My wife tells me I am lousy at watching movies, if one can be thus. It seems I either google the ending on my phone, or I determine it on my own halfway through the show. Shoot, I already know how every movie based on a Nicholas Sparks’ book ends. There is no need to watch them.
However, how this all ends in the economy? That is still up for grabs.
To be sure, I can make argument for the worst-case scenario, an economic Armageddon, better than I can the best case, a sudden, sharp acceleration.
After all:
- Washington is playing games with the debt ceiling, threatening an unprecedented default in the process.
- The Treasury yield curve has been inverted for a while, which has always meant slower growth.
- The money supply is shrinking.
- Leading Economic Indicators have been negative for the last 12 months.
- The Fed is probably going to raise the overnight rate again in June.
Whew. I could continue with the bad news, but I would rather not. However, something funny happened on the way to the forum this week.
Yesterday, the Bureau of Economic Analysis (BEA) announced the U.S. economy grew at a 1.3% annual clip during the 1st Quarter of 2023. While that headline number is far from impressive, the underlying data was much better than you would imagine.
Much. In fact, I could argue it was actually a surprisingly strong report. All that negative stuff I rattled off above be darned.
After all:
- It appears ‘personal consumption expenditures’ increased at a 3.8% clip last quarter. Apparently, we spent a lot of money on new vehicles and other durable goods.
- What’s more, commercial real estate apparently had a strong start to the year, up some 11%.
- Government expenditures were also robust, coming home at a 5.2% pace.
- Shoot, the trade deficit didn’t even take away from the total.
So, what’s gives? If everything is going gangbusters, why the tepid 1.3% figure in economic growth?
Well, it seems wholesalers and retailers continued to work down their inventories. Why wouldn’t they if they have to finance them with the Prime at 8.25%? It seems this measure, inventory drawdown, shaved a whopping 2.10% of the Gross Domestic Product (GDP) equation.
All told, ‘final sales of domestic product’ was a very healthy 3.4% during 1Q. This is arguably more reflective of the actual health of the economy than that 1.3%.
Further, it seems ‘disposable personal income’ climbed 7.8% after inflation. Really? People must have waited to pay their taxes until the last minute this year or something. I mean, that is fever pitched.
How is this happening this late in the Fed tightening cycle? When the money supply is shrinking and the yield curve is inverted? It doesn’t make much sense.
The best, and really only, reason for this continued strength is the strength of the U.S. labor markets.
Basically, if you can sign your name and pass a drug test, you can get a job doing something. In fact, you might not even have to do those two things in some industries.
Such is the demand for labor.
Despite all the doom and gloom in the press, the Unemployment Rate in the U.S. is a miserly 3.4%, rounded to the closest tenth. That is incredibly close to a 60-year low, trailing by a couple of basis points. Further, weekly ‘initial jobless claims’ have recently been falling. Last week, there were 229,000 initial claims across the country. While that might sound like a lot, the all-time average, some 56 years of data, is around 367,000.
What’s more, just about every business I know would love to add capable capacity. They just can’t seem to find any takers. It’s borderline nuts or bizarre. Take your pick.
This is important. After all, consumer expenditures make up roughly 70% of the GDP equation. As such, how goes the American consumer is how goes the U.S. economy. With that in mind, what do employers create when they hire people? That’s right, new consumers.
As “Sports Illustrated” swimsuit model Martha Stewart might say “it’s a good thing.” You read that correctly.
Make no bones about it. This isn’t the ending anyone would have thought 12-months ago. The Unemployment Rate actually falling as the money supply shrinks and the Federal Reserve is jacking up rates? Let me rephrase that. The Unemployment Rate actually falling as the money supply shrinks the fastest it has since the Great Depression while the Federal Reserve is jacking up rates faster than at any time since 1980?
That last paragraph is almost as crazy as Martha Stewart being a “Sports Illustrated” swimsuit model. Hey, wait a second. That is most unexpected, just like the continued strength of our economy.
It’s going to be fun to see how everything plays out. This, most certainly, is not a Nicholas Sparks’ book.
Separately, I would be remiss if I didn’t mention something about Memorial Day. While we usually celebrate it with BBQ, burgers and libations, it is also a time to remember and honor those who have died in service to our country. So, while you are having fun, please take a second to give thanks for those who gave all for your freedoms.
John Norris
Chief Economist
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.