From Fremont Bank
Leading up to this week’s Halloween celebration, you may have visited a pumpkin patch with a corn maze. Walking through a corn maze is like trying to figure out where we are at in our current economy: there are parts that are strong while other parts are in contraction. Economic reports out earlier this year showed we were moving in the right direction, and then we stumbled and moved the other way. Just like a corn maze, we get twists and turns and dead ends, leaving us confused. Whether we listen to the daily news or talk with co-workers or friends, it’s apparent that there are divergent perspectives on the economy’s current and future outlook.
Inflation:
Inflation is continuing its downward trend but remains well above the Fed's target. The index for shelter was the largest contributor of the increase, along with motor vehicle insurance and lodging. Shelter tends to have a long lag time to come down, and in this housing environment, it may prove to be a lot stickier. The areas of inflation that have decreased over the past few months are often viewed as volatile, which could prove unsustainable. The impact of inflation, even if it has improved since last year, remains a headwind.
Employment:
We hear a lot about layoffs in the news, yet job openings increased by over 9.5MM, exceeding expectations, according to the Job Openings and Labor Turnover Survey (JOLTS), released by the Bureau of Labor Statistics (BLS). ADP’s private payrolls showed employers created 89K jobs in September. The report, part of a collaboration with the Stanford Digital Economy Lab, is built on the payroll transactions of more than 25MM US workers. Most of the adds were from leisure and hospitality. In comparison, non-farm payrolls, produced by BLS, showed a robust job market during the same period, adding 336K, well above the average monthly gain of 267K over the prior 12 months. Leisure and hospitality, along with government, were the leading gainers. However, this is a sample survey of about 60K households in the US, it double-counts workers with more than one job, and the response rates have decreased from 70% in 2019 to 62%. Also, according to BLS, the error rate is 130K +/-. So, interpreting this mixed data is just another tortuous path in the corn maze.
GDP:
The first read of Q3 GDP came in stronger than expected on consumer services, with higher housing and utilities costs, along with health care and financial services/insurance. One third of the surge came from inventories, and government spending accounted for 0.8%. The buildup in inventories is in anticipation of strong consumer spending this holiday season. We will see how this plays out. Meanwhile, the rise in housing and utilities costs doesn’t seem to coincide with a healthy economy, as we are spending more money on basic needs. For example, in California, it is harder to obtain homeowners insurance due to the increase of wildfires, and premiums have gone up substantially. The early take on Q4 GDP, according to GDPNow produced by the Atlanta Fed, shows the economy slowing to 1.2%.
Debt:
The Treasury Department announced last week that the federal government ended its fiscal year in September with a budget deficit of almost $1.7T - yes, trillion - adding to a national debt of $33.6T. Our nation’s debt has risen by more than $10T since the pandemic. To service this debt, US Treasurys are sold, and as interest rates rise, the cost to service the debt rises. This week the Treasury estimated they will need to issue $776B this quarter, down from an $852B estimate in August. They also pegged the borrowing total for the first quarter of 2024 at $816B. Yields have surged since the August announcement, with the 10-year rates up more than 75 basis points. Although the Treasury says the increase in yields is consistent with a robust economy, analysts believe it is in part due to the increased premium required for investors to buy Treasurys. As we continue with a larger supply, we will need to see if there is increased appetite; otherwise, rates will continue to shift upward. The Fed, foreign governments, and commercial banks have been reducing their Treasurys holdings. In their place, hedge funds, mutual funds, insurers, and pensions are becoming more active buyers; these buyers tend to demand higher premiums. The real issue is we just can’t sustain these higher interest payments. Rates either need to come down, or we need to reduce our deficit.
FOMC:
The Federal Open Market Committee (FOMC) concluded their two-day meeting, and as expected, extended the pause on rates while maintaining a tightening bias. Fed Chair Jerome Powell, in a speech last month at the Economic Club of New York, cited a “range of uncertainties” and said that they will continue to “proceed carefully.” This tone carried through the Q&A session that proceeded the rate announcement, where he added that they are seeing “inflation head in the right direction but there is still a long way to go.” Over the past 18 months the fed funds rate has increased 525 basis points, and the Fed decreased their securities holdings by roughly $1T. This restrictive policy has put downward pressure on inflation and economic activity; however, we still have a loose fiscal policy stance. When these two factors are at odds, the net effect can be indeterminate. This could be why we are seeing contradictory economic reports.
In a wrap:
For every report that is good news, you can find something negative. For every bad report, you can find a bright spot. So we are at a time that gives us some confusion. And just like corn mazes, it reminds us there are no easy paths. We will persevere through the good and bad, knowing we will eventually reach the exit of the maze.