This week on Inside the Economy, we dive into the current state of wage growth, job prospects, inflation trends, Federal Reserve activity, and emerging trade agreements. Wage growth, which experienced downward pressure following the Fed’s interest rate hikes starting in 2022, appears to be stabilizing. Currently, the average monthly wage per U.S. worker is around $7,000. How does this figure compare with wages in the E.U. and other nations? On the inflation front, the cost of borrowing (interest rates) exceeds the rate of inflation (CPI), a potentially positive signal for the economy. Is there mounting pressure on the Federal Reserve to cut rates this summer? Meanwhile, trade negotiations are gaining momentum. How significant is it for the U.S. to secure a balanced trade agreement with China? What elements of the recent E.U. deal stand out as particularly beneficial for the U.S.? And which other countries might be priorities in America’s trade strategy? Tune in to learn more!
Key Takeaways:
- Core PCE Inflation at 2.6% (YOY)
- 10-year bond yield at 4.37%
- ISM Services at 51.6
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Wages, jobs, inflation, stock market, that kind of thing. Right in the middle of a pretty interesting rally going on in the market today with some of the announcements of a few tariff deals, which we’ll get to in a minute.
Anyway, numbers are unexciting, certainly not dramatic. Initial claims aren’t going anywhere. ISM numbers are fine. Interest rates for the most part have stabilized in the very high likelihood that the Fed is not going to lower rates in June. Talk about that a little more later.
So the only thing that’s really going up and down dramatically is oil, and it’s mostly down. It briefly touched on $59 a barrel last week. We’re up in the low 60s. Jobless claims, you know, that’s the red. They’re doing fine. Very seasonal. And separations. Oh, planned layoffs and all the rest of that stuff. That’s kind of the thing of the past.
Right now everybody’s hanging on to their jobs and those that have good workers are hanging on to them. It’s a good time to do that. We don’t know who’s going to be not in the job market anymore. And the manufacturing, especially in the Midwest, more to the east coast, they’re hanging on to their people. That’s not bad news in the job market. The wage growth that was really killing people there for a little while has stopped almost growing. It’s just growing about inflation level right now for the most part. Three and a half, that kind of stuff. Some of that is on wage an hour.
The other side is, you know, salary, wages. It’s not nearly as painful as it was two years ago and it is mellowing. Quick reminder. Yes, the inflation of wages in the United States really do matter. It’s inflationary to the rest of the world because the workers here make significantly more than anybody in the world. Closest competitor is the EU. Not quite twice as much, but it drops off in a hurry.
So when the US worker makes a little more just to normalize the standard of living here, it hits a potential customer across the ocean. Hard part of the tariff deal. A lot of industries are adding jobs. This is the diffusion index.
So some of it is dispersed over some very wide styles of manufacturing. Very few services in here. This is manufacturing jobs could be anything from collecting trash to building wheelbarrows. But they’re not getting rid of people. They are slowly adding more jobs, mostly as a replacement. Even though there’s not a lot of retiring people out of the job market at this point. I always look at the national delinquencies. They are down first mortgages. The delinquencies are very low, bordering on historically low. And that has stabilized too. That wasn’t a little fluke.
People that own home are going to want to hang on to them. What we have now is what an economy should look like. The blue and the red. Well, that’s the CPI and the CPI core below the cost of money, which is white. We had that reverse for quite a while and it generated a couple of problems in the economy which have self been resolved if not expunged. And the Federal Reserve is not motivated or I think even remotely interested in changing this scenario.
There’s nothing for them to gain by lowering the cost of money from let’s call it four and a quarter to four. It might be a publicity move. I don’t think they care. There isn’t a lot of economic drivers right now. And the big issue is, gee, what are they going to do in June? Well, a couple of weeks ago there was almost a 50-50 chance they were going to lower rates at the meeting in June. Today I’d tell you 25% and that number’s dropping. The economy is starting to show.
Well, you remember we kind of had a low number here. This is GDP in the first quarter. Estimates for GDP were slightly down. There’s a tiny little red line all the way over there. Well, I think that’s going to correct up into positive numbers. And what I’m seeing already, the GDP numbers for the second quarter, they’re already one and a half, maybe close to two. Some of that is going to be data coming out of the first quarter numbers. And some of that was from the problems in California and the fires and collecting data and all the rest of that stuff.
The point is the chances of having a recession are very small. I’d give it 12% in the next 12 months. Very unlikely. And we’re certainly not in a recession now. You look at the stress and I’m a great fan of the Kansas City Financial Stress Index. I look at it all the time and it has just worked its way up to zero stress in the system. And zero stress means money is flowing where it wants to go. There are very few hindrances on people borrowing, paying back, refinancing, any of that stuff. It is a clean pipeline back and forth.
It just…. Not that I normally just look for problems, but I look for problems and there just aren’t any here in the system. Longtime fan of Warren Buffett, who really said he’s going to retire now, it’s too bad. He had a great, very clever valuation for years. It’s the Wilshire 5000 divided by basically the GDP annualized. And he sort of gave a valuation range on that and it dropped down and started some buying, started some algorithm buying in the S&P 500 that has since corrected, which we’ll get to in a minute. But happy retirement, Mr. Buffett.
The markets are back. The markets are back where they were literally a year ago. And they were in a good place. The S&P 500, the NASDAQ and the Dow were in a good place a year ago. It was matching earnings. It looked great. There wasn’t any drama. We had this little fluke. Well, the fluke done corrected, and here we are, we’re back where we belong and earnings are coming out supporting these numbers pretty well. I wouldn’t say there’s a lot of growth in the near future in the S&P 500. Certainly not spectacular growth because the earnings aren’t there and the prospects aren’t there.
We have to settle out and rearrange how money is being spent before the drama ever returns. Unfortunately, just even without today, which was a pretty good day in the market, the markets in Europe and the S&P 500, we’re back being expensive again. We got back to being expensive in a hurry and we’re there.
Growth. Yay! It’ll stay okay, growing along with earnings, but we’re not going to have another little bump, little camel hump like we did before for the foreseeable future. And don’t be surprised that this was another, another year of spectacular corporate buying their own stock back, about $630 billion of their own stock back for a variety of reasons, evaluation reasons, and a few other things. But. And two, they have the money. It’s also sort of indicative. They have a little confidence in what the valuation is going to be in the future. Not spectacular, but it certainly helps if you take that stock out of market, push your valuation up a little bit, which is what’s going on right now.
A couple of client questions. Gee, really? Is the tariff deal with China the most important thing out there? And the drama with Japan and all the rest of that stuff? Well, all of the Asia tariffs and all those economies. And over there on the far right, that’s China, Japan, Philippines, Indonesia, all of the South Pacific countries all put together. They are an important trading block.
It is sort of the low end manufacturing block. Shirts, manufactured doodads, some more sophisticated things from China, even more sophisticated things from Japan, kind of. But it isn’t the most important one. The important trading bloc we have is the EU. The entire European auto industry is there. The Germans, the Italians, the Brits, everybody. The French, the upper end, more sophisticated manufacturing. And even though most of them, it’s hard for them to admit that they are basically an exporting nation. The tariffs back and forth in the EU, airplanes, everything, there’s a lot more at stake. Well, not a lot more, but just fewer countries. Very important side of our import, manufactured imports, cars and airplanes.
This is going to be resolved. I think the EU stuff, there was great progress in China today. I think the stuff with the EU is going to be resolved by the end of June. And the other group that is yet to have any meaningful changes, that’s Canada and Mexico. Mexico will bounce around. Canada still has a lot of tariffs against American goods. Very broad, very detailed, I wouldn’t say insidious, but they are not making any moves on those at all.
And again, Canada, as far as the US is concerned, is 98% of their exports come to the US. It’s important that that get resolved. I’ll still go with the end of June for that. Okay. No recession. Fed’s not going to lower rates. There’s no reason to. The markets are kind of returning to normalcy and we’ll sort of see how quickly this tariff stuff gets resolved. Other than that, it looks pretty good.
Well, send questions along to info@shjwealthadvisors.com and I’m happy to deal with it.
Thanks for joining me!
I’ll see you next time!
