Economic data & company earnings point to a slowdown in the US economy, yet the labor market is strong & US households sit at record net worth. The dilemma for the Fed grows stronger.
Love your 2-minute version so readers get the gist nicely! Let us also appreciate your header picture - how fun and creative!!
I think whether the Fed hold further or cut interest rates, long bond yield may still stay high given bond and inflation Nd supply risk premium all have come back. So long rates are the key to watch for the health of the rest of the economy!
Thank you Marianne. I have started doing the "2-minute versions" since last week, partially inspired by Axios. As for the header-picture, that would be my husband Uttam Dey, who is far more creative than I and helps me out with the look and feel of my newsletter. He also co-authors my Thursday industry deep dive posts, so you have probably seen his name floating around.
As for your thoughts on the long term bond yield, I fully agree with you. Plus, given the sheer amount of government debt that is projected to be issued in the coming years, the long duration bond yield is going to be under constant pressure, given the supply-demand dynamic. With foreign investors more concerned about the size of the ballooning US debt and inflation and slightly downsizing their UST holdings, we may be in for continued volatility in the Treasury market.
I like that feature also. Stumbled across this article and your summary was so good it quickly went into my saved articles. Really nice layout for covering many important points.
You are right, the inflation episode that we experienced post pandemic was driven primarily by fiscal excess, instead of increase in bank lending. And unfortunately, the set of tools at the Fed's disposal is capable of fighting bank lending driven inflation, not fiscal driven inflation. In the meantime, the earnings and revenue boost that companies got from inflation is possible at a peaking point as was noticed by forward guidance in Q3 earnings, and as a result, we are seeing insider selling pick up once again. It is good to see underneath the high level data, else you are going to swayed by Wall Street mindlessly shouting that a new bull market has emerged.
Thank you for your thoughtful reply. I’m watching the private equity area. Rates aren’t different from banks and the collateral is largely unknown. Watch it be derivatives on war outcomes tied commodity contracts. What will companies do to roll debt? We’re all n trouble!
What is the biggest solvable problem we can fix if we can find ways to work together better as humans?
We believe the answer is this:
Stop the corruption in our systems: systems of government, medicine, science, food, academia, and more.
BUT -we cannot fight the old systems. We need to create new systems that make the old ones obsolete, and migrate to the new ones. High trust systems. Transparent systems. Decentralized systems. Systems that are much much harder to corrupt.
We are working on these types of systems and need your help. Come be part of the solution, together.
This article explains how we can run systems like governments or businesses with this type of high trust system. But that's not all Human Swarm Intelligence can do if we build the right ecosystem for it.
The Fed’s interest rate policy is having a devastating effect on mortgage rates, disproportionately affecting first-time home buyers who are looking at prices for existing homes that are already inflated by private equity landlords keeping vacant homes off the market to create artificial scarcity-and at the same time cashing in on 5% returns in the bond market. The rich get richer......
Unfortunately, that is the case for now. The Fed claims it is data-dependent, yet it forgets that the data it looks at is the average of numbers and the average can often often be skewed disproportionately by one small segment of the population. Plus, the Fed's tools are blunt and doesn't work well, especially in today's scenario, where the rich is getting richer and the less well-off is getting further squeezed.
The housing market is in a gridlock, as people who have locked in lower rates aren't moving anywhere. Plus the number of mortgage free people are on the rise as most of the transactions are taking place in cash amongst the wealthy in the housing market. With housing affordability at an all time low, the general sentiment of the population is likely to get gloomier, imo, unless there are major reforms aimed to improve the well-being of the middle class.
Thank you. I’m deeply gratified by your thoughtful reply and validation of the concerns I listed. “Data dependent analysis” with blunt tools - don’t it figger! The more I learn, the more my blood boils that a privately owned Cabal of MOTU bankers has been empowered by our elected government to control the supply of OUR money. Cui bono? The corruption of those who seek power is approaching “absolute” levels. (“Grifters gotta grift”) The survival of our precious planet is in dire straits. I pray we can achieve a Jubilee as described by Prof. Michael Hudson. Dissolving the Fed would be icing on the cake. I can dream, can’t I ?
We humans always look for pattern, and as this pattern never happened our learned rules don't really apply. I think we are doomed to wait. The biggest thing I see is, that we don't have a "healthy" economical growth anymore that is fulled by real, natural demand. After WW2 everybody wanted to improve his life and upgraded whatever he/she had. New house, cars, TV, whatever. Nowadays must people have almost everything. The global market in the western world is pretty saturated. You can only push it with artificial demand/ policies like we can see in Germany. Natural growth is now reserved for the emerging markets.
That's a very thoughtful observation. I am optimistic about growth in certain emerging countries, specifically India, Indonesia and Vietnam, based on my early level research. To your point, these nations have a younger population who are not only consuming but producing, and as a result there is accelerated growth. Plus, if we are to see a commodity supercycle, these nations stand to benefit as they are net exporters of key commodities. As trade balances improve, these nations already are and will continue to draw more investment.
As for the West, it has been spending more than it makes and while cheap debt has made it possible, this is simply not sustainable just like how a company goes broke with poor balance sheet discipline.
These are very interesting times with crosscurrents and forces that are shaping up faster than before.
Great post to show how quickly sentiment changed from inflation angst to a goldilocks soft-landing scenario! As you mentioned consumer spending and household wealth, I think it will be important to watch spending once consumers run down their savings from the pandemic times, as we may have a spending cliff ahead of us. Just curious about your thoughts on that!
I think for the most part excess pandemic savings is mostly over, especially amongst the middle and lower income individuals. As a result, they have tapped into credit card debt at a disproportionately higher level.
While I do think that the wealthy will keep spending (as they have accumulated assets at a much faster rate over the 3 years), spending amongst middle and lower income will continue to drop, and as a result, we will see consumer spending weaken, which will weaken overall Real GDP. People like Ed Yardeni and Goldman Sachs looks at it as a sign of "goldilocks" or "soft landing", but it vey well could also transpire into a recession, if the labor market weakens and loan delinquencies pick up.
The labor market is where I keep disagreeing with many other economists. Wages driving inflation are an economic theory that has been tested repeatedly and shown to not occur. If the Fed (which I believe they are) does look at wage data and use it to justify keeping rates higher for longer, then I think there will be major issues. Wages, after such inflationary bouts, catch up in real terms for a period as I discussed in one of my articles.
I do think we will experience productivity growth - but it's not the typical one we think of it. Since the pandemic supply chain issues are reosloving, we are basically experiencing a return to the proper allocation of inputs. Proper allocation of inputs increases total factor productivity, which is productivity. So we don't need technological growth to see big productivity gains in the short run - just a return to pre-pandemic production chains.
You bring very interesting and valid points regarding productivity growth. I am curious to understand why you think wages would not drive inflation? If wages are high, doesn't it mean consumer spending will remain high, which would continue to put upward pressure on inflation? This is obviously linear thinking, but I am curious to hear your perspectives.
Regarding the wages and inflation dynamic - the short form is that empirical evidence does not show this causal link with respect to inflationary surges. To elaborate on this topic:
The major model used by most central banks, the New Keynesian model, shows mathematically that the rate of inflation is directly linearly impacted by three factors: the real marginal cost, the 'desired' mark-up (or targeted mark-up), and inflation expectations. (Due to market clearing condition - i.e. supply and demand equal each other, whether we look from the supply or demand side of the problem is equivalent in terms of outcomes). More details on this model and the mechanism can be found here - https://www.nominalnews.com/p/unintuitive-inflation-supply-wages
Higher real wages therefore impact inflation via the real marginal cost channel, although labor is only part of the costs of production. Typically though, wages act as an inflation dampener - that is during an inflationary surge, such that we saw now, inflation jumps and nominal wages react slowly. Thus, real wages fall, reducing real marginal cost. Therefore labor has a dampening impact on inflation. (As an aside, this is why I believe that the main cause of the recent inflationary surge was the pandemic induced supply chain issues, as this significantly increased the real marginal cost of production - for example, shipping delays or closing of factories are a real cost).
Now over-time, workers want to regain their real purchasing power, so they start to demand higher wages, and therefore real wages end up growing during the catch-up phase (which we are experiencing now). At the same time, other sources of inflation (real production costs such as the supply shocks) start to subside. In this way, we return to our previous inflation rate.
Naturally, an inflationary surge can theoretically be generated if workers were to all of a sudden demand higher real wages. Without anything else offsetting, we would have a permanently higher inflation rate. This would create the wage/price spiral as defined by Layard et al in their textbook. The question therefore becomes a bit of a chicken/egg situation - what moves first, other factors that push inflation and then wages respond, or do wages move first and inflation responds. This is difficult to disentangle since it is two time series closely following each other but most economic research has argued that there is no evidence of wages causing inflation, but there is evidence of inflation causing wages to go up ( and especially in the context of the current shock). I delve into it - https://www.nominalnews.com/p/wages-and-inflation
An additional slight caveat is that the model looks at real marginal costs. Thus, what really matters is the real marginal wage of production. So we could have increasing average wages, but falling real marginal cost of production. This can happen if a firm improves its production and for example, no longer needs workers to do overtime (since overtime is often a multiplier of base wages, a firm that is at max capacity may need to have workers stay on overtime to produce 1 extra unit of good. If it hires more workers, it can reduce the marginal cost since it no longer needs to pay overtime, while offering higher wages).
So overall - to be precise - holding all else constant, a higher real marginal wage will increase the inflation rate. However, wages have not been the cause of an inflationary surge - the inflationary surge is due to other factors. If wages were to respond quicker to inflationary surges, however, they could make the inflationary period last longer. Which world is better for welfare - a world where real wages fall more sharply to reduce inflation quickly vs a world where real wages stay a bit higher, prolonging the inflationary period - is being studied (one such theoretical paper here - https://economics.mit.edu/sites/default/files/inline-files/WagePriceSpirals.pdf )
Apologies for the long comment! And thank you for the great content!
I am truly grateful to you for taking the time to respond so thoughtfully. Your explanation is superb and it helps me understand the intricacies much better now , especially since I don't come from a traditional finance or economics background. After I read your explanation, I went to your "about" page and realized that you have a phd in economics and now it all makes sense. Thank you, once again.
Thank you! Exactly, I believe that Tom Lee is actually right in the sense that as long as the next set of economic reports come in weaker than expected and we don't have an earnings recession, the markets will take it as a sign to run in the meantime.
1. We are currently running federal deficits of 6% or so of GDP. This isn’t going to be sustainable, but certainly is juicing the GDP numbers.
2. There are meaningful discrepancies between the household, and establishment survey on employment and between GDP and GDI. There is some reason to believe that at the very least economic truth is somewhere between those numbers suggesting performance is weaker than advertised.
You are 100% right with the federal deficit side of the story. Such a level of federal deficit rarely occurs at current employment levels. But if it were not for the fiscal deficit, GDP would have been lower, and the economy might have slipped faster into a slowdown or a recession.
As for the discrepancies, I am aware there are more voices that are questioning the methodologies behind certain economic data that are possibly not portraying the truth. I have never properly paid attention to GDI.
But at least, at a high level, though employment and wages per the data look strong, we are increasingly hearing about mass layoffs in tech and banking and people picking up multiple gigs to sustain the cost of living.
Plus, I think the gap between the haves and the have-nots is skewing the consumer spending data. Across the board, we hear CEOs cautioning about consumer demand waning, yet consumer spending as measured by PCE is not falling off a cliff, as the "haves" still have excess spending to maintain their spending levels.
At this point. just looking at FRED, I often peruse through other reports published by other sources that often dig deeper into the layers of the data to see what is going on at a fundamental level.
I think the last point is interesting although I don’t recall seeing the data breakdown. Skewed spending should mean luxury going gangbusters and Walmart struggling. Luxury seems a bit more of a mixed bag, but that is more my anecdotal observation on a handful of companies.
The other thing is low unemployment is a terrible coincident indicator for a downturn, but a pretty good leading indicator. Unemployment in the 3.5% range frequently precedes a recession. It did in the early 50’s and late 60’s. You can’t grow very easily when there are not new workers to add to the system.
Also the data on jobs can be terrible at turning points as the fed itself has noted. I guess I’m a pragmatic pessimist. I like your optimism better.
Hahaha, love the sound of pragmatic pessimist, oddly enough. You are right about the labor market being a severely lagging indicator and the fact that usually when the economy is at 3.5% (or so) unemployment, a recession precedes, as the economy is technically at full capacity and the only way to boost capacity would be through productivity, but that doesn't happen overnight.
The luxury industry is also in a kind of "tug of war", as they are seeing spending amongst the wealthy intact for the most part, but it is the "aspirational" shoppers that have pulled back on spending in luxury, as they don't have the resources anymore, as a result LVMH and others are struggling and indeed the luxury retail space is expected to continue growing at a slower rate.
I had actually touched on this topic a few Fridays ago in this post:
Nice write up. I'll offer the idea that growth is tied to revenue and revenue= # of customers x avg order value. True for businesses likely true for economies.
IMO we've reached peak # of customers (low UE, high participation rate, low interest rates to make large purchases affordable, govt forbearance). Those are now unwinding (UE creeping up, credit tightness, rising delinquencies, student loan payments).
Avg order is murkier, but Q3 personal consumption numbers were smoking. Plus the aforementioned govt deficit. In other words, I don't know what puts those with means on more of a spending bender than mid 2023.
I'm glad you mentioned the concentration of household wealth. Half this country has been drained by inflation, and I just don't see a few percent of real wage gains really turning the tide.
If rates do fall, what happens when those with savings see their new income streams cut and home prices fall as the market unfreezes? The fed may have worked themselves into a box here.
Love your 2-minute version so readers get the gist nicely! Let us also appreciate your header picture - how fun and creative!!
I think whether the Fed hold further or cut interest rates, long bond yield may still stay high given bond and inflation Nd supply risk premium all have come back. So long rates are the key to watch for the health of the rest of the economy!
Thank you Marianne. I have started doing the "2-minute versions" since last week, partially inspired by Axios. As for the header-picture, that would be my husband Uttam Dey, who is far more creative than I and helps me out with the look and feel of my newsletter. He also co-authors my Thursday industry deep dive posts, so you have probably seen his name floating around.
As for your thoughts on the long term bond yield, I fully agree with you. Plus, given the sheer amount of government debt that is projected to be issued in the coming years, the long duration bond yield is going to be under constant pressure, given the supply-demand dynamic. With foreign investors more concerned about the size of the ballooning US debt and inflation and slightly downsizing their UST holdings, we may be in for continued volatility in the Treasury market.
I like that feature also. Stumbled across this article and your summary was so good it quickly went into my saved articles. Really nice layout for covering many important points.
Thank you, glad you enjoyed it.
Excellent read. Looks to me like the Fed has lost control of it. Too many large company insiders selling significant amounts of their personal stock.
You are right, the inflation episode that we experienced post pandemic was driven primarily by fiscal excess, instead of increase in bank lending. And unfortunately, the set of tools at the Fed's disposal is capable of fighting bank lending driven inflation, not fiscal driven inflation. In the meantime, the earnings and revenue boost that companies got from inflation is possible at a peaking point as was noticed by forward guidance in Q3 earnings, and as a result, we are seeing insider selling pick up once again. It is good to see underneath the high level data, else you are going to swayed by Wall Street mindlessly shouting that a new bull market has emerged.
Thank you for your thoughtful reply. I’m watching the private equity area. Rates aren’t different from banks and the collateral is largely unknown. Watch it be derivatives on war outcomes tied commodity contracts. What will companies do to roll debt? We’re all n trouble!
So nothing left to add happy Thanksgiving to you and your family 🎈🎈🎈 honestly 🎉🎉
Thank you Hannah. I wish you and your family Happy Thanksgiving.
Thank you 🙏
The proper question, is this:
What is the biggest solvable problem we can fix if we can find ways to work together better as humans?
We believe the answer is this:
Stop the corruption in our systems: systems of government, medicine, science, food, academia, and more.
BUT -we cannot fight the old systems. We need to create new systems that make the old ones obsolete, and migrate to the new ones. High trust systems. Transparent systems. Decentralized systems. Systems that are much much harder to corrupt.
We are working on these types of systems and need your help. Come be part of the solution, together.
This article explains how we can run systems like governments or businesses with this type of high trust system. But that's not all Human Swarm Intelligence can do if we build the right ecosystem for it.
https://joshketry.substack.com/p/fix-any-business-using-human-swarm
Fully agree with you.
As always everything is profoundly rethought ❤️
And as always, thank you for your constant support and kindness.
The Fed’s interest rate policy is having a devastating effect on mortgage rates, disproportionately affecting first-time home buyers who are looking at prices for existing homes that are already inflated by private equity landlords keeping vacant homes off the market to create artificial scarcity-and at the same time cashing in on 5% returns in the bond market. The rich get richer......
Unfortunately, that is the case for now. The Fed claims it is data-dependent, yet it forgets that the data it looks at is the average of numbers and the average can often often be skewed disproportionately by one small segment of the population. Plus, the Fed's tools are blunt and doesn't work well, especially in today's scenario, where the rich is getting richer and the less well-off is getting further squeezed.
The housing market is in a gridlock, as people who have locked in lower rates aren't moving anywhere. Plus the number of mortgage free people are on the rise as most of the transactions are taking place in cash amongst the wealthy in the housing market. With housing affordability at an all time low, the general sentiment of the population is likely to get gloomier, imo, unless there are major reforms aimed to improve the well-being of the middle class.
Thank you. I’m deeply gratified by your thoughtful reply and validation of the concerns I listed. “Data dependent analysis” with blunt tools - don’t it figger! The more I learn, the more my blood boils that a privately owned Cabal of MOTU bankers has been empowered by our elected government to control the supply of OUR money. Cui bono? The corruption of those who seek power is approaching “absolute” levels. (“Grifters gotta grift”) The survival of our precious planet is in dire straits. I pray we can achieve a Jubilee as described by Prof. Michael Hudson. Dissolving the Fed would be icing on the cake. I can dream, can’t I ?
Your concerns are fully justified. As long as there is trust, the system prevails. But there sure is a better way to build the world.
We humans always look for pattern, and as this pattern never happened our learned rules don't really apply. I think we are doomed to wait. The biggest thing I see is, that we don't have a "healthy" economical growth anymore that is fulled by real, natural demand. After WW2 everybody wanted to improve his life and upgraded whatever he/she had. New house, cars, TV, whatever. Nowadays must people have almost everything. The global market in the western world is pretty saturated. You can only push it with artificial demand/ policies like we can see in Germany. Natural growth is now reserved for the emerging markets.
That's a very thoughtful observation. I am optimistic about growth in certain emerging countries, specifically India, Indonesia and Vietnam, based on my early level research. To your point, these nations have a younger population who are not only consuming but producing, and as a result there is accelerated growth. Plus, if we are to see a commodity supercycle, these nations stand to benefit as they are net exporters of key commodities. As trade balances improve, these nations already are and will continue to draw more investment.
As for the West, it has been spending more than it makes and while cheap debt has made it possible, this is simply not sustainable just like how a company goes broke with poor balance sheet discipline.
These are very interesting times with crosscurrents and forces that are shaping up faster than before.
Great post to show how quickly sentiment changed from inflation angst to a goldilocks soft-landing scenario! As you mentioned consumer spending and household wealth, I think it will be important to watch spending once consumers run down their savings from the pandemic times, as we may have a spending cliff ahead of us. Just curious about your thoughts on that!
I think for the most part excess pandemic savings is mostly over, especially amongst the middle and lower income individuals. As a result, they have tapped into credit card debt at a disproportionately higher level.
While I do think that the wealthy will keep spending (as they have accumulated assets at a much faster rate over the 3 years), spending amongst middle and lower income will continue to drop, and as a result, we will see consumer spending weaken, which will weaken overall Real GDP. People like Ed Yardeni and Goldman Sachs looks at it as a sign of "goldilocks" or "soft landing", but it vey well could also transpire into a recession, if the labor market weakens and loan delinquencies pick up.
The labor market is where I keep disagreeing with many other economists. Wages driving inflation are an economic theory that has been tested repeatedly and shown to not occur. If the Fed (which I believe they are) does look at wage data and use it to justify keeping rates higher for longer, then I think there will be major issues. Wages, after such inflationary bouts, catch up in real terms for a period as I discussed in one of my articles.
I do think we will experience productivity growth - but it's not the typical one we think of it. Since the pandemic supply chain issues are reosloving, we are basically experiencing a return to the proper allocation of inputs. Proper allocation of inputs increases total factor productivity, which is productivity. So we don't need technological growth to see big productivity gains in the short run - just a return to pre-pandemic production chains.
You bring very interesting and valid points regarding productivity growth. I am curious to understand why you think wages would not drive inflation? If wages are high, doesn't it mean consumer spending will remain high, which would continue to put upward pressure on inflation? This is obviously linear thinking, but I am curious to hear your perspectives.
Regarding the wages and inflation dynamic - the short form is that empirical evidence does not show this causal link with respect to inflationary surges. To elaborate on this topic:
The major model used by most central banks, the New Keynesian model, shows mathematically that the rate of inflation is directly linearly impacted by three factors: the real marginal cost, the 'desired' mark-up (or targeted mark-up), and inflation expectations. (Due to market clearing condition - i.e. supply and demand equal each other, whether we look from the supply or demand side of the problem is equivalent in terms of outcomes). More details on this model and the mechanism can be found here - https://www.nominalnews.com/p/unintuitive-inflation-supply-wages
Higher real wages therefore impact inflation via the real marginal cost channel, although labor is only part of the costs of production. Typically though, wages act as an inflation dampener - that is during an inflationary surge, such that we saw now, inflation jumps and nominal wages react slowly. Thus, real wages fall, reducing real marginal cost. Therefore labor has a dampening impact on inflation. (As an aside, this is why I believe that the main cause of the recent inflationary surge was the pandemic induced supply chain issues, as this significantly increased the real marginal cost of production - for example, shipping delays or closing of factories are a real cost).
Now over-time, workers want to regain their real purchasing power, so they start to demand higher wages, and therefore real wages end up growing during the catch-up phase (which we are experiencing now). At the same time, other sources of inflation (real production costs such as the supply shocks) start to subside. In this way, we return to our previous inflation rate.
Naturally, an inflationary surge can theoretically be generated if workers were to all of a sudden demand higher real wages. Without anything else offsetting, we would have a permanently higher inflation rate. This would create the wage/price spiral as defined by Layard et al in their textbook. The question therefore becomes a bit of a chicken/egg situation - what moves first, other factors that push inflation and then wages respond, or do wages move first and inflation responds. This is difficult to disentangle since it is two time series closely following each other but most economic research has argued that there is no evidence of wages causing inflation, but there is evidence of inflation causing wages to go up ( and especially in the context of the current shock). I delve into it - https://www.nominalnews.com/p/wages-and-inflation
An additional slight caveat is that the model looks at real marginal costs. Thus, what really matters is the real marginal wage of production. So we could have increasing average wages, but falling real marginal cost of production. This can happen if a firm improves its production and for example, no longer needs workers to do overtime (since overtime is often a multiplier of base wages, a firm that is at max capacity may need to have workers stay on overtime to produce 1 extra unit of good. If it hires more workers, it can reduce the marginal cost since it no longer needs to pay overtime, while offering higher wages).
So overall - to be precise - holding all else constant, a higher real marginal wage will increase the inflation rate. However, wages have not been the cause of an inflationary surge - the inflationary surge is due to other factors. If wages were to respond quicker to inflationary surges, however, they could make the inflationary period last longer. Which world is better for welfare - a world where real wages fall more sharply to reduce inflation quickly vs a world where real wages stay a bit higher, prolonging the inflationary period - is being studied (one such theoretical paper here - https://economics.mit.edu/sites/default/files/inline-files/WagePriceSpirals.pdf )
Apologies for the long comment! And thank you for the great content!
I am truly grateful to you for taking the time to respond so thoughtfully. Your explanation is superb and it helps me understand the intricacies much better now , especially since I don't come from a traditional finance or economics background. After I read your explanation, I went to your "about" page and realized that you have a phd in economics and now it all makes sense. Thank you, once again.
Powell will keep pausing for now. Like you said, they're just waiting for more data, whilst making all of us feel more (cautiously) optimistic.
Sleek overview!
Thank you! Exactly, I believe that Tom Lee is actually right in the sense that as long as the next set of economic reports come in weaker than expected and we don't have an earnings recession, the markets will take it as a sign to run in the meantime.
A couple other points I would make.
1. We are currently running federal deficits of 6% or so of GDP. This isn’t going to be sustainable, but certainly is juicing the GDP numbers.
2. There are meaningful discrepancies between the household, and establishment survey on employment and between GDP and GDI. There is some reason to believe that at the very least economic truth is somewhere between those numbers suggesting performance is weaker than advertised.
You are 100% right with the federal deficit side of the story. Such a level of federal deficit rarely occurs at current employment levels. But if it were not for the fiscal deficit, GDP would have been lower, and the economy might have slipped faster into a slowdown or a recession.
As for the discrepancies, I am aware there are more voices that are questioning the methodologies behind certain economic data that are possibly not portraying the truth. I have never properly paid attention to GDI.
But at least, at a high level, though employment and wages per the data look strong, we are increasingly hearing about mass layoffs in tech and banking and people picking up multiple gigs to sustain the cost of living.
Plus, I think the gap between the haves and the have-nots is skewing the consumer spending data. Across the board, we hear CEOs cautioning about consumer demand waning, yet consumer spending as measured by PCE is not falling off a cliff, as the "haves" still have excess spending to maintain their spending levels.
At this point. just looking at FRED, I often peruse through other reports published by other sources that often dig deeper into the layers of the data to see what is going on at a fundamental level.
I think the last point is interesting although I don’t recall seeing the data breakdown. Skewed spending should mean luxury going gangbusters and Walmart struggling. Luxury seems a bit more of a mixed bag, but that is more my anecdotal observation on a handful of companies.
The other thing is low unemployment is a terrible coincident indicator for a downturn, but a pretty good leading indicator. Unemployment in the 3.5% range frequently precedes a recession. It did in the early 50’s and late 60’s. You can’t grow very easily when there are not new workers to add to the system.
Also the data on jobs can be terrible at turning points as the fed itself has noted. I guess I’m a pragmatic pessimist. I like your optimism better.
Hahaha, love the sound of pragmatic pessimist, oddly enough. You are right about the labor market being a severely lagging indicator and the fact that usually when the economy is at 3.5% (or so) unemployment, a recession precedes, as the economy is technically at full capacity and the only way to boost capacity would be through productivity, but that doesn't happen overnight.
The luxury industry is also in a kind of "tug of war", as they are seeing spending amongst the wealthy intact for the most part, but it is the "aspirational" shoppers that have pulled back on spending in luxury, as they don't have the resources anymore, as a result LVMH and others are struggling and indeed the luxury retail space is expected to continue growing at a slower rate.
I had actually touched on this topic a few Fridays ago in this post:
https://amritaroy.substack.com/p/friday-5-who-thinks-a-us-recession
Nice write up. I'll offer the idea that growth is tied to revenue and revenue= # of customers x avg order value. True for businesses likely true for economies.
IMO we've reached peak # of customers (low UE, high participation rate, low interest rates to make large purchases affordable, govt forbearance). Those are now unwinding (UE creeping up, credit tightness, rising delinquencies, student loan payments).
Avg order is murkier, but Q3 personal consumption numbers were smoking. Plus the aforementioned govt deficit. In other words, I don't know what puts those with means on more of a spending bender than mid 2023.
I'm glad you mentioned the concentration of household wealth. Half this country has been drained by inflation, and I just don't see a few percent of real wage gains really turning the tide.
If rates do fall, what happens when those with savings see their new income streams cut and home prices fall as the market unfreezes? The fed may have worked themselves into a box here.
You are welcome J.R. Hope you enjoyed my post.