With all the commentators rending their garments over the economy you’d wonder how the US had 2.9% growth last quarter. The quarter before that had positive GDP growth too.
Yet, in the headlines today, people are still worried about a “recession”. We already had it. It was the six months of negative GDP growth we had prior to the six months of growth. It’s amazing what happens to logic when you stick to traditional definitions instead of using politics to deflect and misinterpret them to avoid responsibility for actions.
American businesses are resourceful and resilient. They are innovative despite the brickbats lobbed at them by anti-capitalist fools.
Where did the growth come from? Some headline numbers seem really awful. Tech companies ($MSFT, $NTFX, $GOOGL, FB 0.00%↑ ) are laying off workers, and old-line Dow stalwart 3M ($MMM) announced a layoff yesterday. Inflation is lower than it was, but it is still high. We see shortages of different products at grocery stores from baby formula to eggs to even carrots. Interest rates continue to rise. The Biden scandal deepens. It’s clear the FBI, mainstream news media, and Big Tech social media are corrupt. Government spending has not decreased and there is a carefully staged debt ceiling fight in the offing. The Covid vaccine has a lot of questions swirling around it. Trust in any institution is broken. There seems to be no good news.
When you look inside the numbers, businesses built inventories. Why did they do that? Covid. In the US 98.9% of people got better from Covid but Covid killed the “just in time” inventory standards businesses used to use. Businesses need inventory so they don’t run out if some shock happens to the supply chain. Businesses took that risk and paid a price so they won’t let that happen again. That’s going to increase costs for companies, but they are having trouble passing along all of those costs so profit margins are taking a small hit.
If the stock market bears want to find some solace inside the numbers, final sales to domestic partners minus government spending were down from 1.1% to .2%. That is an indication of demand. Economic demand is waning. Higher interest rates are the cause.
To be clear, in our “on-demand I want it now society” we expect things to happen really fast. The truth is it takes at least six months for an interest rate rise or drop to work its way through the economy. The Fed started in Mar of 2022. It was the most aggressive rise in Fed Funds since the late 1970s.
Another bright spot for stock market bears is the middle class is struggling. People are plowing through savings and purchasing power continues to drop due to inflation. Inflation will not tame with the anti-growth policies of the Biden administration, especially as they pertain to fossil fuels and energy. Inflation also will not be tamed until government spending is cut. Let’s see if Speaker McCarthy can do anything about that.
If you are looking for a leading indicator of stock market sentiment, you might follow Tim Knight at Slope of Hope. He uses Tesla as a measure of the animal spirits in the market ($TSLA). Tesla is off its lows and has had a strong rally over the past weeks. But, technical analysts will tell you it has hit a crucial point, and the rally could be over.
I have said previously on my blog I think the stock market will be in both the red and green this year. We haven’t seen the red yet, but I do think it’s coming. “Sell in May and go away” often isn’t just an old stock market slogan. We aren’t in a baby bull market that is for sure. I see it as a transitional type year.
Companies started to pare back investment in the last quarter of 2022. This shouldn’t surprise you for a lot of reasons.
Higher interest rates make it more expensive to invest. Internal corporate hurdle rates for return on investment are raised.
Biden tax policy changes from 2022 to 2023 disincentivize all types of business-expanding projects. That further raised corporate hurdle rates for return on investment.
A more rigorous Federal Trade Commission, and an aggressive regulatory state has caused companies to be cautious about making moves.
Nationwide, housing has slowed. Higher interest rates will do that. But, more recently, lumber prices have started to lift higher. They were down 58% last year. For what it is worth, lumber often tracks the bond market. When rates go up, bonds and lumber go down. Lumber might also be telling us that the Fed will stop raising rates sooner rather than later.
I also think lumber is telling us the desire to leave high-tax states for lower-tax states is stronger than a fear of higher interest rates. I suspect housing starts in places like New York will be down but in places like Florida will be up. People are calculating the costs and opportunity costs of staying versus moving and they are moving.
Will we get a soft landing? It’s very hard to say. It seems like right now the answer is yes. What’s that mean for the broader stock market? Statistically, it only has a 9% probability of being lower this year on December 31 than it was at the end of 2022. However, if it does go lower it should be a bigger drop than in 2022. Only a totally unforeseen circumstance or shock to the world economy would cause that.
If you want to find an unexpected shock, the obvious places to look are the Russian-Ukrainian border and China.
"Businesses need inventory so they don’t run out if some shock happens to the supply chain. Businesses took that risk and paid a price so they won’t let that happen again."
I think you forgot to complete the sentence: "...until next time."
I'm old enough to remember when JIT was considered newfangled and somewhat suspect, inasmuch as we imported the concept from Japan (leaving aside the fact that the Japanese pinched the idea from Deming in the first place, of course).
And I suspect we're all old enough to have some memory of the Great Inflation, but that hasn't stopped us from repeating those same mistakes.
I could go on but you get the point.
Can Russia-Ukraine or China really be said to be obvious places to look for UNEXPECTED shock or circumstances? Aren't they on the front burner, with a watchful eye observing their condition as they work to a full boil? The risk is boiling over, not cooling off.
The unexpected might be the next media hoax ginned up, the next partisan crusade reinforced in The Narrative. From the Russian hoax to the China-Origin-Viral-Infectious-Disease, to Ukraine proxy war, the public is treated like a game of ping-pong, from one crisis to the next. With the information war playing the biggest part in gaslighting the public with propaganda.
And contrary to Mr. Minch's miracle, the unexpected, based on Western media and govt reports would be Russia achieving its objective in Ukraine, while the US pours billions down the toilet--spending that adds to GDP, but has little substantive effect on the living standards of Americans.