Weekly Economic Update: 01-16-23

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At-a-Glance:

• A look at December’s inflation numbers.
• Job Market stays resilient.
• Small Business is feeling the pain.
• Credit Card use and interest rates spike.

Happy MLK Jr. Day! It was a fairly significant week for economic reports, so let’s dive right in.

A look at December’s inflation numbers.

The December CPI (Consumer Price Index) report was released last Thursday, after a lot of speculation about whether it would come in surprisingly low, as many analysts expected (we did not assume this). Instead, it was essentially exactly in line with estimates, showing a year-over-year increase in inflation at 6.5% (The source for all charts for this section is The Daily Shot):

Inflation did moderate slightly from November to December, as you can see in the month-over-month survey:

These CPI numbers are often called the “headline inflation” numbers because they are the ones most commonly reported by media and the consumers are most familiar with, but there are a number of other ways to look at the data, including examing core inflation, or looking at each part of the inflation calculation (like energy, groceries, and rent) separately.

If you remove food and fuel entirely from the Headline Inflation figure, you get what economists call Core Inflation. Core Inflation is often more telling of an indicator because food and fuel prices tend to fluctuate a lot on their own and therefore make it harder to see higher and higher prices taking hold in the economy at large. The Core Inflation index shows us parts of your budget that can’t really change radically month-to-month like gas prices (or today, the cost of eggs) can.

The December Core inflation shows us that inflation on everything but food and fuel are still up higher than the Federal Reserve would like to see them, off their peaks slightly year-over year:

 

…while month-over-month core inflation continued to climb slightly, but the highest bump up in 3 months.

 

CPI is a calculation of various goods and services the normal household has to budget for in a given year, so those two major categories, physical goods (like groceries, cars, and clothing) and services (everything from air travel to hospitals to cable TV and cell phone bills), can be broken apart and looked at separately.

While the prices of goods are trending down noticeably…

…inflation in services is still a major factor in the high prices we feel in our monthly budgets:

Far and away, the most significant upward contributor to services CPI was hospital services, followed by increasing rent costs. Hospital services won’t account for a significant amount of most families’ monthly budget, however, so this cost is not a significant part of the overall CPI calculation:

Rent continues to be a major factor, as well, though there is currently conflicting analysis on how much inflation in rent has subsided already that may not be factored into the current inflation calculation. Typically, the Federal Reserve uses about a 9-month lag on rent prices in their calculation because unless we are living under a month-to-month covenant, we won’t feel changes in rent in our budgets until the next time we sign a lease.

Other research, like that provided by online residential company Zillow, tracks rent in real-time as new leases are signed, and they report that rent inflation is down significantly over the last six months that the Fed hasn’t taken into account yet. If true, inflation estimates may come down sharply in the coming months, reflecting this “Zillow factor” by summer.

We hope the Zillow figures are true, because as the graph below shows, rent costs far exceeded our wage increases last year:

What this means to you:

Although inflation does show signs of finally moderating, this softening is very mild and does show the Federal Reserve that there is still more work to be done to slow down the economy and get prices on a definite path back down. Service prices are still climbing significantly, even if we’ve felt some relief in food and energy costs (that we fear may only be temporary). Also, remember that the year-over-year CPI means the increase in prices in 2022 above what they went up in 2021. December 2021 inflation was 7.0%, so adding 2022’s number to it means families felt a 13.5% increase in their basic costs over the last two years. Many families take issue with the entire CPI calculation, as they know their budgets have been squeezed by more than 13.5% in reality.

Remember also, that a slowing rate of increase does not mean a decline. Wall Street loves to tell you that 6.5% inflation is very good news, and they’re attempting to rally the markets on this flawed premise, simply because it’s not as bad as 8.5% was a few months ago. If your car was speeding out of control down the highway at 85 miles per hour, you might be relieved somewhat that it slowed to 65 miles per hour, but you still haven’t gotten control of your car.

Prices are still going up at a pretty good pace, even if we are off the peaks of the rate of increase. The Fed has more work to do. To use the car analogy, since the Federal Reserve’s target inflation rate is 2.0%, let’s say the Fed wants the car to be going 20 mph through a school zone. Right now, it’s going 65 mph past the playground.

The bottom line is: there are some signs of relief, but we are nowhere near where we’ve historically been in terms of rising prices. There is still a long way to go. Also, one thing we are watching closely is for a possible reversal and resurgence in inflationary pressures because the US Dollar has been rapidly dropping in value over the past few weeks. We’ll keep you posted.

The Job Market stays resilient.

One of the unfortunate consequences of the Federal Reserve’s battle to lower prices is that it must impact jobs and wages, as well. So, many economists are watching the labor figures closely for changes in the job market as a sign that the policies of the Fed have had their intended effect. They look for this in the hopes that the Federal Reserve will be able to ease off of their restrictive policies and let the economy heal.

However, we don’t see significant deterioration in the labor market yet. There are signs things are slowing, but the lack of workers overall is going to keep upward pressure on wages and benefits as companies have to aggressively compete for every available job applicant. However, last week the unemployment rate came in 20bps below expectations, indicating a very strong job market overall:

This has a lot to do with the participation rate (number of people who can work and are actively looking for a job). Interestingly, this graph shows there has been a massive disconnect between eligible workers aged 16-25 and workers aged 25-64. Where these age groups used to seek and find work in very similar ways prior to Covid-19, they completely disconnected after the pandemic:

Younger people (age 16-24) just stopped looking for work after covid. This has caused employers to clamor to offer higher and higher wages for even entry-level positions because there are just not enough workers seeking employment to fill everything that is available. The Federal Reserve must fix that employment disparity and will do so by slowing the economy down enough that it will eliminate all of those excess jobs. Sadly that means company downsizing, layoffs, closed factories and businesses: a significant and prolonged recession in our view.

There are signs that the labor market is starting to feel the early effects of the Fed’s actions. For instance, the average workweek for employees in manufacturing sector jobs is slowing. Average hours is now back to December 2020 levels, and overtime pay is down to November 2019 levels:

And overall pay is decreasing (which is NOT a good thing for families during periods of very high inflation):

Also, the demand for temporary workers has significantly decreased; we are now seeing the most monthly declines in temp positions since the Great Financial Crisis of 2007-2010.

What this means to you:

The job market will be one of the major factors in the Federal Reserve’s decision-making about how high to hike interest rates, and for how long they will remain elevated. Right now, we are starting to see the very first signs of softening labor demand, but there is still a long way to go to correct the issue.

Small Business is feeling the pain.

It makes perfect sense that families who earn less will feel the impacts of an economic downturn before wealthier families do. In that same vein, it makes sense that we would be able to see the effects of the economy’s cycles faster and more easily if we look at small businesses.

The NFIB (National Federation of Independent Business) is an advocacy alliance of small business owners across America. Among their many activities supporting small businesses, the NFIB gathers and publishes important insights on the current sentiment and climate for small businesses in the United States.

NFIB’s most recent report came out last week. How are small businesses doing at this point in our inflationary/recessionary cycle? Let’s look.

First, small business owners were asked what their optimism level was currently and for the coming months. The sentiment survey came in below expectations:

That lack of optimism is now reflected in their business decisions. For instance, small business owners intend to do less hiring…

… and do fewer expansion activities.

Jobs are still harder to fill than normal for the small business owner, but they report that it is becoming less difficult than it has been in the past two years:

And some good news: small businesses don’t plan to do much in terms of raising their prices abnormally any further this year. This is likely because the cost to make and market their products and services is also stabilizing.

What this means to you:

Although we imagine that everyone in America works for a major corporation, the exact opposite is true. In fact, almost 80% of all of the jobs in the United States are found in small companies. As small business goes, so goes the broader economy. Small companies are feeling the strain of the economic conditions and are already planning to slow down their production and hiring in the year ahead. This is an important leading indicator of worsening economic conditions that may see company closures and layoffs in the next six to twelve months.

Credit Card use and interest rates spike.

And finally today, we have a chance to see how the American family is holding up through all of this. Several savings and debt statistics came out last week that give us a picture into how our households are meeting our budget needs. Are we saving or going into debt right now? Let’s look:

Consumers’ use of credit cards has continued to climb since the Covid-19 pandemic, trending up to a peak in early 2022. December came in $3 billion more in credit card debt than was expected:

Now in 2023, households are starting to feel the economic effects in ways they can’t gloss over anymore. Over the last 18 months, more and more families are starting to rely on credit cards, borrowing from families, and depleting their savings for everyday purchases:

Of note: the “borrow from friends and family” and “taking from savings” portions are declining now, but that’s not a positive sign. It means your friends and family don’t have any more to lend you, and your savings accounts are starting to run low on funds. We know this is true because as the others drop, credit card use spiked.

We got a short reprieve from credit card use during the Covid-19 pandemic when many families got stimulus checks and doing things like going on vacation were difficult if not impossible, but we have now reversed that brief pause, and are actually trending above the historical trend for credit card use:

This is not good for families because as interest rates have climbed, using a credit card has never been more expensive.

… and because of price increases over the last two years, those credit card purchases and high balances bought less and less:

Where is this credit card debt starting to pile up? Which households are going deeply into debt to maintain their lifestyles? Far and away, the households in the lowest three quartiles of income. The top 1% of households, as you can see, almost never use debt to buy products.

What this means for you:

American families are starting to feel real economic strain that they can no longer just shrug off and hope is very temporary. Rising credit card balances, combined with record-high credit card interest rates will cause havoc on many household budgets in the coming months. This has the potential to create a recession on its own: we will have to make painful choices that result in permanent changes to our spending: a concept called demand destruction. When even back things like a tank of gas for the car, or a week’s worth of groceries are going onto a credit card, families are in a dire financial situation.

You and I spending our paychecks makes up 70% of the total economy in the United States. If we cannot make basic purchases because debt payments are taking up more and more of our monthly budget, it often results in an inevitable spiral toward bankruptcy the loss of a home, etc. At some point, we reach the limits of our credit and can’t add another purchase to that card, and when we stop spending, 70% of the economy no longer has support: the reduction in our spending can crash-land an economy into a recession without any help from the Federal Reserve.

Bottom Line:

We firmly believe the United States, and indeed, much of the rest of the world will endure a recession in 2023. No one knows exactly when a recession will be declared (because it’s a subjective process), but we firmly believe most of the larger economies of the world are on a solid trajectory to experience one this year. Recessions can take years to recover from, which is why we believe it is vitally important to get your family and business finances ready to weather through such a storm.

Whether you are our client or not, you need to consider the broader economy (and much less so the daily market fluctuations) when making investment decisions. The economy is telling us clearly what is coming, and you need to have your investment accounts prepared before that happens.

Use these economic reports, and those of others working in this space, to prepare. You can not only avoid much of the pain that is coming, but you might actually profit from it, if your investments are properly positioned, and you’ve done what you can to shore up your business’ and family’s financial situation. If you need help with this, nVest Advisors has amazingly affordable personal financial planning and fiduciary investment management services to help you.

This is what we do for a living, and we’re very happy to partner with you on that endeavor.

Reach out to us for a totally free financial and portfolio checkup today if you’re concerned about where your finances sit for the coming few years, particularly if you are at or approaching retirement age. We’re delighted to offer you our thoughts. You can schedule that time with us below:

Watching This Week:

• Thursday, we will get updated news on the current inflation rate in the U.S.
• Friday, we will learn the new consumer sentiment numbers from the University of Michigan.

The views and opinions expressed in this economic outlook are for information purposes only and are not intended to be financial advice. nVest Advisors, LLC does not provide specific investment or financial planning advice to a client without an executed client service agreement. nVest Advisors, LLC does not trade directly in commodities or cryptocurrencies. Economic data changes rapidly; no warranty is expressed or implied about the reliability of this data once published. Although the information provided here is derived from authoritative sources, we cannot guarantee the accuracy of this information. Please see our general disclosure page for additional details.