Tag: Economy

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.

Two Non-Wall Street Economists Share Their 2023 Projections

Posted on by phoffman@channelchek.com

Image Credit: Engin Akyurt (Pexels)

Inflation, Unemployment, the Housing Crisis, and a Possible Recession: Two Economists Forecast What’s Ahead in 2023

With the current U.S. inflation rate at 7.1%, interest rates rising and housing costs up, many Americans are wondering if a recession is looming.

Two economists discussed that and more in a recent wide-ranging and exclusive interview for The Conversation. Brian Blank is a finance professor at Mississippi State University who specializes in the study of corporations and how they respond to economic downturns. Rodney Ramcharan is an economist at the University of Southern California who previously held posts with the Federal Reserve and the International Monetary Fund.

Both were interviewed by Bryan Keogh, deputy managing editor and senior editor of economy and business for The Conversation.

Are we headed for a recession in 2023?

Brian Blank: The consensus view among most forecasters is that there is a recession coming at some point, maybe in the middle of next year. I’m a little bit more optimistic than that consensus.

People have been calling for a recession for months now, and this seems to be the most anticipated recession on record. I think that it could still be a ways off. Consumer balance sheets are still relatively strong, stronger than we’ve seen them for most periods.

I think that the labor market is going to remain hotter than people have expected. Right now, over the last eight months, the labor market has added more jobs than anticipated, which is one of the strongest streaks on record. And I think that until consumer balance sheets weaken considerably, we can expect consumer spending, which is the largest part of the economy, to continue to grow quickly.

[But this] doesn’t mean that a recession is not coming. There’s always a recession somewhere down the road.

Rodney Ramcharan: Indeed, yes, there’s a likelihood that the economy is going to contract in the next nine months. The president of the New York Fed expects the unemployment rate to go up from 3.5% currently to somewhere between 4% to 5% in the next year. And I think that will be consistent with a recession.

In terms of how much worse it can be beyond that, it’s going to depend on a number of things. It could depend on whether the Fed is going to accept a higher inflation rate over the medium term or whether it’s really committed to getting the inflation rate down to the 2% rate. So I think that’s the trade-off.

Will unemployment go up?

Blank: [Unemployment] hasn’t risen much, and maybe it’ll pick up to somewhere close to 4%. Many are expecting something like four and a half percent. And I think that’s certainly possible. And I think that we can see small upticks in the coming months.

But I don’t think it’s going to rise as quickly as some people are expecting, in part because what we’ve seen so far is a lack of labor force participation. Until more people enter the labor market, I think there are going to be plenty of jobs to go around.

What is your outlook on interest rates?

Ramcharan: As people find it more and more difficult to find jobs, or to get jobs as they begin to lose jobs, I think that’s going to dampen spending. And we’re seeing that now as the cost of borrowing has gone up sharply, and the Fed is expecting that.

The expectation is the federal funds rate will go up to 5% by next year. If you tack on another couple of points, because of the risk involved, then the cost to borrow to buy a home could potentially get up to 8% for some people. And that could be very expensive.

And the flip side of this for businesses is there’s potentially going to be a slowdown in cash flow. If consumers are not spending, then the revenues that businesses depend on to make investments might not be there.

The additional piece in this puzzle is what the banks will then do. I think banks are going to begin to curtail the extension of credit. So not only will interest rates go up for the typical consumer and the typical business, it’s also likely that they are more likely to experience denial of credit, and so that should together begin to slow spending quite a bit.

After massive increases in housing prices, what caused them to suddenly drop?

Ramcharan: As the Fed lowered interest rates, there was a massive shift among the population for various reasons. They decided that housing was the right investment or the right thing. And so when 50 million people all collectively decide to buy homes, the supply of homes is reasonably constrained in the short run. And so that led to this massive increase in house prices and in rents.

In the last three months, the housing market has cooled sharply. We’re now seeing house prices beginning to fall. I would imagine, going forward, the housing market cooling is going to be a major driver behind the slowdown in the inflation rate and in real estate investment trusts. So that’s positive.

Our recent election just changed the composition of Congress. How will that affect the economy?

Blank: Certainly, when we have a divided Congress, we’re less likely to see decisions made that involve passing legislation that might support the economy. And I think it’s likely the Republican House is going to become a little bit more conservative with spending.

And so if we do start to see a downturn, I think you’re less likely to see legislation that might help support an economy that could be in need of it. That is going to make the job of the Federal Reserve more important.

How certain are these predictions?

Ramcharan: I just want to be careful here and let your viewers know that we’re making these statements based on theory, because the inflation that we’re experiencing now comes about from a pandemic, and there really is no evidence, there’s no data available, that people can look to to say, “What happens to an economy after a pandemic?” That data does not exist.

So we’re trying to piece together the data we do have with the theories we do have, but there’s a huge band of uncertainty about what’s going to happen.

Watch the full interview here.

The Fed Still Has a Long Way to Go To Reel in Wage Inflation

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

Employers Added 263,000 Jobs in November, How this Impacts Future Fed Decisions

There were many more jobs created and filled in the U.S. during November than expected. This may, on the surface, seem like a good thing for the economy, markets, and job seekers. But any expectation that the Fed is past the tipping point and is winning in the battle against conditions that increase prices will have to be curbed for a while.

The number of new hires points to unmet demand in filling positions, and the increase in wages directly adds to the cost of goods sold. Unmet high labor demand is inflationary and part of why the Fed is clear that it is not done.

Fed Chair Powell spoke last Wednesday in a lengthy address outlining the challenges that face the Fed and the avenues it is most likely to take. There is nothing in the strong November jobs report that alters what Powell has said. In fact, it may underscore the resiliency of the economy that the Fed is looking to temper. If you weren’t of the belief that the Fed would push Fed Funds beyond 5%, there is evidence that the Fed may need three 0.50% increases or more before it steps back.

Background

The Fed Chair and other Fed officials have reiterated in recent days that they are likely to lift rates and hold them at levels high enough to slow economic activity and hiring to bring inflation down from 40-year highs.

The just-released employment report for November was expected to come in far below the level reported. Digging even deeper into the numbers, it showed continued rampant hiring and elevated wage growth. The Fed had been hoping to keep a wage-price spiral at bay and get ahead of the supply-demand issues pushing wages and prices up.  

The November Unemployment Report

The headline number showed that employers added 263,000 jobs in November while the unemployment rate held steady at 3.7%. But the revised wage data in Friday’s release could concern Fed officials because it points to an acceleration in pay gains in recent months. For the three months that ended in November, average hourly earnings rose at a 5.8% annualized rate. This is a surprising increase from an initially reported 3.9% annualized rate for the three months that ended in October. Economists had expected the U.S. economy had gained 200,000 jobs last month.

At the same time, senior Fed officials have made sure it is no surprise if they lessen the size of rate increases in coming meetings. The next FOMC is the Dec. 13-14 meeting; the Fed is expected to move 0.50% rather than another 0.75%.

Most major stock market indices have traded lower, taking a bearish tone from the report and signs the Fed still is a little behind in its effort to squelch inflation-feeding activity.

Of interest to investors, the sectors with the most job gains were the leisure and hospitality and healthcare industries, both of which had been hard hit during the pandemic, and in government, where employment levels are still 2% below where they stood in February 2020.

Take Away

“To be clear, strong wage growth is a good thing,” Powell said this week. “But for wage growth to be sustainable, it needs to be consistent with 2% inflation.”

The accelerated pace of job growth in November, coupled with upwardly revised October statistics, makes clear to the markets the persistent challenge facing the Federal Reserve. The central bank has repeated that it needs to see some slack in the labor market in order for inflation to fall. This could come from reduced labor demand or increased labor supply, or both.

Jerome Powell Gives “Progress Report”

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

“By Any Standard Inflation Remains Much Too High,” Says Powell

The Federal Reserve has a blackout period for its governors. It begins the second Saturday preceding an FOMC meeting. During this period the members cannot give any sort of public address on topics that will be under consideration at the Committee meeting. Today, Fed Chair Powell gave an address titled, Inflation and the Labor Market. These are the two missions of the Fed. This address may be the last the markets hear from Powell until after the December 14th FOMC session.

The stock and bond markets were hoping to hear that the Fed will be backing off significantly. Instead, what was delivered by Powell was more consistent with his previous talks which don’t back away from full commitment to bringing down prices. Although he did suggest that they have covered the bulk of the ground, they will need to.

Current Status

Powell referred to the address given on the last day of November 2022 as a “progress report on the Federal Open Market Committee’s (FOMC) efforts to restore price stability to the U.S. economy for the benefit of the American people.” The report made mention several times that a healthy economy with ample job growth consistent with inflation targets is consistent with low price inflation. In fact Powell lead with the words, “the report must begin by acknowledging the reality that inflation remains far too high.”

Powell said that he and other Fed governors are “acutely aware that high inflation is imposing significant hardship, straining budgets and shrinking what paychecks will buy.” He continued, “price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”

Inflation

Powell said that 12-month personal consumption expenditures (PCE) inflation through October ran at 6.0 percent (figure 1). While October inflation data received so far showed a welcome surprise to the downside. He cautioned that “these are a single month’s data, which followed upside surprises over the previous two months. As figure 1 makes clear, down months in the data have often been followed by renewed increases.” Powell said. He reminded that, “it will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high.”

In order to reach the Fed’s goal, Powell says they need to raise interest rates to a sufficiently restrictive level to return inflation to 2 percent. He relents that there is considerable uncertainty about what rate will be sufficient.  Although he says they are much closer now than at the beginning of the year.

Powell said of himself and his associates, “we are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.”

Housing Prices

The rise in the price of all rents and the rise in the rental-equivalent cost of owner-occupied housing is called housing services inflation. Unlike goods inflation, housing services inflation has continued to rise and now stands at 7.1 percent over the past 12 months, according to Powell. Housing inflation tends to lag other prices around inflation turning points, but because of the slow rate at which the stock of rental leases turns over. The market rate on new leases is a timelier indicator of where overall housing inflation will go over the next year or so. Measures of 12-month inflation in new leases rose to nearly 20 percent during the pandemic but have been falling sharply since about midyear (figure 3).

As the above chart shows, overall housing services inflation has continued to rise as existing leases turn over and jump in price to catch up with the higher level of rents for new leases. Powell thinks this is likely to continue well into next year. But as long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year. Importantly, a decline in this inflation underlies most forecasts of declining inflation.

Labor costs is the largest of the three inflation categories covered in Powell’s address. It represents more than half of the core PCE index. Powell used it to explain the future evolution of core inflation.  

Chair Powell said, “ [the] demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time. Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market.”

The Fed Chair said some of the labor force participation gap can be explained as workers who are still out of the labor force because of Covid related issues. But recent research by Fed economists finds that the participation gap is now mostly due to excess retirements—that is, retirements in excess of what would have been expected from population aging alone.

Economic Conditions Summed Up

In order to bring inflation down to 2%, the Fed Chair said he was happy that growth in economic activity has slowed. Also that bottlenecks in goods production are easing and goods price inflation appears to be easing as well. Housing services inflation will probably keep rising well into next year, but if inflation on new leases continues to fall, we will likely see housing services inflation begin to fall later next year. Finally, the labor market, which is especially important for inflation in core services ex housing, shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2 percent inflation over time. Despite some promising developments, we have a long way to go in restoring price stability.

Monetary Policy

Powell said in his address, “returning to monetary policy, my FOMC colleagues and I are strongly committed to restoring price stability. After our November meeting, we noted that we anticipated that ongoing rate increases will be appropriate in order to attain a policy stance that is sufficiently restrictive to move inflation down to 2 percent over time.”

He admitted that monetary policy affects the economy and inflation with uncertain lags, and the full effects of rapid tightening are yet to be felt. With this, he says it makes sense to moderate the pace of the rate increases.

Powell said, “The time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm

Is Rising Unemployment Good for the Economy?

Posted on by aweinsoff@channelchek.com
Image Credit: Anna Shvets (Pexels)

Rising Unemployment: Economists Sometimes Say it’s Good for the Economy, But Are They Right?

interest rates are up, which means that projections for growth are down. Put simply, the proverbial something is close to hitting the fan.

Business closures and job losses are likely to become another hurdle for the global economy – and that points to rising unemployment. Yet, while most people would think of rising unemployment as a bad thing, some economists don’t entirely agree.

Economists have long pointed to a counterintuitive positive relationship between unemployment and entrepreneurship, born of the fact that people who lose their job often start businesses. This is often referred to within economic literature as necessity-based or push-factor entrepreneurship.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Daragh O’Leary, PhD Researcher in Economics, University College Cork

Where it Gets Tricky

There is certainly good evidence for the existence of this contradictory relationship. The graph below shows the rates of UK business creation in blue and unemployment in red. As you can see, unemployment started to increase during the global financial crisis of 2007-09 and business creation followed not long after.

UK new business creation and unemployment, 2006-2020

This relationship between business creation and unemployment has previously been used by some as a justification for cold social policies towards the unemployed on the rationale that “the market fixes itself” in the long run. They see business closures and job losses not as human miseries that require government help, but necessary evils that are needed to reallocate the money, people and other resources back into the economy in more efficient ways .

But my latest research has found that rising unemployment is not quite the silver bullet for reigniting the economic engine that it’s cracked up to be. I looked at 148 regions across Europe from 2008 to 2017. Although I did find evidence that unemployment can stimulate business creation over time, this only seems to happen in higher performing regions within higher performing economies such as the Netherlands, Finland and Austria.

In lower performing regions within lower performing economies such as Bulgaria, Romania and Hungary, the relationship between unemployment and business creation actually appears to be negative. In other words, rather than inducing business creation, unemployment simply seems to lead to more unemployment.

The reason why higher performing regions in wealthier areas have a positive relationship between job losses and business creation is that they enjoy what are known as “urbanisation economies”. These are positive benefits derived from the scale and density of economic activity occurring within that area, including wider arrays of services, greater pools of customers and greater numbers of transactions relative to other areas of the economy.

For example, a firm located in a capital city like London will benefit from more abundant access to consumers, suppliers and lenders as well as larger labour pools. The higher population density in these areas also makes it more likely that firms and workers will learn faster as they observe the activities of their many neighbours. In more peripheral areas with fewer of these characteristics, the opposite is true. This is why unemployment affects different places differently.

What it Means

One consequence is that economists need to stop explaining how economies perform differently based solely on national factors. And it’s not just unemployment where this becomes apparent. For example, Ireland’s longstanding low rate of corporation tax (12.5%) has been cited as a reason for its high foreign direct investment, which accounts for roughly 20% of private sector employment.

Yet while just over 43% of all Irish enterprises in 2020 were located in either Dublin or Cork, counties like Leitrim in the north accounted for fewer than 1% of enterprises. So while national measures can help induce entrepreneurship and increase the overall size of the pie, the pie is shared very unequally. Just as rising unemployment can benefit some areas while hindering others, the same is true of government interventions.

Rural areas like County Leitrim have benefited far less from Ireland’s low corporation tax than more urbanised regions further south. Julia Gavin/Alamy

We therefore need to stop viewing the free market and government intervention as either wrong or right. In some contexts one is going to be more helpful, while in other contexts it will be the opposite. Recognizing this reality would improve on much of the polarized debate in politics and economics, in which those on the right can come across as cold and ignorant, while those on the left can seem self-righteous and sanctimonious, viewing capitalism and markets as dirty words.

How does this apply to today’s gathering downturn? It would make sense for governments to prioritize supporting businesses in more peripheral regions, while leaving those in wealthier urban areas to fend for themselves.

The famous economist John Kenneth Galbraith gave what I believe to be one of the best pieces of commentary on this topic, saying:

Where the market works, I’m for that. Where government is necessary, I’m for that … I’m in favor of whatever works in the particular case.

If we are to survive this upcoming recession and get things going again, we are going to need to acknowledge that centralized “one-size-fits-all” policies won’t be useful everywhere. The solutions to economic recovery are in some cases government intervention and in others the free market, but not always one or the other.

The Week Ahead – NY Fed’s Inflation Forecast, Michael Burry’s Holdings, and PPI

Posted on by phoffman@channelchek.com

There is Potential for a Change in Sentiment Spurred by this Week’s Wholesale Inflation Report

One economic number doesn’t make a trend. The members of the Federal Open Market Committee know this, and certainly, the Chair, Jay Powell, understands. As it relates to last week’s CPI report, he may wish that one lower-than-expected inflation data point could prevent him from needing to do more, but it simply isn’t enough info from which the Fed can glean any actionable information.

As we head into the first trading session of a new week, it’s uncertain what the reaction of interest rates will be. They dropped substantially in response to last Thursday’s inflation data coming in better than expected. However, there was no chance of follow-through or reversal as Friday’s Veteran’s Day holiday left the bond markets closed.

With this, inflation numbers continue to be the most significant for both stock and bond investors. On this coming Tuesday, November 15, wholesale prices will be reported as the Producer Price Index (PPI). This release could have more weight in trade action than usual.

Thursday is another big day on the calendar as the markets will be grappling with a larger-than-normal volume of economic releases.

Monday 11/14

  • 11:00 AM ET, The NY Federal Reserve Bank’s one and five-year inflation forecast. This is not an event that is usually paid much attention to by market participants. However, considering there are many parties interested in what members of the Federal Reserve System are now thinking, a dramatic shift from the previous forecast could inspire the financial markets to adjust accordingly.

Previously the one-year inflation expectation was 5.7%. The five-year inflation forecast was 2.2%.

Tuesday 10/15

  • 8:30 AM ET, The Producer Price Index (PPI) from the Bureau of Labor Statistics (BLS) is an inflation gauge that measures the average change over time in the prices received by U.S. producers of goods and services. The prices are typically considered input costs for final products and can impact CPI, it may also impact company costs of production and, therefore, profits. The trend has been lower, YOY PPI has been running at 8.5%, and last month, it rose 0.4%, the expectation is for another 0.4% increase.
  • Michael Burry, and Warren Buffet’s holdings. The SEC requires investment funds to file a 13-f disclosing their publicly traded security positions. It is required every 45 days, making all of the information a minimum of 45 days old. Looking at a successful investor’s 13F filings can be revealing, especially when looking at industries they’ve been hot on or comparing one holding period to another.

Wednesday 10/16

  • 11:00 AM ET, The Mortgage Bankers Association (MBA) creates a statistic from several mortgage loan indexes. The Mortgage Applications index measures applications at mortgage lenders. It’s considered a leading indicator and is especially important for single-family home sales and housing construction. Both are considered foundational in a strong economy. Last week the Purchase Index was 162.6.
  • 11:00 AM ET, The Mortgage Bankers Association (MBA) also provides an average 30-year mortgage level which is consistently calculated so that it is an oranges-to-oranges comparison from previous periods. Last period the rate was 7.14%.
  • 12:30 PM ET, Export Prices (MoM), this data set reflects changes in prices of goods and services that are produced in and exported from the United States in the given month compared to the previous one. Last reading, this came in at a negative 0.8%.
  • 12:30 PM ET, Import Prices (MoM) The import price index m/m measures the price changes of the respective month compared to the previous month. Last month they fell 1.2% (not adjusted for fx), this month, expectations are for a decline of 0.5%.
  • 12:30 PM ET, U.S. Retail Sales have been flat, neither rising nor falling. As we head toward Thanksgiving and Black Friday sales levels, the market will be taking more and more interest in how strong the consumer is. Expectations for October are for a rise of 0.8 percent overall, an increase from 0.0 percent. When excluding vehicles, the projection is for an increase of 0.4%, up from 0.1%. and up 0.4 when also excluding gasoline.
  • 1:15 PM ET, Capacity Utilization is expected to remain unchanged at an 80.3% use of available manufacturing capacity. Reading well above, this may be considered inflationary as production could be using less efficient means.
  • 1:15 PM ET, Industrial Production is expected to have been weaker at a 0.2% increase compared to a 0.4% increase.
  • 2:00 PM ET, NAHB Housing Market Index this is expected to continue weakening, the October number was 38.
  • 2:00 PM ET, Business inventories are expressed in dollar value held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity. Rising inventories can be an indication of business optimism that sales will be growing in the coming months. However, if unintended inventory accumulation occurs, then production will probably have to slow while those inventories are worked off. Last month’s inventories increased by 0.8%.

Thursday 10/17

  • 12:30 PM ET, Housing Starts, last month housing starts had declined for the seventh consecutive month by 8.7%. 

Friday 10/18

  • 2:00 PM ET, Leading Economic Indicators are expected to show a decline of 0.3% vs. a decline of 0.4% the prior month.

What Else

The focus on signs of economic weakness or receding inflation will be high, and reactions may be extra sensitive. The following week is shortened in terms of trading. The focus will be on how strong the consumer shows they will be for the holidays.

Paul Hoffman

Managing Editor, Channelchek