Walking the walk

In an economy driven by spending, can you believe what consumers are saying… or what they’re actually doing?

October 20, 2021
  • Ryan Severino

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Quick takes:

  • Divergence between words and actions
  • Consumers in a dour mood
  • Yet retail spending remains robust
  • Inflation driven by demand growth
  • Could present great environment for CRE

Walking the walk 

Over the last few months some confusion has set into the economic landscape, especially concerning consumption and inflation. While economic growth almost certainly slowed during the third quarter, some aspects of the economy are showing a divergence between sentiment and action. The lesson? Watch what people do and not what they say. While survey data indeed plays an important role in analyzing the economy, it can often belie the true intentions of economic actors.

What they are saying

First let’s look at what consumers are saying. The most recent consumer sentiment index reading for early October showed consumers in a dour mood, with the index falling below levels reached even during the second quarter of 2020 when the bottom was dropping out of the economy. The Delta variant, supply chain disruptions and higher inflation are weighing down consumers’ spirits. With a much-improved economy and labor market since the second quarter of last year (despite some ongoing challenges) one might expect a higher consumer sentiment reading. Yet, survey results can sometimes mislead. Respondents’ feelings on a particular day, or during a time of well-publicized problems, can skew results relative to underlying reality. Without explicitly asserting that happened here, turning to consumers’ behaviors provides a somewhat more nuanced view of reality.

Consumers feeling glum?



What they are doing

While consumers claimed that they held negative views about the current situation and expectations for the future, their actions said something different. Retail sales data from September (when consumers also claimed they were feeling gloomy) significantly surprised on the upside. Growth rates from July and August were both revised upward. These results seemingly contradict what consumers said in the sentiment surveys. For September, upside surprises occurred across most categories, including the important control series that feeds into GDP calculations. Of note, spending on food services and drinking places increased during the quarter, showing that despite the resurgent pandemic, spending on dining and drinking out increased during the month. Though overall spending growth slowed during the quarter, the actual results do not completely comport with consumers’ feelings.  How to reconcile this? Consumers’ desire and willingness to spend is sometimes not fully reflected in the sentiment data. With consumers sitting on some dry power, the tightening labor market pushing up wage growth and the most recent wave of the pandemic cresting, the outlook for consumer spending in the fourth quarter remains positive, even if future sentiment readings remain somewhat depressed.


“Retail sales data from September … significantly surprised on the upside.”


The impact it is having

Consumers’ desire to continue to spend, driving up aggregate demand, is running headlong into the supply-chain issues that continue to restrain growth in aggregate supply. The combination of strong government policy (primarily fiscal but also monetary) coupled with the relatively quick development and early domestic distribution of effective vaccines enabled consumers’ spending to rebound and surpass previous peak levels quickly. Meanwhile, the current wave of the pandemic has voluntarily and involuntarily kept workers idle and stymied production while the ongoing labor shortage restricts the ability of companies and the overall economy to operate at or near full capacity. 

As a result, prices in the economy continued to increase at an elevated pace in September. The headline consumer price index (CPI) increased at a slightly greater rate than anticipated while the core CPI matched consensus. On both a month-over-month and year-over-year basis, inflation appears to be peaking. But it remains at levels unseen in decades which reflects demand growing faster than supply. Data from the producer price index (PPI) is starting to show something similar. Inflation continues to push prices up, but the rate of change appears to be slowing, for both the headline and core indexes. While headlines often paint inflation as a negative, this proves somewhat inaccurate. We prefer to see inflation as a relatively positive development. Prices are increasing so quickly (at least relative to the last few business cycles) because demand rebounded so quickly relative to supply. If demand had not, we certainly would not be discussing inflation and would likely be talking about more worrisome problems, such as the lack of job growth and weak consumer spending. We still believe that inflation will not reach dangerous levels akin to what occurred in the 1970s because the current price dynamics do not reflect a supply shock, like the oil embargoes of the 1970s. But the supply side of the economy will likely take at least another 18-24 months to get back to anything approaching normal. Therefore, we see inflation abating over time, but slowly. 


“On both a month-over-month and year-over-year basis, inflation appears to be peaking. But it remains at levels unseen in decades which reflects demand growing faster than supply.”


|  What we are watching this week  |

Housing starts and building permits should decline, coming in below expectations, as both head slightly downward. Existing home sales could surprise on the upside with deals from the summer still in the pipeline. 

|  What it means for CRE  |

For commercial real estate (CRE) we continue to view inflation as a net positive. With its ability to imperfectly hedge inflation, CRE should fare well during an environment of elevated inflation and economic growth. Property types with short-term leases should mark-to-market relatively quickly while those with longer-term leases are increasingly moving toward incorporating an inflation index like CPI into the lease structure. While some worry that higher interest rates, pushed upward by inflation, would create a headwind for CRE, the key to the fortunes of the sector remains real growth. Our positive view on real growth coupled with elevated and slowing inflation could present a very beneficial environment for CRE over the next few years. 

|  Thought of the week  |

2.9% of all employed workers in the U.S. quit their job in August, the highest quits rate on record.


Contact Ryan Severino

Chief Economist, JLL