Taylor Swift brings Powell some Christmas cheer

FOR much of the past two years, the US economy’s extraordinary resilience has revolved around demand for services. That’s been a zombie narrative that’s refused to die a tidy death — perhaps until now. 

Despite a cooling in some services spending in early 2023, the category caught a second wind thanks, in part, to Taylor Swift’s Eras Tour and the summer box-office hits of Barbie and Oppenheimer. Now, spending on recreation services is ebbing anew, and central bankers should be thrilled. 

Consider the latest personal consumption data published on Nov 30. On a seasonally adjusted annualised basis, spending on recreation services (movie theatres,concerts, spectator sports, etc) fell for a second month in October and essentially returned to levels last seen in June. 

Movie-theatre spending has plummeted since Barbenheimer; most live entertainment has mellowed; and only spectator sports have continued to trend up (although inflation itself is a clear factor there; more on that later.) 

There are several ways to read these developments, but I’m leaning toward the glass-half-full interpretation. The Federal Reserve (Fed) has raised interest rates by 525 basis points since March 2022 precisely to cool consumption and restore 2% inflation. Not just that, chair Jerome Powell has put special emphasis on the services side of the economy, since he believes that inflation there tends to be stickier and more sensitive to wage dynamics. 

In that sense, a bit of cooling — and even some controlled backpedalling — is probably welcome. Indeed, the slowing activity has coincided with more palatable inflation figures in October, including in the all-important core services ex-housing category — apparently one of Powell’s favourite bespoke cuts of the data. 

When the spending boom was happening, I argued that it was being slightly misunderstood — and I think the latest developments support that argument. Some observers thought it was a sign of a society veering toward nihilistic spending after the life-altering effects of the Covid-19 pandemic, and among them, some seemed to believe that consumption habits might have changed forever. 

In reality, it was largely just a confluence of factors (a few great artists on tour; a brilliant marketing campaign around Barbie; and the continuation of our gradual return to pre-pandemic habits.) 

On a real (inflation-adjusted) basis, movie-theatre spending is still well below pre-pandemic norms; live event consumption is “meh”; and only live sports have seen any kind of meaningful increase — leaving the quantity of recreation spending about flat relative to 2019 norms. We’ve just been paying more for it, most of us reluctantly. 

The risk, of course, is that the slow-down will go too far — that some of these labour-intensive industries will start laying off workers and contribute to a broader downturn. That’s not happening in any sort of large way at present, but separate data reported on Nov 30 showed that recurring applications for unemployment benefits across the economy rose to the highest in about two years. There are some concerns that the trend could start to snowball. 

The labour market would surely turn south eventually if the current circumstances persist for too long (especially high-interest rates.) 

The good news is that I expect the Fed to provide some relief in 2024. Provided the economy doesn’t reaccelerate and disinflation continues apace, the Fed should get the opportunity next year to start surgically reducing policy rates, and that should prevent any services moderation from turning into a bust (fingers crossed!). So, while the summer confluence of the Swift tour and Barbenheimer may have been a flash in the pan, the services moderation that’s taken place may be just what the economy needs to return to a more sustainable path. Bloomberg

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  • This article first appeared in The Malaysian Reserve weekly print edition