Stock Investors: Blame Social Security for Friday's Market Drop

The stock market’s performance in 2022 was terrible, and inflation was largely to blame. Higher prices took more money out of consumers’ pockets, forcing them to draw down cash reserves built up during the early years of the COVID-19 pandemic and weighing on demand. Companies also had to fight rising costs of production, and many weren’t able to pass all of those higher costs on to their customers.

Recently, though, investors have hoped that inflation would continue to ease, and that optimism prompted a big rally in the stock market to begin 2023. However, market benchmarks fell on Friday after the Bureau of Economic Analysis (BEA) released its latest economic data on personal income and outlays, largely because the report showed an increase in the rate at which prices of goods and services are rising. Although many of the same factors that have existed over the past year continued to put upward pressure on inflation, there was a new factor at play in January’s data: Social Security.

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What the PCE price index said

The BEA is in charge of collecting information on personal income and expenditures, and among the data it gathers are the prevailing prices for commonly used goods and services. The BEA doesn’t follow the same methodology in compiling its personal consumption expenditures (PCE) price index that the Bureau of Labor Statistics uses in coming up with the Consumer Price Index, but the takeaways for those who track the two metrics are generally the same.

The PCE price index rose 0.6% in January compared to December 2022, which was the largest monthly rise since last June. That boosted the year-over-year rise in the PCE price index to 5.4%, up from 5.3% last month and failing to deliver the decline that investors expected and wanted to see.

Even more troublingly, prices rose even after factoring out volatile food and energy costs. The core PCE price index was also up 0.6% for the month of January, bringing its rise over the past 12 months up to 4.7%.

How is Social Security responsible?

Looking more deeply at the report, some interesting trends showed up at the beginning of 2023. Disposable personal income jumped 2% for the month, as consumers had $387 billion more to spend than they had previously. That helped to fund a 1.8% rise in personal consumption expenditures.

The vast majority of that increase came from higher wages. However, the annual cost-of-living adjustment (COLA) to Social Security did have a substantial one-time impact. In January, Social Security paid out nearly $112 billion in benefits. That was roughly $10 billion higher than the program had been paying in late 2022, and that’s because Social Security checks got an 8.7% bump at the beginning of the year. That increase reflected the previous year’s inflation, which recipients had struggled with throughout 2022. 

The BEA report specifically mentioned the positive impact of the Social Security COLA on personal income. It did note, though, that the end of some one-time programs providing pandemic-related relief led to an overall decrease in government social benefits in January, including the expiration of the extended child tax credit and the end of various state-level stimulus payments to residents.

The last boost until 2024

Prices reflect supply and demand, and when consumers have more money to spend, they’re willing to pay more to get what they want. That has been a primary driver of inflation, which in turn determines the size of Social Security’s COLA each year. You can see the circular nature of that process, and that’s exactly the kind of feedback loop that the Federal Reserve is trying to prevent from becoming entrenched in the economy.

The good news, though, is that COLAs won’t have any further upward impact on prices until the next one takes effect in January 2024. That should give policymakers time to work through inflationary challenges, but that won’t necessarily stop short-term traders from pushing stocks still lower.