore any hiccup gets magnified through the system. So yeah there is going to be some shortage, but let's be honest, every holiday season there's always some shortage relating to something or another, even when there isn't a problem. So this year there will probably be more of them and people will just have to be a little bit more flexible in terms of what they purchase.

With regard to the ability of the economy to withstand this and deal with the higher prices, the higher prices will be one of the factors that helps bring the economy back to a more realistic growth perspective. Once we get into the second half of next year, will inflation continue to rise into 2022? The answer is in the early portions, probably yes. By the time we get to the second half of the year inflation will definitely be coming off the boil because of supply chain constraints will have been alleviated, not only by supply going up, but also by demand coming back down to more realistic levels.

- Yeah and I guess in the interim there are some concerns still about price pressure. And particularly we're going to be talking about this more in the next hour, but gas prices weighing on consumers. I assume a bit here and expectations that it could rise in terms of oil costs, rise more, that could impact everything. We've been talking a lot about airfares and how those have swung in the pandemic as well. But do you see maybe potential pressure there coming if energy prices are indeed to rise, perhaps spike, here in the short term before leveling out?

STEVEN RICCHIUTO: Well there's two ways to answer that question. The first way is, will energy prices going to a higher level derail what's going to be a long expansion? The answer is no. Will it curtail some of the short term level of economic activity? The answer to that question is yes.

So it is more of a short term problem than it is a long term problem. And to be honest with you, it's really been created by a regulatory environment that's tried to move the economy to being green more quickly than the economy was able to get there. And the net result is the regulators and the politicians and the industries all have to adjust, and they will adjust, and energy will not be a derailer of this expansion.

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