Our economic updates are 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.
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Good morning and happy Monday! I hope you had a great Passover and Easter Holiday. Last week was another important one in terms of economic information. Remember that you can get daily updates instead of this weekly digest by checking out my daily economy journal that you can read and subscribe to at “Think Like A Rich Guy”):
- PCE softened slightly as consumers pull back on spending
- US manufacturing continues to show retraction
- S&P’s returns are being largely held up by only 3 stocks
- OPEC’s production cut spiked energy prices
- Jobs report surprises to the downside
- Housing market update
PCE softened slightly
The Personal Consumption Index is a second measure of inflationary pressure in the economy, and is closely watched by the Federal Reserve. While still elevated, indicating upward pressure on prices overall, the PCE indicator softened slightly last month on both the Headline and the Core measures:
Seeing Month-over-Month figures as a bar graph can give a distorted picture of the inflationary environment overall. Here is the same data presented as a Year-over-Year line graph, showing that, though there has been some cooling off of inflation from the peaks, prices remain elevated well above the Fed’s typical target (more than doubly so):
Prices are based on supply and demand. As demand deteriorates into the coming recession, we should see price increases moderate. Indeed, the current Consumer Sentiment index by the University of Michigan shows a continuing weak sentiment overall (though off the lows from the start of the Russian-Ukrainian conflict a year ago):
One question of particular interest for politicians as we finish 2023 and move into 2024 is consumer sentiment about their current situation today versus the recent past. During the 1980 election cycle, Ronald Reagan famously asked the American voters if they were better off than they were four years earlier. America was in the throes of an energy crisis, had just come out of the Watergate scandal, had hostages held for over a year in Iran, and were facing the third and largest wave of inflation in a decade. Reagan won overwhelmingly.
Because recency bias is such a strong psychological influence, if this assessment (“how are you today vs. 5 years ago”) remains this sharply depressed, it may provide impetus for voters to change direction in upcoming elections at the local, state and national levels.:
What this means to you
It appears that inflation, in general, is off of its peak, but we remain cautious that inflationary pressures may resume, particularly with the recent oil production cuts from OPEC. Also, with the recent and largely unsustainable rallies in the equity markets, there remains much (too much) liquidity in our system. When stocks can rally 10% or more while the economy teeters on the brink of a serious recession, there is too much money left in the system. We are hopeful that the worst in inflation is behind us, but believe it is going to be more difficult than most investors think for the Fed to get prices down permanently. We believe this will mean the Fed will be forced to hold interest rates up higher than expected for longer than anyone has priced in, creating a much weaker economy in the near-term than most investors have prepared for. Be vigilant and keep your head about you – things are NOT getting better in the economy.
US manufacturing continues to show weakness
The updated ISM Manufacturing and Service data continues to show retraction in our country’s major industries. Manufacturing itself remains in recessionary territory, continuing to decline in largely a straight line:
While the Services sector surprised with a sharp downward revision from the month prior. Services remain barely above the recessionary marker of 50, but are sharply down from the historical average, and well off the largely unnatural highs following the stimulus spending of the Covid pandemic.
A deeper dive into the manufacturing numbers shows declining inventory levels as producers have slowed their factory output and allowed their inventories to be sold off:
Employment has also slowed significantly. Also, new orders to those factories have dropped.
The combination of lower Services and Manufacturing output across the nation has caused the Atlanta Federal Reserve Bank to lower its GDP estimate for the previous quarter (they did so twice last week). The current estimated GDP is now about 1.5%.
S&P’s rally has largely been the result of just three stocks
One of the things investors must take into account when they see large moves in an investment index is whether the majority of the companies in the index are moving together, or whether the index is “skewed” by large movements in only a few of the companies. The former indicates a likely sustained, organic trend. The latter indicates irrational speculative behavior and you should use caution.
We see that recent movements in the S&P (and the NASDAQ, to be clear) have been the result of large moves in just a few companies (mainly Apple, Microsoft and Nvidia), pulling the whole index higher:
What this means to you
The good fortune of (or activist investors supporting) one company doesn’t indicate a trend in a sector or the economy overall. Be very careful not to misinterpret irrational rally (or selloff) behavior in a couple of companies to indicate a broader market trend.
OPEC production cuts spikes energy prices
As expected, the announced cuts to oil production by the OPEC+ nations a week ago has spiked energy prices:
We provided a fairly exhaustive explanation of the serious changes in energy that resulted from this announcement last week, so we won’t repeat that info here. However, we believe that generally, where oil prices go, the prices of much of the rest of the economy will follow. This change by OPEC is going to have significant political and economic impact, driving gasoline and diesel prices higher in the short term, and making the Fed’s job of getting price inflation under control much more difficult.
U.S. Jobless Claims rise again and hiring surprised to the downside
The jobless claims in the U.S. increased for the sixth week in a row…
\While the ADP jobs report surprised to the downside, showing that the U.S. only produced 145,000 jobs last month, well below expectations and well below the amount needed to maintain full employment (between 250,000 and 300,000 jobs a month)::
Initial jobless claims remains fairly low (for now – keep reading), coming in near the bottom of decade-long averages.
However, it looks more and more like those who ARE laid off, are having a difficult time finding new work, as the continuing jobless claims week-to-week have flatlined and are bucking the seasonal trends of the last decade. The second graph shows that we are now, ever-so-slightly, growing the ongoing jobless number:
But like most of the numbers we examine, those are lagging indicators (meaning, past data). To get a sense of trajectory, we need to look at CURRENT and LEADING indicators, as well. Here are a couple of them related to jobs. First, we have the announced job cuts by week, showing that while there aren’t that many applying for unemployment benefits at the moment, there are many more in the queue for layoffs:
Also, the NFIB (a small business advocacy organization) surveyed its members and found that their hiring plans are continuing their sharp downward trend that started shortly after Covid. 80% of the jobs in the United States come from small businesses.
What this means to you
The jobs statistics are showing we are hitting the brakes on hiring, albeit slowly for now. This will change in coming weeks as the economy continues to slow down. We might even see a drop in the continuing claims as inflationary pressures resume (we believe they will, in very short order), and household budgets require unemployed or under-employed people to pick up work to help make ends meet.
There has been much interest in our weekly Macro updates, and information is coming faster than ever as our economy winds down into a recession we’ve long been forecasting. Readers of the nVest Advisors Weekly Macro Update can now get more current information each morning by following CEO Jeremy Torgerson on his separate personal finance blog, “Think Like A Rich Guy”. These daily journal entries will be then consolidated into the weekly macro update you are reading here.
We strongly urge you to follow the daily updates if having a daily look at the changing economy is vital for your investments or business activities. You can do so by visiting Think Like A Rich Guy.
Housing market update
And finally, here’s a quick look at changes in the housing market. Actually, let me preface this section with a quick discussion on Commercial Real Estate, which I believe will suffer a major recession during the coming few years. This is due in part to company downsizing of office space following the “work from home” changes brought on by the Covid pandemic. Many employees found that they prefer working from home, and many employers agreed and decided to reduce their overhead expenses and pare down their offices.
But more than that, as industry grinds down, we believe we will end up with a glut of commercial property (both sales and rental) that there will simply be very little demand for. Obviously, just like with residential housing, the impacts of this slow-down will be felt differently in each real estate market, but overall, we believe commercial property is headed for the worst of the housing correction. We are already starting to see that show up, as commercial real estate prices, while still elevated, have dropped 15% in a year already:
New mortgages continue to come in very week on residential real estate, also:
As actual closed deals struggle under the weight of persistently high interest rates.
It’s important to note that this housing price collapse isn’t just happening in the United States. In fact, much of the world has already seen more deterioration than we have. Some may argue that this means the U.S. housing market won’t fall as much as other places (and that may in part be true), but we tend to feel that the U.S. is simply lagging behind many of the other developed nations, and our trend will likely follow theirs.
Bottom Line:
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We are at the economic tipping point. We’ve been alerting our clients for over a year and a half 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 have been 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 moves 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
