Good morning! It’s been a month since we last published an economic update due to a number of interruptions to our normal posting schedule in November, including the Thanksgiving holiday and an anniversary trip to Costa Rica. There were not many major changes to the trajectory of the main economic indicators during the month, either, so there was little news to report. However, we are finally starting to see some divergence from the months-long status quo, and we will address these changes today.

Because nearly all of our investment clients grant us what is known as discretionary trading authority, keeping up with global economic changes is an important part of our client service work. As a financial planning and investment management firm that is committed to doing 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 simply gather and present this information. Their vital service saves dozens of hours a week. We want to give a big shout-out (and a thank you) to CurrentMarketValuations, FRED, MacroMicro, TradingEconomics, and The Daily Shot. Though we use several more, these are our favorite places to see a daily aggregation of economic data, and you’ll often see their charts used here.

  • nFocus: PMI Reports
  • Jobs Update
  • Real Estate Update
  • Consumer Confidence Reports
  • Inflation isn’t finished

nFocus: PMI Reports

The Q3 2023 GDP was revised upwards from 4.9% to 5.2% in the past month, and markets rallied on the supposedly strong economic output. We’ve had a lot of issue with the current GDP reports for one reason only: none of the underlying data supports it, and most of the data contradicts it.

First, there is another broad way to assess a country’s economy other than GDP (gross domestic product). It’s called GDI (gross domestic income). It’s pretty much the same thing except GDP looks at all production created within the United States, and GDI looks at the income from productive activity of U.S. companies. The difference is that companies may produce revenue from factories and offices outside of the U.S. or its territories, so that’s included in GDI.

One might assume that GDI, then, might actually look better than GDP since it includes work done by US companies, from which they receive revenue, outside of US factories and offices. You’d be surprised how closely correlated GDP and GDI usually are – until recently.  In short, GDP shows startlingly good economic activity in the U.S., whereas GDI shows the exact opposite. It is rare for GDI and GDP to be way off like this, but when it’s happened before, we had the last two serious recessions:

The disconnect between GDP and GDI has NEVER been higher than it is right now, by the way.

Now let’s look directly at manufacturing and service as it’s reported by the actual companies, which is called a PMI report. We got several just in the last week. First, Chicago, which is the only one that actually reported in positive territory after being down for almost the entire year so far:

This was so far above expectations that I expect it to reverse sharply in the next reading. It looks like a data mis-fire for October. Here’s Dallas:

Dallas reports layoffs in manufacturing in the district:


Here is Richmond, VA’s district info:

And here is the entire country rolled up into one PMI report. Does this look like 5.2% GDP to you? Not to us, either:

Employment is slowed nationally, as well:

This is the 13th straight month that US Manufacturing has reported itself in recession:

What this means for you

We frankly cannot reconcile the currently published GDP numbers with all of the other available data on economic activity in the United States. GDP itself is the outlier; all other sources of data about the productive health of our industries show significant and sustained slowdowns. Time will tell, but economists are famous for revising data long after the fact to reflect reality after it’s obvious the original data was way off-course. We believe it is foolish to assume the country has rounded the corner and it’s “full steam ahead” economically. Literally every data point we track says the exact opposite. We therefore remain very cautious and keep our clients in a very defensive posture in terms of their investment strategies.

Jobs Update

Jobs are very slowly starting to become an economic issue. Typically, hiring remains strong right into each recession, and job losses come in the middle to end of an economic slowdown, so in many ways it’s not surprising that the jobs market has remained so tight for this long. When you consider the fact that Baby Boomers are retiring in record numbers, the labor pool is just very low.

However, new unemployment claims ticked up slightly in line with seasonal norms but remain low. There is always a drop in filings the week of Thanksgiving (you can see that repeated every year in this chart) because most filing offices are only open Mon-Wed:

 

But as we’ve said many times before, CONTINUING claims tell the story so far. It is increasingly difficult to find a job if you lose one. The second graph shows that this trend has been the same for nearly the entire year so far:

 

What this means for you

We continue to watch employment carefully but it is a lagging indicator in terms of predicting a recession. Hiring typically stays strong right up to the start of a recession, because laying people off is the very last thing most companies want to do (or even have to do). However, once sales drop off and hours have been reduced, job cuts always follow. We anticipate a sudden spike in layoff announcements as the recession gets underway. Indeed, companies with more than 100 employees who are required to give 60-day advance notice of a layoff jumped massively this month:

This tells us that higher unemployment numbers are imminent. If past recessions are any indication of what is very likely ahead, look at how fast unemployment claims shot up in each of the last 7 recessions after the yield curve inverted (which ours has for 18 months and counting):

Real Estate Update

As has long been the trend, real estate continues to cool off in this high-interest-rate environment. Very few mortgage loans were reported again last week, and by far, the slowest mortgage market in a decade:

We are finally starting to see inventories of new homes climb quickly, being only lower than the same time in 2022 when interest rates were again in the 7% range for a 30-year mortgage:

This is having a chilling effect on homebuilders, who must now offer significant incentives, and lower the price of their new homes, in order to get people to qualify. For the first time in almost 20 years, new home prices are now LOWER than existing home prices, and new home prices are now officially below 2022 and 2021’s spikes in fact, (graph 2) they are on average 17.6% lower than they were a year ago, and crashing fast. Still a lot higher than the average of the other seven years in the last decade, but we believe home prices will continue lower as the recession gets underway. This is GOOD news for prospective home buyers.

What this means for you

We’ve said in this space for a very long time now that home prices will come down long before interest rates do. This is good news for home buyers but bad news for current homeowners. We recommend that you keep your debts minimal, clean up your credit score, and try to save as much as possible. If you are dealing with a high-interest mortgage that you thought you could refinance by now, you may have to adjust your budget, as we anticipate that it will be another 1-2 years before you can refinance your home at a measurably lower rate, and even longer if you have less than 15% equity in your home (because you may be “underwater” in terms of home equity and may be unable to refinance until your home value climbs back up).

Consumer Confidence Reports

Just like GDP is wildly off from its usual data partner, GDI, we have seen a similar divergence in the two major indicators of consumer confidence. In both instances, GDP and Consumer Confidence, one of the indicators is now clearly wrong.

The most recent data from the Conference board shows that consumer confidence GREW slightly last month (100 is considered neutral). Consumers seemed to say things were okay right now (graph 2) but believe things are going to get much worse in the short term (graph 3).

This renewed confidence happens fairly commonly after a sustained stock market rally, and when gasoline prices drop for long enough:

However, consumers are now showing us that the employment analysis we’ve been reporting to our clients is, in fact, accurate, as they report getting a job is increasingly difficult:

Now, let’s look at the two different consumer confidence reports side-by-side. You just saw the Conference Board’s information (in black in the graph below). The purple line shows the results from the very similar survey conducted by the University of Michigan. You can see that these two surveys were always very closely correlated until 2021, when they fractured and are now wildly different. University of Michigan is reporting MUCH worse consumer sentiment. Which is correct? We tend to believe Michigan’s data…

… particularly when you combine the jobs numbers with other reports of financial health for consumers, like their use of credit cards and ability to make payments. Delinquency rates on credit cards are skyrocketing, in every income bracket:

And despite news to the contrary about Black Friday weekend, consumer spending has significantly slowed down, into very near recessionary territory:

This is confirmed again by rising retail inventory levels, indicating that product is starting to back-log at the stores:

But even if we use just the Conference Board data, and compare current conditions with future expectations, a pattern can be found that concerns us. Each time we examine the difference between them (“now is good, but the future looks bleak”) as consumers report it to the survey, we can see that any time there’s been a big gap between the present and future expectations, a recession immediately follows:

What this means for you

Consumer confidence matters because it becomes a self-fulfilling prophecy. When we’re confident about the future, we tend to spend more and are willing to assume more debt, but when were worried about the future, the opposite happens. We believe consumer confidence is both a current and leading (future) indicator and definitely worth tracking closely.

Inflation isn’t finished

Most of the recent market rally has been based on the notion that inflation has truly been beaten and the Federal Reserve will now begin to lower interest rates. It’s a rally based, again for the fifth time, on a narrative that so far has not been true, and ultimately reverses.

So is inflation finished this time? We don’t believe it is. Inflation tends to run in waves over successive years, each wave slightly higher than the one before (because after each wave, you’re still slightly above where you started). We therefore have said for months now that the Federal Reserve will likely have to hold interest rates high, or even raise them slightly from here, in order to make sure inflation is truly crushed.

Even Fed Chairman Jerome Powell tried to warn the markets last week that inflation was likely not finished, a warning that market participants, hell-bent on a “Santa Claus” rally to end the year, ignored. We not only heed his warning; we’ve been saying the same thing for months.

The evidence of inflationary pressure resuming is easily seen in this composite graph of other indexes. In each instance, the lower inflation trend of late has reversed and is headed up again.

Bottom Line:

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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. No one knows exactly when a recession will be declared, but we 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 movements that run 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 of Wall Street. We do believe, however, that the recent rally has fully run its course, and the shift from stocks into safer investment options such as gold, cash, and government bonds will continue. 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:

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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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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. This article may include forward-looking statements as defined in our general disclosures. Please see our general disclosure page for additional details.