• 4 months ago
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, joins TheStreet to give her take on the U.S. economy.
Transcript
00:00What do you make of the disconnect between the perception of the economy right now and the reality of the economy?
00:08That's a really amazing one, because there have been surveys, recent surveys that suggest a high percentage of individuals think the economy is in recession or that we've got a very high historical unemployment rate.
00:20And obviously, that's just not the case. And I think it's the the filtering in of the inflation problem that has colored a lot of people's perceptions of the state of the economy more broadly, the health of the economy more broadly.
00:35So even though the inflation problem is where the issues have been concentrated, that does filter into a broader perspective for individuals that that see the erosion of their purchasing power.
00:48And they may liken that to a problem from a labor market and wages perspective.
00:55So I really think that the crux of this disconnect, seeming disconnect between how folks feel and what you actually see in the numbers on the economy, I think inflation is the connection point between that disconnect.
01:09And do you see inflation softening? And if so, will that help correct this disconnect?
01:14Well, it has softened in many areas. The problem right now is if you look at inflation metrics, whether it's CPI or PCE, which is the Fed's preferred metric, and you break out the components of those indexes into two somewhat basic categories, discretionary and non-discretionary.
01:36So discretionary would be the stuff that represents wants and the non-discretionary is the stuff that represents needs.
01:43And in the case of CPI, you look at the non-discretionary, the needs categories, things like health care and home insurance or auto insurance.
01:56Inflation is running at somewhere in the 6% range, which is 3x the Fed's 2% target, where those discretionary categories are closer to flat territory, really no inflation anymore in those areas.
02:12And that's another reason why I think you have this filtering into weaker confidence, because the stuff we have to purchase is where the stickiness on the high side still exists.
02:23And the rub from the perspective of the Fed is if they keep policy tight and let real rates move higher, that the point of tighter monetary policy is to weaken demand in the economy.
02:38The problem is that that doesn't really apply to the same degree on the non-discretionary side of things as stuff we have to purchase.
02:47I'm not sure the Fed – their want that they can waive via what they do with short rates or the balance sheet can have a near-term impact on things like auto insurance rates.
02:58So it is a bit of a pickle right now for the Fed in trying to tackle that.
03:08Thanks for watching.

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