Whither Thou Goest, Economy?
On one hand I count the reasons I could stay with you.
And hold you close to me all night long.
So many lover’s games I’d love to play with you.
On that hand, there’s no reason why it’s wrong.
But, on the other hand, there’s a golden band.
To remind me of someone who would not understand.
On one hand, I could stay and be your lovin’ man.
But the reason I must go, is on the other hand.
On the Other Hand - Randy Travis
…..
Figuring out where the economy is headed is never easy. We have more data available to us now than ever before. That data may actually make divining the future even more difficult because the data is conflicting. Let’s take a look at three important measures of economic activity – Inflation, Employment and Consumer Spending.
Inflation: There is much improved news here. Inflation peaked last summer and has been in decline ever since. The Fed says they will get it back to 2%. The price of a basket of commodities was increasing at a 50% rate last year is now down 20% in price from a year ago. This should feed into lower goods prices at some point. The price of many foods has stabilized, apartment rents are not rising by much if at all, and the price of oil is standing well below its peak.
On the other hand, the “headline” CPI index is still 5%, which is considerably higher than it has run for most of the last 15 years. The cumulative effect of a 9% increase last year and another 5% this year on consumer’s budgets is substantial. There are many “macro systemic” factors that point to consistently higher inflation. “Deglobalization” reverses the trend of the last decades when many products got cheaper because of cheap Chinese labor. These products will get more expensive as production moves to more stable but costlier locales. Whether you support or oppose the “green energy transition,” most western governments are committed to it and it means that energy will be more expensive with no offset in availability or abundance. There is no argument that moving to less carbon energy means more expensive energy and energy impacts the price of literally everything. Longer lives and less babies in the U.S. and other developed countries means more old people consuming resources and fewer young people to produce those resources. Hence, the cost of labor increases.
Employment: There are headlines daily about layoffs in major corporations. Amazon, Apple, Google, Meta and Twitter have all laid off thousands of largely highly paid workers. As I write this, Disney just announced they will lay off 15% of their entertainment division employees in addition to layoffs already announced. Big banks are all cutting back employees. GM is not replacing thousands of retiring employees. New claims for unemployment have been ticking up in the last few weeks. The number of new jobs being added to the economy has been trending down of late. It looks as though jobs may become harder to come by soon.
On the other hand, if you are a nurse, an auto mechanic, a truck driver, or an accountant, you are unlikely to have any trouble finding a job for the foreseeable future. There are more positions than people to fill them in these and many other professions right now. And these jobs are unlikely to disappear in big numbers even in a recession. The U.S. unemployment rate as of last month is only 3.5%. The last time it was sustainably at or below that number was in 1953! So, big companies may be laying off, but there are still a lot of other jobs out there.
Consumer spending: There are broader measures out there, but I have always looked to cars and houses to gauge the economic impact of consumer spending. Buying a house and a car are the two biggest expenditures consumers have, and they are a major source of employment in the economy overall. When the prices of houses drop, homeowners feel less wealthy and cut back other places. They do the opposite when housing prices are rising. When car sales drop, lots of people who build, sell, finance, and insure cars lose their jobs.
Housing sales are down, but prices have been holding up. In some markets, primarily in parts of Florida and the Midwest and Plains states, prices have not fallen or are still rising. Many people have locked in low fixed rate 30- year mortgages and so the increase in interest rates will not affect them. Car sales are holding up as well. Inventories are still low, albeit higher than the zero inventories at points last year. Overall US car sales were up 8.5% in the first quarter over last year.
On the other hand, the ability of the average family to afford a home at today’s prices and interest rates, is at an all-time low. It takes more of their income than ever to pay the mortgage. That does not bode well for demand. And although car sales were up, the manufacturers sold nearly 40% more vehicles to rental car companies and other fleets. Without that, retail sales would have been flat. Nearly 20% of all new car loan payments are now $1000 a month or more. Again, sales are holding up, but a lot of people are priced out of today’s market.
In the interest of brevity, I have excluded many other factors affecting the economy like debt and international affairs and many others. And of course, a “black swan event” (is that racist to use that term now?) like the lockdowns or war can also change everything. So, what does it all mean? You can draw your own conclusions. Mine are as follows, and are worth what you are paying for them, which is nothing.
We will have an economic downturn at some point. The business cycle has not been repealed. But, I do not think it hits this year. There is still so much cash out there and the stimulative effect of massive federal deficits is ongoing. Individuals and companies are burning through the cash, but that will take some time. Unemployment will rise, housing prices will fall and automakers will discount again. But none of that is imminent. More banks will fail and unprofitable companies will close down, but it will happen over months and not weeks.
So, I think the downturn doesn’t hit in earnest until sometime in 2024. But when it does, it will not be a “soft landing” and will be quite a deep falloff. We have not had a cyclical recession in 16 years. There are many, many imbalances in the economy that need to be cleared out and that process will be painful and longer in duration.
If I am right, that means that all this will happen in the middle of a presidential election. So, what will the Fed do? My prediction (again not worth any more than the electrons you are burning to read this) is that they give up the inflation fight and try to restore stability by printing money again and lowering rates again. If they do that, they risk 5% inflation becoming the “good ol’ days.” And that’s only if their effort succeeds, which it might not.
On the other hand…
I remain respectfully,
Congressman John Campbell
Drive Fast and Live Free