Maybe It's Not That Bad . . . Arguing Against an Echo

January 6, 2023

There’s a gap. 

There’s a gap between my reality and your sentiment. 

A chasm really between your expectations and my belief, and I don’t know how we get there from here, or how we build a bridge of understanding.  Maybe we don’t, and maybe you’ll stay on your side, and I on mine.

You’ll holler “the world is ENDING.  A recession is near!” 

To which I’ll respond, yelling “but it sure doesn’t seem like it when I go OUTSIDE!

. . . outside . . . outside . . . outside.” 

The word lingers as the echo fades. 

Maybe I’m the one to be faded as the markets runs us over.

“The ISMs and the leading indicators are horrid,” you scream. 

“Yet, GDP Now isn’t though!” I say.

Is it though? . . . is it though?

. . . even the echo has jumped in with questions.

“3.8%, the data is 3.8%” . . . I say, under my breath.

Taking a deeper one I quickly blurt out this stream of consciousness before you or even Mr. Echo can respond . . .

. . . consumer consumption accounts for ~2/3rds of our US economy, and of that, ~2/3rds is spent on services and 1/3rd on goods.  Personal consumption for services is rising back towards its original trend line, which was previously hammered by the impacts of COVID, while our appetites for goods is declining, after years of gorging on “stuff.” 

Services are labor intensive, dine at any restaurant and you understand, and labor intensity coupled with a tighter labor market leads to rising wages.

So again . . . hottest sector? Services. Highest job openings? Services (note we’ve put “government” into the non-services sector for clarity).

Even with all the tech worker layoffs, job openings have stayed relatively flat (bottom left). Sure some are getting laid off, but equally as surprising, hiring is also up. Just look at today’s jobs report with 223K jobs added. Again, guess who’s hiring? Services.

Specifically leisure hospitality (in demand) and education/healthcare (very sticky). Notice the information sector taking a dip there, that would be your software peeps, but for now it seems pretty small and muted because again, we come back to the first point . . . there’s still plenty of jobs out there in the service sector that needs filling. Translation = even with the layoffs we’re hearing, employment could stay robust, and so could wages.

Although the market is applauding the declining rate of change for wage growth (i.e., it’s not going up as fast anymore), relative to inflation it looks to be improving. Translation here? Potentially more spending power as higher paychecks catches-up with falling inflation.

Speaking of which, inflation may be set to fall a bit more as we dive into 2023. Rising prices of goods are likely to abate as China reopens, Europe rebounds, and shipping costs finally normalize as global supply chains heal (see @Callum_Thomas on Twitter).

Things that are hard to find and hard to ship means things are expensive, but reduce those friction costs and you suddenly have a tailwind.  Also, prices should adjust lower as people shift consumption from goods to services. Particularly for larger purchases. Consumer sentiment has fallen sharply for buying “big stuff” (i.e., cars, homes, and home stuff).

The number 1 reason given for this decline in sentiment (per University of Michigan survey)? “Financing is increasingly more expensive as interest rates climb.” So the Fed’s actions of raising rates and tightening quantitatively is definitely curbing enthusiasms.

Fortunately, the American consumer isn’t quite over their skis yet. Although total nominal debt continues to rise, so does disposable income, so when we mix the two, we’re still below the debt to income % that we saw pre-COVID. Truthfully, the two years of consumer “time-out” plus stimulus checks did help us deleverage, even if our government was the one that shouldered the burden. We’ll eventually get back to our spendthrift ways, but we aren’t there yet.

If we want to step even further back and include household debt like mortgages, etc.; we’re still not even close to the bubble-days of 2008, where the housing crisis really destroyed our personal balance sheets.

Are we getting higher than pre-COVID levels? Yes, slightly, but still a far cry from crying.

Yet the drumbeat that’s reverberating seemingly everywhere is that it’s bad, the economy is bad, and things are headed to a recession.

I guess . . . I mean, I don’t know. Sure, if all the central bankers keep acting like Formula One pit crews, and try to outrace each other by ratcheting rates higher with their power tools, I guess . . . but one would imagine that the Fed would slow and eventually stop the rate raises to assess. Even a slowing of rate raises would be an improvement, let alone achieving a terminal rate. Remember the markets are about relative changes. Secondly, the sentiment out there is moribund. The zeitgeist is pretty clear, everyone’s “not feeling it” for 2023 (per Gallup Poll) and we get that.

No doubt much of that stems from risk assets (i.e., stocks, bonds, housing prices) selling off. There’s a negative wealth effect (beyond the actual “things are getting pricey and the cost to buy things is getting pricey”), and it’s impacting our psyche and consumer sentiment. Still, if the Fed eases up, doesn’t the wealth effect headwinds shift a bit? Moreover, if it shifts while we all have jobs, isn’t that a good thing? If the jobs are there, then we arguably have a path forward.

So there it is Mr. Echo and Mr. Man Across the Way. Maybe it won’t be that bad. Maybe all this good news is just kind of . . . good news, and that while the Fed will continue to raise rates, it’ll do so at a slower pace, and the economy can slow itself a bit more, giving us time to adjust and work our way through our issues . . . at our jobs.

Maybe.

🦗🦗🦗🦗🦗🦗

“Did you just blurt that or blather it?” . . . the echo asks.

Probably a bit of both.

Here’s to a whole new year of blathering . . . Happy New Year.

Please hit the “like” button and subscribe below if you enjoyed reading the article, thank you.