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Good morning and happy Monday! After a week off to celebrate Independence Day, we’re back with a quick look at the economic data over the past two weeks, and how they are impacting the investing strategies we use for our clients.

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. Also, though it’s spotty so far, I want to blog a daily journal of economic activity as we head into this recession, which will shortly include daily market and trading activity. Sadly this has take a back seat in recent weeks to massive (and great) changes happening here at nVest Advisors, but we’ll be back in the routine for the rest of the summer. You can find those at my personal finance blog (undergoing a complete rebrand this summer): “Think Like A Rich Guy”):

• At the Top: JOBS UPDATE: Labor demand remains impossibly high
• Housing update
• Manufacturing and Service Sector Updates

At the Top:

Labor demand remains impossibly high

The biggest issue I see in the past two weeks is that there is a pervasive and growing disconnect between what should be connected elements of the economy. Take, for example, the different looks at labor statistics. Labor is a major issue right now because the Federal Reserve is trying to lower the upward pressure on wages to lower the resulting effect on prices of the goods and services that labor produces. As long as there remains a strong demand for labor, prices will remain stubbornly high. So we need to weaken the labor market specifically to lower overall inflation.

However, there is a wide range of assessments of just how strong the labor market is. For example, the BLS reports that there are still 1.6 jobs out there for every available worker without a job. Layoff announcements have also supposedly slowed significantly in the last month.

BUT, the initial jobless claim number actually increased at the same time:

And this is the 19th week in a row that jobless claims were higher than the same week in the average of the last 3 “normal” labor years:

And where the jobs actually are: in the manufacturing and service sectors of the economy, hiring has been slow for most of the last 12 or 15 months, with many months negative (layoffs):

We continue to stress that while initial claims are important, the CONTINUING claims are much more important. It’s one thing for a company to lay off workers and have them quickly find new work, but another if that worker can’t pick up a new job. Continuing claims are trending up all year, and we continue to see that as the most important sign of the weakness of the labor market.

What this means to you

We believe there will be “surprise” revisions downward in labor reports in the coming weeks, because we cannot have both a robust job market and a weakening economy (see the Manufacturing and Service reports, below). But until it does, the Federal Reserve Bank is relying on these mainstream labor market reports to determine where our interest rates should peak. Making the wrong guess on where labor actually is, or failing to accurately predict the trajectory and velocity of labor market changes, will most likely crash the economy harder than the Fed intends to.

We have to also remember that we aren’t looking for massive negative changes in jobs numbers to confirm our recession prediction. Recessions don’t mean absolute devastation to companies and jobs, they mean our unemployment rate climbs from 3.5% today to maybe 5% or 6% – still a major impact on consumer spending and therefore, economic output, but it doesn’t mean the end of the world. However, that said, the most important thing you can do to prepare, particularly if your job is at risk in any way, is to make sure your monthly expenses are minimal and you have sufficient emergency savings. We can help you with both of those goals.

Housing Update

The other major “upside” surprise over the last two weeks was the information on the housing market, which we discussed in detail in our last update on June 26. Interest rates on mortgage loans dipped for a few weeks this past spring, and the markets were constantly bombarded by biased announcements from people with interests in the real estate and mortgage industry, and the investment markets in general, about the inevitable “Fed pivot”.  We believe homebuyers may have jumped too early and locked a loan payment that they thought they could quickly refinance. As a result, there was a couple of months of increasing activity in the housing and mortgage sector.

Existing home sales spiked in a way that is typical for the early summer. It is still the slowest housing market in the last 8 years except for the 2020 Covid-related shutdowns”. Year-to-date sales, however, as still the lowest of all 8 years (second chart):

It was also late spring. Most families move to a new home during the summer break from school, so much of this uptick was seasonal and expected.

However, interest rates on 30-year mortgages have once again climbed north of 7.25% nationally, which will cool off the mortgage market substantially. If the Federal Reserve raises interest rates again this month, as expected, rates will only move higher.

Home prices have cooled somewhat; less than we think is coming overall, but also less than a market this slow would indicate. YTD change in home prices are now down 3.1% from 2022.

Mortgage rates are so high, most families cannot afford to qualify for a home loan at these prices, so the answer to why prices haven’t fallen further (and more quickly) is the current lack of inventory available for sale. We believe this will increase quickly this fall as both student loan payments resume, and the economy continues to cool off.  Sadly, this will mean a stream of homes lost to job losses and impossibly high payments that home buyers in 2021 and 2022 thought they could refinance for a lower rate by now.  There will also be a dearth of houses bought as investment properties that we believe will re-enter the market as people who bought houses to rent out or AirBnB have their business loans (real estate investors don’t get 30-year fixed mortgages) remain high or go even higher due to prolonged interest rate hikes.

 

What this means for you

We remain convinced that there will be a significant correction in real estate over the next 2-3 years, starting first in commercial real estate and then extending into residential markets. Despite the rally in real estate related stocks this year (which we do not believe was sustainable or wise), our investment models continue to avoid the real estate sector for now.

Manufacturing and Service Sector Updates

After we got the Philly and Chicago reports two weeks ago, we had several more regions of the US economy report their results in the interim. All point to a significant slowdown in economic activity which is broadly spread across the nation, confirming month after month, and all of which points to slower hiring demand (which defies some of the labor numbers we receive, as we discussed above).

Let’s start with the S&P Global MARKIT (national) survey. Manufacturing is decisively in recessionary territory and getting worse. It’s also coming in lower than expected repeatedly:

Services have remained stronger nationally, but also dropped lower than expected. The services sector will follow the manufacturing sector into recession, but it’s possible that services will see less of an impact overall:

 

This S&P data is confirmed by the info coming out of the Dallas Region:

And the Richmond, VA region (largely defense and nautical industries):

And the Chicago surprised to the downside, as well:

Nationally, we see the same kind of confirmation from the ISM survey that we saw in the S&P, and that the sector is down in all parts of its supply cycle. Literally every part of manufacturing – every step in the production and selling process – has slowed:

 

What this means to you

Forget what the market is doing – this is what companies themselves are telling you is going on. Both the Manufacturing and Service sectors, here in the US and abroad, are pointing to a rapid slow-down in their business prospects. We need to make sure we are properly protected against the slow-down in sales which will sadly include job losses and even some business failures.

Bottom Line:

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 month, 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.