Jeremy Torgerson, CEO, CIO & Senior Advisor

Our Economic nSight articles are typically written once weekly by nVest Advisors CEO Jeremy Torgerson for the general education of the public, and as a way to provide transparency for our clients and sponsored-plan participants as to how we create and modify our investment models. It is copyrighted and may not be republished in whole or in part without written permission.

At nVest Advisors, we believe that successful investing depends on an understanding of, and correct response to, changes in the world economy as they happen. We incorporate real-world economic conditions into almost all of our investment models and strategies at nVest Advisors, which we believe provides significant benefit to our clients’ overall investment returns by reducing various short-term market risks and enhancing portfolio performance over time.

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Good morning and happy Monday! 

Keeping up with global economic data is a monumental task. With a financial planning and investment management firm to run, that is committed to doing our own independent research, we are forever grateful to the many excellent Economic aggregation resources that take the work out of gathering this data for us each day. They don’t give us analysis – that’s our job – but just compiling this information can be a full-time job. We want to give a big shout-out (and a thank you) to MacroMicro, TradingEconomics, and The Daily Shot. Though we use several more, these are three of our favorite places to see a daily aggregation of economic data, and you’ll often see their charts used here.

  • At the Top: China’s Economy Tumbles
  • Housing update
  • Leading Indicators update
  • Jobs update

At the Top:

China’s Economy Tumbles

We seldom talk about other national economies in this space because our clients are entirely U.S. citizens. However, our largest trading partner and nation with whom the United States has a love/hate relationship, China, is experiencing a broad, systemic economic challenge that deserves mention. Given the increasingly interconnected economies in the world, the fear of one country’s economic problems spreading like a contagion into other economies is a real one.

The news coming from China is indeed pointing to something like a 2008-style of financial crisis for the nation. China is a unique country in many ways: it is a strange blend of free market capitalism and strict, command-style control by the communist political regime. And because of that dual system, it is often difficult to trust all of the data figures coming out of China, and when Chinese economic challenges arise, it’s often unexpected and much worse than investors were guessing.

The past few weeks have seen some very seriously challenging data points come officially from China, making us believe things are actually much worse than they appear:

  • China’s economy is significantly focused on cheap exports – about 21% of their economy, in fact. China’s exports (mostly to the U.S. and Europe) dropped 14.5% over the prior year. This tells us much about the state of U.S. consumption, as well.
  • China’s (official) unemployment rate for younger workers under 30 is around 25%. That figure may be much higher, however, as China opted not to release the figures for July at all.
  • About 70% of Chinese household wealth is stored in real estate, and real estate development companies in China are a massive part of their overall economy, producing as much as 30% of their total GDP. With the collapse in the Chinese real estate industry, we’re also seeing the largest drop in mortgage lending in China’s history.

What this means to you

China is the world’s second-largest economy and one of the primary trading partners with the U.S. and several other large nations. It is also a place of much investment by both U.S. companies (for manufacturing and service parts of their supply chain) and investment markets looking to capitalize on the decades of massive growth in China. If the Chinese economy continues to fall as hard as its current trajectory predicts, it will most certainly affect the economies of other countries.

I am particularly concerned about the interconnectedness between many of the larger U.S. banks and Chinese real estate debt. We’ve financed a lot of what is now collapsing. Banks here have had more than two years to deleverage and disinvest from that space since the first serious signs of problems with Evergrande and other real estate companies came to light – did they? Time will tell.

Housing Update

We continue to remain watchful of a downturn in residential real estate, but we won’t see housing fall uniformly across the entire process of building out a new property. Permits and plans have to be completed first, then financing must be obtained, and finally the house gets started, finished, and ultimately turned over to the buyer.

Housing STARTS held up okay last month, which makes sense since we had a few months of slightly lower mortgage rates (around 6%).

However, as rates have climbed back up again, reaching peaks not seen since 2002…

…new loans and building permits have come down sharply:

What this means for you

As long as interest rates remain high – which the Federal Reserve’s FOMC has stated will likely be the case for much longer than the markets have priced in – expect to see a weaker and weaker housing market. Clients who are interested in buying a home or a second home may very well have the opportunity to do so at dramatically better prices in the next 18-24 months, but other clients who are interested in selling property may have a long time to wait for those home prices to return. Our macro models are not invested in either real estate or mortgage/property finance at this time.

Jobs Updates

We look at jobs regularly, and the current trajectory remains unchanged. Initial claims, while still low, are trending higher, and continuing claims remain my most persistent worry. This week’s initial jobless claims came in slightly below expectations, though trending against historical trends..

We continue to see jobless claims come in higher each week over the same week in the average of the last three “normal” employment years. This means we definitely have a cooling off of employment compared to before and just after the Covid-19 pandemic.

But as I’ve said many times, the continuing claims are where we need to focus a lot of attention. Continuing claims mean that, which overall employment is still okay, it is becoming harder and harder to find a job once one is lost.

What this means to you

The job market will get worse as we head into a recession – that’s an economic certainty and one the Federal Reserve is actually trying to achieve without too many job losses. We urge our clients to reduce their debt load and increase their personal savings, and keep investments conservatively positioned for now. A recession doesn’t mean the end of the world, but it does mean seeing our unemployment rate climb from its current 3.5% to maybe 5.5% or 6.5%. That means, sadly, a lot of lost jobs and financial hardship for many families, so please take the risk of job insecurity seriously.

Leading Indicators Outlook

We received an updated Leading Indicators report from the Conference Board this past week.  This report composites a number of factors together to give us a good indication of where the economy is headed. For sure, we are trending toward a recession.

It’s interesting to look at what makes up the LEI and which ones are pulling the economy up or down. Stock prices are the major factor holding the LEI up to even where it is today (and the markets have corrected about 2% downward since this survey was taken). The only other positive contributor is jobless claims (discussed above).

What this means for you

No one knows the future for sure, but the LEI has been a consistent predictor of economic slowdowns. It’s important to remember that most of what we look at each week are LAGGING indicators – looks backward at events that have come and gone already. LEADING indicators are telling us what is queueing up.

Bottom Line:

Download our brand-new E-Book “7 Hacks To Recession-Proof Your Financial Life” today.

We remain convinced that a recession is imminent, even as the market fights back hard against it. Do not let the current market rally fool you – there is no sustainable way to grow profits (and therefore a supportable stock price) in an economy that is rapidly losing steam. Corporate profit reports are backward-looking and economic projections are forward-looking. Do not be lulled into complacency just because the stock market allows itself to.

We’ve been alerting our clients for nearly two years now that inflation was going to cause significant problems and our central banks would have to take progressively stronger actions to combat it. That appears to be a correct call.

No one knows exactly when a recession will be declared, but we firmly believe most of the larger economies of the world are right at the door of one now. 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.

We predicted the beginning of a turn in the current market rally last week, and we reiterate that sentiment now. There will always be market movement that runs counter to the economic data because markets are much more short-term focused, and let’s face it: until fear takes hold, greed is the prevailing emotional state of most market participants. We do believe, however, that the recent rally has fully run its course, and there will soon be a strong shift from stocks into safer investment options such as corporate and government bonds. With interest rates this high, getting a 5% or better yield, risk-free is becoming a more and more attractive option for investors concerned about the coming economic uncertainty. Once there is consensus that either the economy is earnestly deteriorating, or the Fed announces the end of rate hikes, the move from stocks to bonds will accelerate.

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.

Just this past spring, I published an ebook to help you get your finances ready for the recession directly ahead. It’s yours totally free. Just click on the book image to access and download it.

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:

  • Jobs Report
  • Service Sector Update
  • Commodities
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.