Podcast Summary
Surprising Economic Resilience in 2023: Despite the largest interest rate hike cycle in decades, the economy showed resilience, with no significant slowdown or labor market weakening, leading to a strong Nasdaq performance and stable mortgage rates. Maintaining a 360-degree perspective is crucial for identifying investment opportunities amidst volatility.
The economic landscape of 2023 defied expectations with the largest interest rate hike cycle in decades not leading to a significant slowdown in economic activity or a noticeable weakening in the labor market, despite high inflation. This was a surprising turn of events, as many economists and business leaders predicted a recession at the start of the year. The Nasdaq saw an impressive annual gain of 41.02%, and mortgage rates remained below 7%. Principal Asset Management, a real estate manager, exemplifies the importance of maintaining a 360-degree perspective to identify compelling investment opportunities amidst such volatility. While the market has shown resilience, it's crucial to remember that investing involves risk, and potential losses are always a possibility.
Bloomberg Economics' Recession Prediction: Bloomberg Economics predicts a recession starting in the second half of 2023 based on their empirical model, aligning with other theoretical models' predictions.
The last few years are expected to be a significant period in economics, akin to the Great Depression, with much debate and research expected in the future about what happened during this time. A year ago, Bloomberg Economics predicted a recession towards the end of 2023 based on their recession model, which uses 13 indicators including yield curve spreads and sentiment. However, the timing of the recession call has evolved, and the model now suggests a higher probability of a recession starting in the second half of 2023. Bloomberg Economics approaches a question in three ways, and if those three ways align, they make a call. Their recession call was also influenced by the range of other theoretical models. It's important to note that their recession model is empirical and does not have a theoretical framework, but economists also use general equilibrium models and large scale models as part of their toolset.
Monetary policy impacts on industrial production and inflation may still be in the works, with labor and credit markets adjusting slowly.: Despite advanced models suggesting shorter monetary policy lags, labor and credit markets may take time to adjust, with credit market inefficiencies and rising auto delinquencies potentially causing surprises in 2024.
While there are advanced models suggesting shorter lags for monetary policy impacts on industrial production and inflation, the labor market and credit market adjustments may still be in the works. The credit market, in particular, might not be as efficient in transmitting rate hikes due to the significant amount of locked-in low interest rates and potentially inflated credit scores from pandemic-era debt forbearance. Auto delinquencies, which have risen to levels last seen in 2010, are a concern, with many of the defaulters having subprime or near-prime credit ratings. These factors might contribute to potential surprises in the credit market in 2024.
Economic Situation: Disinflation and Low Unemployment Defy Conventional Wisdom: Experts attribute recent disinflation to supply and demand factors, with demand playing a significant role. While CPI suggests inflation is under control, other measures like Super Core indicate otherwise. Wage growth may continue to slow, but it's unclear how long this trend will last or if it's a normal slowdown or a credit crunch.
The current economic situation, marked by disinflation and low unemployment, defies the conventional wisdom that reducing demand through job losses is necessary to control inflation. However, it's important to note that this may not be the end of inflation concerns. According to experts, the recent disinflation is due to a mix of supply and demand factors, with demand playing a significant role. While some indicators like CPI suggest that inflation is under control, others like the Super Core measure, which focuses on labor-intensive goods and services, are not showing the same trend. Furthermore, the lag effect of monetary policy on the labor market suggests that wage growth may continue to slow down, potentially leading to more disinflation. However, it's unclear how long this trend will last, and whether it's a normal gradual slowdown or a credit crunch, depends on how lenders assess borrower creditworthiness in the face of uncertain economic conditions.
External factors causing disinflation: Despite recent decline in core PCE inflation, external factors like global growth slowdown and decreasing commodity prices are likely causing it, not Fed's rate hikes. Core services inflation remains stable.
The recent drop in core PCE inflation, which came in at only 0.04% in November, is not a sign that the Fed has reached its target and should consider cutting rates. Instead, this decline is likely due to external factors, such as a global growth slowdown led by China and decreasing commodity prices, which have affected import categories with high China content. These factors have contributed to a disinflationary environment, but they do not necessarily indicate that the Fed's rate hikes have been ineffective. In fact, the Fed's focus on core services inflation shows that this sector has not seen the same level of decline and is expected to remain stable in the first half of 2024, with a potential dip to 2.2%. The Fed should be cautious about declaring victory too soon and maintaining its commitment to bringing inflation down to its target.
Labor Market Data May Be Overstating Current Strength: Despite expected monetary policy trajectory and industrial production/inflation trends, labor market data may be overestimated due to discrepancies in job gains and wage growth measures
While monetary policy has largely followed the expected trajectory as described by economic models, the labor market data may be overstating the current strength of the labor market. Industrial production and inflation have followed the expected patterns, but the credit market and labor market have not. The labor market data, specifically job gains, may be overestimated due to Birth/Death model adjustments. Bankruptcies have risen, and small businesses report difficulty hiring, yet new firms are contributing significantly to job gains. The discrepancy in views on the labor market may lie in the weight placed on different labor market indicators. Job openings have been high throughout the year, but the recruitment industry has seen significant layoffs, and anecdotal evidence suggests a slowdown in labor demand. Wage growth measures have also been softening despite strong headline numbers. Price data, which is less susceptible to revisions, provides more confidence in the assessment of the labor market.
Understanding Unemployment Rates and Their Components: An increase in unemployment inflows can signal the beginning of a downturn, even before widespread layoffs occur. The most accurate indicator for predicting a recession is the unemployment inflows and outflows indicator.
While job count data can be useful in understanding labor market conditions, it may not paint the full picture. Unemployment rates and their components, such as inflows and outflows, can provide valuable insights into the health of the labor market. In particular, an increase in the number of people entering unemployment without finding quick employment can signal the beginning of a downturn, even before widespread layoffs occur. This is because people may find it harder to find jobs as turnover decreases, leading to a swelling of the unemployment rate. This phenomenon was observed in several past recessions, where the initial increase in unemployment was due to new entrants and reentrants rather than layoffs. The most accurate indicator for predicting a recession, according to research, is the unemployment inflows and outflows indicator, which suggests that we may already be in a downturn and could see a recession as early as October this year. As a real estate manager, it's essential to keep a 360-degree perspective on the economy, considering various indicators and expert insights to navigate market conditions effectively.
Navigating Economic Complexity During COVID-19: Despite the Saum rule and other economic indicators, the COVID-19 economic cycle requires a flexible approach due to unique factors like financial resilience, labor shortages, and continuous monitoring.
While the Saum rule and other economic indicators can provide valuable insights, the unprecedented nature of the COVID-19 economic cycle necessitates a flexible and nuanced approach. Our teams at Principal Asset Management are actively navigating this complexity, factoring in the exceptional financial resilience of households and corporations, as well as the ongoing labor shortage. Historical analysis of previous recessions reveals that labor shortages have always been a persistent issue during economic downturns. However, the uncertainty of the current economic landscape underscores the importance of continuous monitoring and adaptation. We remain committed to providing our clients with exclusive investment opportunities and valuable insights, as we navigate the evolving economic landscape. For more information, visit principleam.com or americanexpress.com/businessgoldcard. (Note: This takeaway is not a definitive prediction or guarantee, but rather a reflection of our current perspective based on available information and expert analysis.)
Understanding the disconnect between hard and soft data: Despite strong employment numbers, consumer sentiment surveys indicate economic distress due to high inflation and skewed economic gains, potentially requiring wealth transfer to younger generations for a soft landing in 2024.
The current economic debate revolves around understanding the disconnect between hard and soft data, specifically in relation to unemployment and consumer sentiment. While hard data, such as employment numbers, remains relatively strong, soft data, like consumer sentiment surveys, indicate economic distress. This disconnect can be attributed to the lingering effects of high inflation, which distorts the relative levels of prices in the economy and makes it difficult for people to plan for the future. Additionally, the distribution of economic gains from asset appreciation is heavily skewed towards older generations, leaving younger generations with increased debt loads. A potential solution for a soft landing could be the transfer of wealth from older generations to younger generations to alleviate debt burdens. Looking ahead to 2024, there are both positive and negative risks, including the possibility of a recession having already started in late 2023, but also the opportunity for policymakers to take action and prevent it.
Economist Predicts Possible Recession Started in October, but Fed Could Still Achieve Soft Landing: Economist predicts potential recession started in October, but Fed's rate hikes could lead to a crunch point when revenues decline and defaults increase, impacting younger generations more than older generations.
The economic outlook for 2024 is uncertain, with a potential recession on the horizon. Anna Wong, an economist, predicts that a downturn may have started in October, but the Fed could still achieve a soft landing if they pivot faster in their interest rate hikes. However, she remains concerned about the credit market, which has not yet fully adjusted to the rate hikes. The lags between the rate hikes and the credit market could lead to a crunch point when revenues start to decline and defaults increase. Additionally, historical precedent from the 2001 recession suggests that the consensus may not fully realize a recession is happening until after it has begun. It's important to note that the impact of a recession would not be evenly felt across the population, with older generations who have significant stock portfolios and homes likely to fare better than younger generations with less savings and assets.
Anna Wong discusses current economic landscape on Odd Lots: Economist Anna Wong shares insights on current economic topics during her appearance on the Odd Lots podcast. Listeners are encouraged to check out the new Money Stuff podcast and leave positive reviews, follow hosts and guests on social media, and visit bloomer.com/oddlods for more content. The episode also promotes the American Express Business Gold Card.
Anna Wong, a well-known economist, was a recent guest on the Odd Lots podcast. The episode featured a discussion about various economic topics, and Wong shared her insights on the current economic landscape. The hosts, Tracy Alloway and Joe Weisenthal, also announced a new podcast called Money Stuff, which will be hosted by Matt Levine and Katie Greifeld and will bring the popular Money Stuff newsletter to life. Listeners are encouraged to check out the new podcast and leave positive reviews if they enjoy it. Additionally, the hosts reminded listeners to follow them and their guests on social media and to visit bloomer.com/oddlods for more Odd Lots content. The episode ended with a promotion for the American Express Business Gold Card, which offers benefits to help businesses maximize their purchases.
