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Inside the Economy: Labor, U.S. Debt, and Trade

By February 7, 2024No Comments

This week on “Inside the Economy”, we discuss labor, debt and where the strain is starting to show. The U.S. debt levels are trending lower after recent infusions during the pandemic and reaching pre Covid levels relative to GDP. Should debt levels be a top priority? Unemployment continues to stay in the 3% range. Will unemployment claims increase with a changing marketplace? Tune in to learn more!

Key Takeaways:

        • Core PCE inflation under 3%
        • ISM Manufacturing index nearing 50
        • 4th Quarter U.S. GDP grew at a 3.3% annual rate

Full Transcript:
Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. Couple of things. Cheery news for the labor and wage side of things and just touch on where the strain is starting to show just starting to show and talk about the global energy exporter that’s trying to get out of the business. Things are sort of good, fundamentally good. ISM survey, the manufacturing survey is just that close to 50. Anything over 50 is expansion in manufacturing and that’s a good thing. ISM services is in 53+ and it’s doing very well. Services are expanding and that’s not just inflation.

The fourth quarter GDP estimate, well that came in at 3.3. There are a lot of us hoping that would be ½, but 3.3. Consumer spending, country’s growing, corporations are coming around, not as lightning fast as a lot of people hope but moving along. The labor side of things, well some layoffs announced in technology around the country not significant. Really didn’t raise the unemployment claims very much. A lot of those people work from home. A lot of those don’t need another job. I mean the story goes on and on, but the strain in the labor department is supposed to be an integral part of slowing this economy down and it’s not there yet. Needs to be.

I was hoping that the unemployment rate which has been very low for the last year would at least creep up to 3.8. No, we didn’t get that. It needs to be in the low fours, and we’ve talked about that before. We’re not there. Interest rates have come down, meaning the price of all of the treasuries has gone up. Yields are down everywhere. The yield curb is trying to adjust itself and there’s a lot of speculation going on the bond market right now. There were people anticipating the Fed was going to lower rates last week. And now they’re thinking oh maybe March. No. No. No. No. No. There’s no way. There’s still inflation in the system.

Labor is not slowed. Spending is not slowed. The economy is moving along at a pretty good clip. They are not going to lower interest rates while we’re doing this. That would just bring inflation back and exacerbate the cycle we’ve been in for the last 45 years. Oh, peak trough, oh we went too far. We got to stop so we got to take money down to free. Well, you know the routine. This is an opportunity for them to get away from 5/4 cost money to 4, 4/3 and then 3, 3/4 and leave it there. Don’t go down to zero. We’ve talked about that too much. Anyway, numbers are pretty good for wage an hour. What has changed though is basically here we’ve been following quits. Boy, that was used to be popular, and layoffs used to be nonexistent that has changed.

Quits has come way down. Layoffs perked up a little bit. You do a little math there, just division and you get an idea of the power the labor market has. When that chart comes down, that means there’s less power in the labor market. People are hanging on to their jobs or getting two jobs. They’re not quitting thinking it’s easy to get another one. So, that is indicative that the labor market is getting weaker. It’s been very strong. They quit; they go else it’s easy to get another one that’s kind of changing right now. That is a strain that’s building into the labor market. That’s the only candidate right now to slow spending down, take inflation out of the system, make the Federal Reserve happy. Let them move forward.

Housing is not going to do it. We have another layer of new single-family homes in the market and another layer of low-income affordable income buildings coming up in the market. It’s not slowing, and the real estate single-family resident market is not collapsing. The only place they’ve adjusted prices significantly was in an extremely overheated market, Austin, Texas. Everybody else, well, they’ve adjusted for 5%. So, we’re not going to get a lot of help slowing the economy down in the residential real estate market and there’s a lot of talk about all the drama in the commercial real estate market. Well, we’ll see how that unfolds but it’s not going to be as dramatic as you hear about.

The stock market has been doing great. S&P 500, all of them. It’s gotten a little bit ahead of itself. Don’t be surprised if in the next week or 10 days, we’re down 3% or 4%. We’re ahead ourselves 3% or 4%. We’re not going to get great earnings, reported earnings till the second quarter. We’ve known that for a while. The earnings, everybody’s just convinced that gee, high single digits isn’t enough. That’s considered subpar now. They want growth in double digits which is what we’re liable to get. So, Corporate America is not slowing down. It’s doing fine. Just let the market take its pace.

A couple more questions and I know we’re going to start into the political fray even more so. Well, we have already. Questions come up about what really is the total debt of everybody, state and local government, federal government, individuals, banks, non-banks. Well, there it is. It’s about $92 trillion dollars. Don’t ever look at that number in isolation thinking it means anything, it doesn’t. It only means something when you compare it to another number that grows with it. If this was an individual, you’d compare their debt, their liabilities to their assets.

Well, if you got $5 dollars in debts and $10 in assets, you’re okay. A lot of these entities and the one that gets the most press is the federal government. Gee, look at the debt it has, some most of this COVID. Look at the debt it has. Well, 2/3s of that debt is in treasuries and anyone watching this video has got money in treasuries. So, it’s actually a pretty good asset. It’s our money. The world’s money. It’s the bank’s money, and the rest of these state and local governments. Well, they don’t have a lot of debt and it’s difficult to determine what the value of state and low local assets is.

How valuable is a bridge? Well, the bridge over I-25 on Spear Boulevard is pretty valuable. Just hard to put a number on it. Federal government, well you get the message. It’s not about assets, it’s basically about how debt is growing compared to GDP. That’s the one that counts. The peak here in the middle was 2008 debt was very high to GDP and growing quickly because we had a bunch of hollowed out real estate deals, empty houses, promises to pay with no income, you remember the routine and we had to really squeeze and break a bunch of bubbles to clarify that. And then debt started coming down. It looked better and it got even look better even when money was free, which it’s been for a while. But then bam, COVID, a lot of stimulus money. Again, it was probably a good idea at the time, but you look at the curve, let’s call it. And Feds are doing a pretty good job pulling that money out of the system.

They are getting rid of their assets, pulling the money out of the system, and it is going to be reasonable to say the debt to GDP is not a significant number. It is going to bounce around a lot, lot of finger pointing, but it’s not dramatic 330% or so percent of GDP total debt is not out of line. China’s much worse than that. Japan is way worse than that and as far as United States ability to pay, it’s not bad news. Some of the details on that are here. It is the Fed putting money in, the Fed pulling money out. 3 or 4 years down the road it’s very likely that the Fed is going to continue to do that and that the biggest plow pushing inflation out of the way is taking the money out of the system. Putting money system causes inflation and a number of other factors but taking it out slows it down and that’s where we are.

So, big oil energy exporter. Well, it’s United States. All the tragedy going on in the Middle East would historically have brought oil into the $100 barrel or more and lets $77. Not a lot of drama in the market. United States is importing, and this is imports. Way less, way less. The US is still the biggest oil producer on earth and natural gas. I don’t think we want to be in that business but we’re in it right now. Obviously, the people that need it the most and it’s a new trading partner for us.

Normally, our trading biggest trading partners have always been Canada and Mexico and a little bit of China but now, top of the heap, European Union. They need energy. They need LNG. They need that than anything. We get cars from the Germans, we get reactor pieces from the French, and all the rest of the stuff standard. We send Europe Buicks and a few manufactured things and some plastic so on and so forth. But a lot of liquefied natural gas, which they’re not buying from the Russians anymore.

I don’t believe for a minute we want to be in that business long term, because there’s a lot of people that need the money that need to be in that business. Half of Africa, Israel, Turkey, Morocco, everybody in the Mediterranean wants to get in the natural gas business and feed Europe. Great, let them. Of all the industries that aren’t doing real well earnings wise, it’s big energy. It’s not profitable. It’s expensive. It’s great that we are able to put our act together quick enough to replace the energy losses with this Russian thing. But we’re not going to be there for a long time.

Anyway, so where we are now is it’s kind of goldilocks, but the strain is showing. The prices are grinding down working people. It’s going to slow their spending. It’s going to change their attitudes and like I’ve mentioned before it’s going to be part of the horse manure tossed around in this political arena. Oh, I got laid off. The economy’s slow and it’s got to be your fault. You know what’s coming? Just plan on it.

Economy underlying is doing very well. It’s perfectly positioned. Slow down a little bit. Get unemployment. Let’s call it let’s be generous and say 4 & 1/2. The federal lower, three quarters of 0.1 year, a full point the next get us down to like 3 & quarter. Bingo. Stay there, it’ll be great.

That’s all for now. We’ll update things as new evidence appears. As always, you have a question, send it along to info@SHJWealthAdvisors.com, and thanks for joining me.

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