Tag: Economy

Jobs Report Rockets Past Wall Street Estimates

Posted on by slightbourne@noblecapitalmarkets.com

The September jobs report revealed the U.S. economy added 336,000 jobs last month, nearly double expectations. The data highlights the resilience of the labor market even as the Federal Reserve aggressively raises interest rates to cool demand.

Economists surveyed by Bloomberg had forecast 170,000 job additions for September. The actual gain of 336,000 jobs suggests the labor market remains strong despite broader economic headwinds.

The unemployment rate held steady at 3.8%, unchanged from August and still near historic lows. This shows employers continue hiring even amid rising recession concerns.

Wage growth moderated but still increased 0.3% month-over-month and 5.0% year-over-year. Slowing wage gains may reflect reduced leverage for workers as economic uncertainty increases.

The report reinforces the tight labor market conditions the Fed has been hoping to loosen with its restrictive policy. Rate hikes aim to reduce open jobs and slow wage growth to contain inflationary pressures.

Yet jobs growth keeps exceeding forecasts, defying expectations of a downshift. The Fed wants to see clear cooling before it eases up on rate hikes. This report suggests its work is far from done.

The September strength was broad-based across industries. Leisure and hospitality added 96,000 jobs, largely from bars and restaurants staffing back up. Government employment rose 73,000 while healthcare added 41,000 jobs.

Source: U.S. Bureau of Labor Statistics via CNBC

Upward revisions to July and August payrolls also paint a robust picture. An additional 119,000 jobs were created in those months combined versus initial estimates.

Markets are now pricing in a reduced chance of another major Fed rate hike in November following the jobs data. However, resilient labor demand will keep pressure on the central bank to maintain its aggressive tightening campaign.

While the Fed has raised rates five times this year, the benchmark rate likely needs to go higher to materially impact hiring and wage trajectories. The latest jobs figures support this view.

Ongoing job market tightness suggests inflation could become entrenched at elevated levels without further policy action. Businesses continue competing for limited workers, fueling wage and price increases.

The strength also hints at economic momentum still left despite bearish recession calls. Job security remains solid for many Americans even as growth slows.

Of course, the labor market is not immune to broader strains. If consumer and business activity keep moderating, job cuts could still materialize faster than expected.

For now, the September report shows employers shaking off gloomier outlooks and still urgently working to add staff and retain workers. This resiliency poses a dilemma for the Fed as it charts the course of rate hikes ahead.

The unexpectedly strong September jobs data highlights the difficult balancing act the Fed faces curbing inflation without sparking undue economic damage. For policymakers, the report likely solidifies additional rate hikes are still needed for a soft landing.

Crisis Averted: Government Stays Open

Posted on by slightbourne@noblecapitalmarkets.com

By averting a government shutdown, Congress has avoided rocking both the economy and financial markets. Shutting down federal operations would have created widespread uncertainty and turbulence. Instead, the move offers stability and continuity as the economy faces broader headwinds.

With virtually all government functions continuing normal operations, economic data releases, services, and programs will not face disruptions. Past shutdowns caused delays in economic reports, processing visa and loan applications, releasing small business aid, and more. These disruptions introduce friction that can dampen economic momentum.

Federal employees will continue receiving paychecks rather than facing furloughs. The last major shutdown in 2018-2019 resulted in 380,000 workers being furloughed. With over 2 million federal employees nationwide, even a partial shutdown can reduce economic activity from lost wages.

Government contractors also avoid financial duress from suspended contracts and payments. Many contractors faced cash flow crises during the 2018 shutdown as the government stopped paychecks. Reduced revenues directly hit company bottom lines.

Consumer and business confidence are likely to be maintained without the dysfunction of a funding gap. Surveys showed confidence dropped during past shutdowns as uncertainty rose. Lower confidence can make households and businesses reduce spending and investment, slowing growth.

The tourism industry does not have to contend with closing national parks, museums and monuments. The 2013 shutdown caused sites like the Statue of Liberty to close, resulting in lost revenue for vendors, hotels, and airlines. These impacts radiate through the economy.

Markets also benefit from reduced policy uncertainty. The 2011 debt ceiling showdown and 2018-2019 shutdown both introduced volatility as deadlines approached. Equities fell sharply in the final weeks of the 2018 impasse. While shutdowns alone don’t determine market trends, they contribute an unnecessary headwind.

With recent stock volatility driven by inflation and recession concerns, averting a shutdown provides one less factor to potentially spook markets. Traders never like surprises, and shutdowns heighten unpredictability.

On a sector basis, federal contractors and businesses leveraged to consumer spending stand to benefit most from the avoided disruption. Aerospace and defense firms like Lockheed Martin and Northrop Grumman rely heavily on federal budgets. Consumer discretionary retailers and restaurants avoid lost sales from furloughed workers tightening budgets.

While shutdowns impose only marginal economic impact when brief, longer impasses can impose meaningful fiscal drags. The 16-day 2013 shutdown shaved 0.3% from that quarter’s GDP growth. The longer the stalemate, the greater the economic fallout.

Overall, with myriad headwinds already facing the economy in inflation, rising rates, and recession risks, avoiding a shutdown removes one variable from the equation. While defaulting on the national debt would produce far graver consequences, shutdowns still introduce unnecessary turbulence.

By staving off even a short-term shutdown, Congress helps maintain economic and market stability at a time it’s especially needed. This provides a breather after policy uncertainty spiked leading up to the shutdown deadline. While myriad challenges remain, at least this box has been checked, for now.

Student Loan Payments Resume

Posted on by slightbourne@noblecapitalmarkets.com

After nearly 3 years of reprieve, student loan payments are set to restart on October 1, 2023. However, the landscape looks much different thanks to sweeping changes made by the Biden administration. These alterations have made student debt more manageable and offered routes to accelerated payoff or even forgiveness that didn’t exist before.

The impact could extend beyond individual borrowers to provide a boost to the overall economy. With less income eaten up by student loan payments, borrowers will have more spending power. That additional discretionary income circulating through the economy acts as a stimulus.

Perhaps the most impactful change was the elimination of interest capitalization in most cases. This is the process where unpaid interest gets added to the loan balance, causing it to balloon. Now, interest no longer capitalizes when borrowers exit forbearance, leave income-driven repayment plans, or have other status changes. Only when exiting deferment on unsubsidized loans does interest get added to principal. This prevents balances from spiraling out of control.

Biden has also dramatically expanded access to forgiveness. Over 3 million borrowers have already had loans discharged through revamps of programs like Public Service Loan Forgiveness and income-driven repayment. The former saw its complex rules simplified, while the latter had payment counts adjusted and forbearance periods now qualifying for credit. These tweaks pushed many over the line into immediate forgiveness.

Even borrowers who don’t qualify for these programs have an easier time discharging loans through bankruptcy. New guidelines tell government lawyers not to oppose bankruptcy discharge requests that meet certain criteria laid out in a 15-page form. This makes the previously rare “undue hardship” determination more accessible.

The administration also implemented a 1-year “on ramp” where missed payments don’t negatively impact credit or trigger default. This grace period offers struggling borrowers a clean slate before consequences kick in again.

Those able to resume payments may even benefit from today’s high interest rates. Federal student loans have fixed low rates, so borrowers can pay them down faster by investing in treasury notes earning far higher returns. Inflation likewise reduces the real burden of student debt over time.

While these changes have brought tangible individual relief, broadly reducing the student debt burden could also provide a macroeconomic boost. Money freed up in household budgets gets spent elsewhere, circulating through and stimulating the economy.

The Biden administration still wants to enact broad student debt cancellation for this very reason. After the Supreme Court blocked its forgiveness plan, the Department of Education launched “negotiated rulemaking” to find another path. This bureaucratic process involving public committees aims to deliver a new cancellation proposal in late 2024.

Until then, the reshaped student loan landscape gives borrowers breathing room. The structural changes determine whether student debt remains a crushing burden or becomes manageable.

With interest capitalization curbed and expanded opportunities for discharge, balances can actually shrink instead of endlessly growing. The credit safeguards offer wiggle room to get finances in order before consequences hit. And the door to forgiveness has been opened wider than ever before.

Of course, these alterations won’t instantly solve every borrower’s problems. But they provide avenues for relief that didn’t exist previously. And more importantly, they signal a philosophical shift that student debt shouldn’t ruin lives or constrain futures.

There’s still work to be done, like making income-driven repayment more accessible and adding guardrails to limit excessive debt. But the momentum is towards a system that helps borrowers succeed rather than burying them in interest and unpayable balances.

So while student loan repayment is resuming, borrowers can take heart that it’s restarting under a fairer set of rules. The old grind of watching debt balloon while relief remained elusive has thankfully been left behind. With a potential wider economic stimulus, these changes could benefit more than just student borrowers.

August PCE Index Release Suggests Slower Pace of Inflation Growth

Posted on by cpatches

Today’s news brings the release of the August data for the Personal Consumption Expenditures (PCE) Index by the U.S. Bureau of Economic Analysis. This report, a crucial indicator of inflation and consumer spending in the United States, has set a positive tone for financial markets as they rally in early trading.

In August, the PCE Index recorded a year-over-year growth rate of 3.5%, showing a modest increase from the previous month’s 3.4%. On a monthly basis, the core PCE, the Federal Reserve’s preferred measure of inflation, inched up by 0.1%, slightly lower than the 0.2% increase in July.

The Federal Reserve has long regarded the core PCE as its favored measure of inflation. While the August PCE report has provided insight into inflation trends, it’s important to note that the Fed made a decision to keep interest rates steady earlier this week. Federal Reserve Chair Jerome Powell consistently references the core PCE figures when assessing inflation. Powell has emphasized that inflation remains above the Fed’s 2% target, which has informed the central bank’s recent decision to maintain interest rates within a range of 5.25%-5.50%. This decision underscores the Fed’s cautious approach to managing inflation while fostering economic growth.

Historically, PCE reports have played a significant role in guiding monetary policy and influencing market dynamics. When inflationary pressures rise, the Fed may respond by raising interest rates to curb price increases. Conversely, when PCE growth moderates, the central bank may opt for rate cuts to stimulate economic activity.

While the report suggests a slower pace of inflation growth in August compared to July, inflation remains a pertinent issue. Investors will closely monitor subsequent reports and Federal Reserve actions to gain insight into the trajectory of inflation and its potential impact on financial markets and the broader economy. The early market rally reflects the market’s optimism following the release of the latest PCE data, as it continues to navigate the evolving economic landscape.

Fed Keeping Rates Higher Despite Pausing Hikes For Now

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve left interest rates unchanged on Wednesday but projected keeping them at historically high levels into 2024 and 2025 to ensure inflation continues falling from four-decade highs.

The Fed held its benchmark rate steady in a target range of 5.25-5.5% following four straight 0.75 percentage point hikes earlier this year. But officials forecast rates potentially peaking around 5.6% by year-end before only gradually declining to 5.1% in 2024 and 4.6% in 2025.

This extended timeframe for higher rates contrasts with prior projections for more significant cuts starting next year. The outlook underscores the Fed’s intent to keep monetary policy restrictive until inflation shows clearer and more persistent signs of cooling toward its 2% target.

“We still have some ways to go,” said Fed Chair Jerome Powell in a press conference, explaining why rates must remain elevated amid still-uncertain inflation risks. He noted the Fed has hiked rates to restrictive levels more rapidly than any period in modern history.

The Fed tweaked its economic forecasts slightly higher but remains cautious on additional tightening until more data arrives. The latest projections foresee economic growth slowing to 1.5% next year with unemployment ticking up to 4.1%.

Core inflation, which excludes food and energy, is expected to fall from 4.9% currently to 2.6% by late 2023. But officials emphasized inflation remains “elevated” and “unacceptably high” despite moderating from 40-year highs earlier this year.

Consumer prices rose 8.3% in August on an annual basis, down from the 9.1% peak in June but well above the Fed’s 2% comfort zone. Further cooling is needed before the Fed can declare victory in its battle against inflation.

The central bank is proceeding carefully, pausing rate hikes to assess the cumulative impact of its rapid tightening this year while weighing risks. Additional increases are likely but the Fed emphasized future moves are data-dependent.

“In coming months policy will depend on the incoming data and evolving outlook for the economy,” Powell said. “At some point it will become appropriate to slow the pace of increases” as the Fed approaches peak rates.

For now, the Fed appears poised to hold rates around current levels absent a dramatic deterioration in inflation. Keeping rates higher for longer indicates the Fed’s determination to avoid loosening prematurely before prices are fully under control.

Powell has reiterated the Fed is willing to overtighten to avoid mistakes of the 1970s and see inflation fully tamed. Officials continue weighing risks between high inflation and slower economic growth.

“Restoring price stability while achieving a relatively modest increase in unemployment and a soft landing will be challenging,” Powell conceded. “No one knows whether this process will lead to a recession.”

Nonetheless, the Fed chief expressed optimism that a severe downturn can still be avoided amid resilient household and business spending. The labor market also remains strong with unemployment at 3.7%.

But the housing market continues to soften under the weight of higher rates, a key channel through which Fed tightening slows the economy. And risks remain tilted to the downside until inflation demonstrably falls closer to target.

For markets, clarity that rates will stay elevated through 2024 reduces uncertainty. Stocks bounced around after the Fed’s announcement as investors processed the guidance. The path forward depends on incoming data, but the Fed appears determined to keep rates higher for longer.

The Perfect Storm Brewing in US Housing

Posted on by slightbourne@noblecapitalmarkets.com

A perfect storm is brewing in the US housing market. Mortgage rates have surged above 7% just as millennials, the largest generation, reach peak homebuying age. This collision of rising interest rates and unmet demand is causing substantial disruption, as seen in the sharp decline in home sales, cautious builders and a looming affordability crisis that threatens the broader economy.

Mortgage rates have taken off as the Federal Reserve aggressively raises interest rates to fight inflation. The average 30-year fixed rate recently hit 7.18%, according to Freddie Mac, the highest level since 2001. This has severely hampered housing affordability and demand. Fannie Mae, the mortgage finance giant, forecasts total home sales will drop to 4.8 million this year, the slowest pace since 2011 when the housing market was still recovering from the Great Recession.

Fannie Mae expects sales to struggle through 2024 as rates remain elevated. It predicts the US economy will enter a recession in early 2024, further dragging down the housing market. Home prices are also likely to drop as high rates impede sales. This could hurt consumer confidence and discretionary spending, considering the critical role housing plays in household wealth.

Higher rates have pumped up monthly mortgage payments and made homes less affordable. Take a $500,000 home purchased with a 20% down payment. At a 2.86% mortgage rate two years ago, the monthly payment would have been $1,656. With rates now at 7.18%, that same home has a monthly cost of $3,077, according to calculations by Axios. That 87% payment surge makes purchasing unattainable for many buyers.

These affordability challenges are hitting just as millennials reach peak homebuying age. The largest cohorts of this generation were born in the late 1980s and early 1990s, making them between 32 and 34 years old today. That’s when marriage, childbearing and demand for living space typically accelerate.

However, homebuilders have been reluctant to significantly ramp up construction with rates so high. Housing starts experienced a significant decline of 11.3% in August, according to Census Bureau data, driven by a decline in apartment buildings. Single-family starts dipped 4.3% to an annual pace of 941,000, 16% below the average from mid-2020 to mid-2022. Homebuilder sentiment has also plunged, according to the National Association of Home Builders.

Take a look at Orion Group Holdings Inc., a leading specialty construction company servicing the infrastructure, industrial and building sectors.

This pullback in new construction comes even as there is strong interest from millennials and other buyers. Though mortgage rates moderated the overheated housing market earlier this year, national home prices remain just below their all-time highs, up 13.5% from two years ago, according to the S&P Case-Shiller index.

Some analysts say the only solution is to significantly boost supply. But that seems unlikely with builders cautious and financing costs high. The housing crisis has no quick fix and will continue to be an anchor on the broader economy. Millennials coming of age and mortgage rates spiraling upwards have sparked a perfect storm, broken the housing market, and darkened the country’s economic outlook.

High Gas Prices Return, Complicating Inflation Fight

Posted on by slightbourne@noblecapitalmarkets.com

Pain at the pump has made an unwelcome return, with gas prices rapidly rising across the United States. The national average recently climbed to $3.88 per gallon, while some states now face prices approaching or exceeding $6 per gallon.

In California, gas prices have spiked to $5.79 on average, up 31 cents in just the past week. It’s even worse in metro Los Angeles where prices hit $6.07, a 49 cent weekly jump. Besides California, drivers in 11 states now face average gas prices of $4 or more.

This resurgence complicates the Federal Reserve’s fight against high inflation. Oil prices are the key driver of retail gas costs. With oil climbing back to $90 per barrel, pushed up by supply cuts abroad, gas prices have followed.

West Texas Intermediate crude rose to $93.74 on Tuesday, its highest level in 10 months, before retreating below $91 on Wednesday. The international benchmark Brent crude hit highs above $96 per barrel. Goldman Sachs warned Brent could reach $107 if OPEC+ nations don’t unwind production cuts.

For consumers, higher gas prices add costs and sap purchasing power, especially for lower-income families. Drivers once again face pain filling up their tanks. Households paid an average of $445 a month on gas during the June peak when prices topped $5 a gallon. That figure dropped to $400 in September but is rising again.

Politically, high gas also causes headaches for the Biden administration. Midterm voters tend to blame whoever occupies the White House for pain at the pump, whether justified or not. President Biden has few tools to immediately lower prices set by global markets.

Take a look at other energy companies by taking a look at Noble Capital Markets Research Analyst Michael Heim’s coverage list.

However, economists say oil and gas prices must rise significantly further to seriously jeopardize the U.S. economy. Past recessions only followed massive oil price spikes of at least 100% within a year. Oil would need to double from current levels, to around $140 per barrel, to inevitably tip the economy into recession, according to analysis.

Nonetheless, the energy resurgence does present challenges for the Fed’s inflation fight. While core inflation has cooled lately, headline inflation has rebounded in part due to pricier gas. Consumer prices rose 0.1% in August, defying expectations of a drop, largely because of rising shelter and energy costs.

This complicates the Fed’s mission to cool inflation through interest rate hikes. Some economists believe the energy volatility will lead the Fed to pencil in an additional quarter-point rate hike this year to around 4.5%. However, a dramatic policy response is unlikely with oil still below $100 per barrel.

In fact, some argue the energy spike may even inadvertently help the Fed. By sapping consumer spending power, high gas prices could dampen demand and ease price pressures. If energy costs siphon purchases away from discretionary goods and services, it may allow inflation to fall without more aggressive Fed action.

Morgan Stanley analysis found past energy price shocks had a “small” impact on core inflation but took a “sizable bite out of” consumer spending. While bad for growth, this demand destruction could give the Fed space to cool inflation without triggering serious economic damage.

For now, energy volatility muddies the inflation outlook and complicates the Fed’s delicate task of engineering a soft landing. Gas prices swinging upward once again present both economic and political challenges. But unless oil spikes drastically higher, the energy complex likely won’t force the Fed’s hand. The central bank will keep rates elevated as long as underlying inflation remains stubbornly high.

U.S. National Debt Tops $33 Trillion

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. national debt surpassed $33 trillion for the first time ever this week, hitting $33.04 trillion according to the Treasury Department. This staggering sum exceeds the size of the entire U.S. economy and equals about $100,000 per citizen.

For investors, the ballooning national debt raises concerns about future tax hikes, inflation, and government spending cuts that could impact markets. While the debt level itself may seem abstract, its trajectory has real implications for portfolios.

Over 50% of the current national debt has accumulated since 2019. Massive pandemic stimulus programs, tax cuts, and a steep drop in tax revenues all blew up the deficit during Covid-19. Interest costs on the debt are also piling up.

Some level of deficit spending was needed to combat the economic crisis. But years of expanding deficits have brought total debt to the highest level since World War II as a share of GDP.

With debt now exceeding the size of the economy, there is greater risk of reduced economic output from crowd-out effects. High debt levels historically hamper GDP growth.

Economists worry that high debt will drive up borrowing costs for consumers and businesses as the government competes for limited capital. The Congressional Budget Office projects interest costs will soon become the largest government expenditure as rates rise.

Higher interest rates will consume more tax revenue just to pay interest, leaving less funding available for programs and services. Taxes may have to be raised to cover these costs.

Rising interest costs will also put more pressure on the Federal Reserve to keep rates low and monetize the debt through quantitative easing. This could further feed inflation.

If interest costs spiral, government debt could eventually reach unsustainable levels and require restructuring. But well before that, the debt overhang will influence policy and markets.

As debt concerns mount, investors may rotate to inflation hedges like gold and real estate. The likelihood of higher corporate and individual taxes could hit equity valuations and consumer spending.

But government spending cuts to social programs and defense would also ripple through the economy. Leaner budgets would provide fiscal headwinds reducing growth.

With debt limiting stimulus options, creative monetary policy would be needed in the next recession. More radical measures by the Fed could introduce volatility.

While the debt trajectory is troubling, a crisis is not imminent. Still, prudent investors should account for fiscal risks in their portfolio positioning and outlook. The ballooning national debt will shape policy and markets for years to come.

The Fed’s Tightrope Walk Between Inflation and Growth

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve is stuck between a rock and a hard place as it aims to curb high inflation without inflicting too much damage on economic growth. This precarious balancing act has major implications for both average citizens struggling with rising prices and investors concerned about asset values.

For regular households, the current bout of high inflation straining budgets is public enemy number one. Prices are rising at 8.3% annually, squeezing wages that can’t keep pace. Everything from groceries to rent to healthcare is becoming less affordable. Meanwhile, rapid Fed rate hikes intended to tame inflation could go too far and tip the economy into recession, slowing the job market and risking higher unemployment.

However, new economic research suggests the Fed also needs to be cognizant of rate hikes’ impact on the supply side of the economy. Supply chain bottlenecks and constrained production have been key drivers of this inflationary episode. Aggressive Fed action that suddenly squelches demand could backfire by inhibiting business investment, innovation, and productivity growth necessary to expand supply capacity.

For example, sharply higher interest rates make financing more expensive, deterring business investment in new factories, equipment, and technologies. Tighter financial conditions also restrict lending to startups and venture capital for emerging technologies. All of this could restrict supply, keeping prices stubbornly high even in a weak economy.

This means the Fed has to walk a tightrope, moderating demand enough to curb inflation but not so much that supply takes a hit. The goal is to lower costs without forcing harsh rationing of demand through high unemployment. A delicate balance is required.

For investors, rapidly rising interest rates have already damaged asset prices, bringing an end to the long-running stock market boom. Higher rates make safe assets like bonds more appealing versus risky bets like stocks. And expectations for Fed hikes ahead impact share prices and other securities.

But stock markets could stabilize if the Fed manages to engineering the elusive “soft landing” – bringing down inflation while avoiding recession. The key is whether moderating demand while supporting supply expansion provides stable growth. However, uncertainty remains high on whether the Fed’s policies will thread this narrow needle.

Overall, the Fed’s inflation fight has immense stakes for Americans’ economic security and investors’ asset values. Walking the tightrope between high inflation and very slow growth won’t be easy. Aggressive action risks supply problems and recession, but moving too slowly could allow inflation to become entrenched. It’s a delicate dance with high stakes riding on success.

Solid Evidence a Recession is Unlikely this Year

Posted on by phoffman@channelchek.com

Reliable Data, Not Emotions, are Pointing to a Growing U.S. Economy

In roughly one month, we will be halfway through 2023. While many point to the Fed’s pace of tightening and the downward sloping yield curve, as a reason to run around like Chicken Little warning of a coming recession, a fresh read of the economic tea leaves tells a different story. Just today, May 23, the PMI Output Index (PMI) rose to its highest reading in over a year. Home sales figures were also reported to show that new homes in May sold at the highest rate in over a year. These are both reliable leading indicators that point to growth in both services and manufacturing.

U.S. Composite PMI Output Index

Business activity in the U.S. increased to a 13-month high in May due in large part to strong growth in the services sector. This is a reliable indication that economic expansion has growing momentum. Despite the negative talk of those that are concerned that the Fed has lifted interest rates closer to historical norms and that the yield curve is still inverted, in part due to Covid era Fed yield-curve-control, the numbers suggest less caution might be warranted.

S&P Global said on Tuesday (May 23) its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to a reading of 54.5 this month. It indicates the highest level since April 2022 and is up from a reading of 53.4 in April. A reading above 50 indicates growth, this is the fourth consecutive month it has been above 50. The consensus among economists was only 52.6.

Home Sales

One sector that is directly impacted by interest rates is real estate. However, new home sales rose in April, this is a clear sign that prospective buyers are making deals with builders.

New homes in April were sold at a seasonally-adjusted annual rate of 683,000, Its the highest rate since March 2022. The April data represents a 4.1% gain from March’s revised rate of 656,000,. The report was from the Census and Department of Housing and Urban Development and was reported Tuesday May 23. Economists had expected new home sales to decline to 670,000 from a March rate of 683,000. It was the largest month-over-month increase since December 2022.

Leading Indicators

PMI is forward-looking as it surveys purchasing managers’ expectations and intentions for the coming months. By capturing their sentiment on future orders, production plans, and hiring intentions, PMI offers insights into economic trends that have yet to be reflected in other after-the-fact indicators.

Home sales are considered a leading indicator because they can serve as a measure of other needs and broader economic trends. Home sales have a significant impact on related sectors, such as construction, home improvement, finance, and consumer spending. Changes in home sales can influence economic activity and indicate shifts in consumer confidence, employment levels, and overall economic health.

While many economic reports offer rear-view mirror data, these reports are true indicators of business behavior as it plans for future expectations, and consumer behavior as it is confident that it will have the resources available to purchase and outfit a new home.

The upbeat reports prompted the Atlanta Federal Reserve to raise its second-quarter gross domestic product estimate to a 2.9% annualized rate from a 2.6% pace. The economy grew at a 1.1% rate in the first quarter.

Take Away

Many economists are negative about the economic outlook later this year. Market participants have been positioning themselves with the notion that there may be a late year recession. Is the notion misguided? Recent data suggests there may be buying opportunities for those willing to go against the tide of pundits preaching recession.

No one has a crystal ball. In good markets and bad, there is no replacement for good research before you put on a position, and then for as long as the position remains in your portfolio.

Channelchek is a great resource for information to follow the companies not likely being reported in traditional outlets. Turn to this online free resource as you evaluate small and microcap stocks.

Paul Hoffman

Managing Editor, Channelchek

Sources

World Economic Outlook

Barron’s (May 23, 2023)

Reuters (May 23, 2023)

U.S. Money Supply, Here’s Why it’s Critical for Inflation Forecasts

Posted on by phoffman@channelchek.com
Image Credit: Pictures of Money (Flickr)

M2 is Fuel for Inflation, How Much Money Must the Fed Drain to Achieve 2 Percent?

U.S. Money Supply, measured as M2, is an important consideration when forecasting inflation. A decline in immediately available cash in the economy has a downward effect on price levels. At the same time, less cash available to consumers also cools economic growth. With the Federal Open Market Committee’s (FOMC) interest rate decision coming the first week in May, the updated report this week (for March) will give investors a look see at how successful the Fed has been draining funds from the system while trying to maintain some growth.

M2 Shrinking

The Federal Reserve will update stock and bond markets Tuesday afternoon on the total amount of currency, coins, bank savings deposits, and money-market funds held in March. This broader measure, officially M2SL, referred to as M2, gained renewed focus after contracting for the first time ever in December 2022, then contracting even further in January and February. January’s 1.75% decline and February’s 2.4% drop to $21.1 trillion, are the steepest drops so far in M2.  

Image: M2 levels ramped up starting in 2020 in response to pandemic economic efforts

A fourth consecutive decline in M2 would provide more evidence that inflation can be expected to continue to come down and weigh into the FOMC decision when the Fed meets to adjust monetary policy at its May 2-3 meeting. While the chart above shows the recent declines are significant, it is still far higher than the trend line that was established decades ago. So while a decline of similar magnitude as the first two months would be welcome by inflation hawks, there is still a great deal more cash in the system than there was pre-pandemic. But it would be a huge positive and may cause the Fed to pause or slow draining money from the system.

Inflation

Consumer price inflation is well off its 8.6% average for all of 2022. Inflation since rose 5% in March 2023 (annual basis), decelerating from February’s 6% pace. While this slowdown in price increases is substantial, the Fed doesn’t want to declare “mission accomplished” until it is ranging near 2%. Its work is not yet finished.

How close is the Fed from finished is what investors will try to discern from M2. Highly regarded analysts and Fed watchers anticipate that there is a lag of about a year when the money supply shrinks. However, as indicated above, it has never come down on an annualized basis, and January and February were the largest declines to date. So even the best analysts have little history to point to.

Financial Sector

The data is for March, so it is the first look at M2 since the banking sector showed trouble early that month. A part of the difficulty banks are currently experiencing is that the reduction in cash has caused a need for them to liquidate U.S. Treasuries and other bonds to fund withdrawals. A further huge reduction in M2 could be shown to be challenging more banks as bonds and other interest rate-sensitive assets had lost considerable value as rates rose dramatically over the past year.

Using the most recent data, the Federal Reserve reported bank deposits were down 6% for the week ending April 12 versus a year ago. Deposits have been falling year-over-year since November, off slightly at $17.2 trillion compared to the highest-ever $18.2 trillion level seen in April last year.

Further declines in deposits should lead to fewer loans written, fewer loans slows economic growth. This in part, accounts for why there is a lag between when the Fed drains and when it has an impact on inflationary pressures.

Take Away

M2 is an important gauge of future inflation. Because of this, the release of data may cause economists to change their May FOMC meeting forecast. A large decline may cause the Fed to pause, if M2 resumed its path upward the Fed may become more hawkish. Efforts to help the banking system last month, may have reinflated money supply, this will be a very interesting report.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230322.pdf

https://fred.stlouisfed.org/series/M2SL#

https://rationalreasoning.substack.com/p/on-the-feds-discontinuation-of-the

https://www.barrons.com/articles/fundamental-reason-interest-rates-will-come-down-444ab9c

https://www.investopedia.com/terms/m/m2.asp#:~:text=M2%20is%20seen%20as%20a,even%20better%20predictor%20of%20inflation.

Where Investors Might Hide in a Storm

Posted on by phoffman@channelchek.com
Image Credit: DonkeyHotey (Flickr)

Doomsday Investor Sees Ongoing Moves by Policymakers as Destructive

We’d all like to think that global decision-makers responsible for economic conditions have the best interest of the world’s citizenry in mind when making decisions – but doubts and concerns are growing. Among the most concerned are economic stakeholders that don’t believe “bad” things should always be prevented. One very credible voice highlighting this idea is hedge fund manager Paul Singer. He’s the CEO of Elliot Investment Management and recently moved his firm’s offices out of NY, NY, to the more business-friendly West Palm Beach, FL. Singer says a credit collapse and deep recession may be needed to restore financial markets.

Paul Singer is the founder and CEO of Elliott Investment Management. Its year-end 13F reportable AUM was $12.25 billion. The firms opportunity-based investment style allows Singer and Company, known for their corporate activism, to move to wherever profit may lie.  

The current thinking of Singer, a registered Republican, has been making headlines. This includes a widely circulated opinion piece published in the Wall Street Journal last week. In it, he discusses more than a decade of what he believes are damaging easy-money policies and how a deep recession and even credit collapse will be necessary to purge financial markets of excesses.  

“I think that this is an extraordinarily dangerous and confusing period,” Singer told The Journal, in his interview, he warns that trouble in markets may only be getting started now that a full year has passed from the start of tighter monetary policy.

One of the more chilling quotes from Singer is, “Credit collapse, although terrible, is not as terrible as hyperinflation in terms of destruction wrought upon societies.”

The idea that we are headed down either one path or the other, he doesn’t mention a third option, may be why the New Yorker magazine calls him “Doomsday Investor.” He explains,  “Capitalism, which is economic freedom, can survive a credit crisis. We don’t think it can survive hyperinflation.”

The Doomsday Investor has been outspoken against government safety nets for a while, including the sweeping banking regulations from the Dodd-Frank Act of 2010. This act created the Financial Protection Bureau (CFPB) and established the Financial Stability Oversight Council (FSOC). Singer strongly opposed prolonged market interventions by global central banks following the 2008 global financial crisis. Interventions that still haven’t been drained from the U.S. monetary system.

Singer, who is 78 called crypto, “completely lacking in any value,” in his WSJ interview. He also said: “There are thousands of cryptocurrencies. That’s why they’re worth zero. Anybody can make one. All they are is nothing with a marketing pitch—literally nothing.”

While his funds performance have placed him near the top of hedge fund manager performance, Singer personally worries the Fed and other central banks will respond to the next downturn by referring to the failed playbook of slashing interest rates and potentially resuming large-scale asset purchases. The point was shown to be current, as Singer called the regulatory response to the collapse of Silicon Valley Bank and Signature Bank, including the guaranteeing of all deposits from the two lenders akin to “wrapping all market movements in security blankets.”

He complained, “…all concepts of risk management are based around the possibilities of loss.” He encouraged decision makers to, “Take it away, it’s going to have consequences.”

Where Can Investors Hide

Paul Singer said in his interview there may be a few places for investors to ride out what he sees as a coming storm. One place comes as no surprise, “At such times, some consider the safest bet to be relatively short-term U.S. government debt,” he said, adding that “such debt pays a decent return with virtually no chance of a negative outcome.” He is likely speaking of U.S. Treasuries two years and shorter as the longer duration bonds would be more volatile as rates shift, and other government debt like GNMAs are fraught with extension risk.

Singer also believes some gold in portfolios may make sense.

Take Away

Without some rain, nothing could flourish. Without an occasional brush fire, the risk of massive forest fire greatly increases. Paul Singer, in his interview with the WSJ, indicates he believes the economic brushfires that decision-makers have been preventing should have been allowed to run their course. Preventing them is a big mistake and a collapse may not be far off.

This collapse in easy credit and crypto, among other bubble-type excesses Singer believes could be destructive but preferred by society over continuing to move toward hyperinflation.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wsj.com/articles/the-man-who-saw-the-economic-crises-coming-paul-singer-banking-signature-svb-financial-downturn-asset-hyperinflation-recession-debt-federal-reserve-cd2638fe

https://www.newyorker.com/magazine/2018/08/27/paul-singer-doomsday-investor

https://opencorporates.com/companies/us_fl/B21000000006

https://www.marketwatch.com/story/hedge-fund-billionaire-paul-singer-still-sees-dangerous-bubble-securities-bubble-asset-classes-in-markets-4cd81a76?mod=search_headline

How is the Economy Really Doing (Just the Facts)?

Posted on by phoffman@channelchek.com
Image Credit: USA Facts

Do the Most Current Economic Measurements Suggest a Trend Toward Recession or Growth?

How is the US Economy Doing?

  • US GDP increased 2.1% in 2022 after increasing 5.9% in 2021.
  • Year-over-year inflation, the rate at which consumer prices increase, was 6.5% in December 2022.
  • The Federal Reserve raised interest rates seven times in 2022 and again on February 1, 2023 to curb inflation, increasing the target rate from near zero to 4.5-4.75%.
  • When accounting for inflation, workers’ average hourly earnings were down 1.7% in December 2022 compared to a year prior.
  • The ratio of unemployed people to job openings remained at or near record lows throughout 2022.
  • The unemployment rate was 4.0% at the beginning of 2022 and ended the year at 3.5%.
  • The labor force participation rate remains almost one percentage point below February 2020.
  • From January to November 2022, the US imported $889.9 billion more in goods and services than it exported. This is 7% higher than the trade deficit in 2021 for the same months.

US GDP increased 2.1% in 2022 after increasing 5.9% in 2021

Gross domestic product (GDP) fell in the first half of 2022 but grew in the second half. GDP reached $25.5 trillion in 2022.

US GDP

Year-over-year inflation, the rate at which consumer prices increase, was 6.5% in December 2022

That’s down from June 2022’s rate of 9.1%, the largest 12-month increase in 40 years. Inflation grew at the beginning of the year partly due to rising food and energy prices, while housing costs contributed throughout 2022.

CPI-U

The Federal Reserve raised interest rates seven times in 2022 and again on February 1, 2023 to curb inflation, increasing the target rate from near zero to 4.5-4.75%

Rate increases make it more expensive for banks to borrow from each other. Banks pass these costs on to consumers through increased interest rates. Read more about how the Federal Reserve tries to control inflation here.

Fed Funds Rate

When accounting for inflation, workers’ average hourly earnings were down 1.7% in December 2022 compared to a year prior

Inflation-adjusted average hourly earnings fell in all industries except information and leisure and hospitality, where earnings were flat.

Hourly Earnings

The ratio of unemployed people to job openings remained at or near record lows throughout 2022

In a typical month from March 2018 and February 2020, there were between 0.8 and 0.9 unemployed people per job opening. But after more than quadrupling in April 2020 at the onset of the pandemic, the ratio fell and settled from December 2021 to December 2022 to between 0.5 and 0.6 unemployed people per job opening, the lowest since data first became available in 2000.

Unemploymed Ratio

The unemployment rate was 4.0% at the beginning of 2022 and ended the year at 3.5%

It decreased most for Black and Asian people, 1.2 and 1.1 percentage points, respectively. Black people still have unemployment rates higher than the rest of the nation.

Categorized Unemployment Rate

The labor force participation rate remains almost one percentage point below February 2020

An additional 2.5 million workers would need to be in the labor force for the participation rate to reach its pre-pandemic level.

From January to November 2022, the US imported $889.9 billion more in goods and services than it exported. This is 7% higher than the trade deficit in 2021 for the same months

During this time, the goods trade deficit reached $1.1 trillion. Complete 2022 data is expected on February 7, 2023.

Trade Balance

This content was republished from USAFacts. USAFacts is a not-for-profit, nonpartisan civic initiative making government data easy for all Americans to access and understand. It provides accessible analysis on US spending and outcomes in order to ground public debates in facts.