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Weekly Economic Perspective

Weekly Economic Perspective

March 15, 2024

Weekly Economic Perspectives is intended to share relevant market and economic news and data that we are observing, which help to frame our outlook.  We hope that you find this timely and interesting.


This week, we want to share a few slides related to things percolating in the broader economy, as well as items related to the jobs picture, which is driving a lot of the positive momentum in the economy.


The first chart below shows the Bloomberg Financial Conditions Index and the Federal Funds Target Rate.  The Financial Conditions Index is comprised of market based metrics that are meant to indicate either stress or comfort across asset classes.  A positive reading on the index indicates accommodative conditions, meaning that the conditions are supportive for stocks and bonds, and a negative reading on the index represents tightening conditions, which is generally leads to an environment where stocks and bonds struggle.  During much of 2022, this reading was negative, which explains the downward move that stocks had, coinciding with when the Fed started raising rates to combat inflation.  However, with the target rate for Fed Funds staying flat for the past 7-8 months, financial conditions have eased significantly, notably starting in November when the Fed announced that they were likely done raising rates and anticipated lowering rates at some point in 2024.  Stocks and bonds, in some instances, have reacted positively to easing conditions.

Source: Apollo


Consumer sentiment as indicated by the University of Michigan Consumer Sentiment Index has also been improving, markedly so over the past 5 months, coinciding with the easing of financial conditions outlined above.  The Consumer Sentiment Index measures consumers' expectations of the economy, as well as their sentiment of current economic conditions.


Source: Apollo

Businesses are becoming more confident on the outlook as well.  Below is the CEO Business Confidence survey, which measures the expectations that CEOs have for their businesses, as well as the economy over the next 6 months.

Source: Apollo


As previously mentioned, much of the strength in the economy, which has led to improved confidence and sentiment by consumers and businesses, has been driven by the strong labor market.  While the headline numbers are strong, there are several divergences in the data that refute the claim that all is well on the labor front.  

The first chart below shows the composition of jobs since March of 2022, which is when the data started to diverge.  The bulk of the increase in jobs has been part-time and multiple job holders, while full-time job creation has significantly lagged.  Another interesting point is that much of the participation in the newly created jobs has been from people not from the US.  Generally speaking, a robust job market is one which shows strong growth in full-time jobs, as those tend to offer more security and stability to employees, versus part-time jobs which tend to be less stable.


Source: Hedgeye Risk Management, LLC


The next chart shows the actual stated Non-Farm Payrolls that are reported to the US Bureau of Labor Statistics versus the Household Survey of Employment.  The divergence between the stated jobs numbers and the survey started in March of 2022.  Prior to that, both the reported payroll data from the BLS and the Household Survey tracked very closely together.  Is one of the data sources not telling the truth?

Source: Hedgeye Risk Management, LLC


Permanent job losses have accelerated and are tracking at nearly 23% on a year-over-year basis, meaning that nearly a quarter of all the jobs that are lost in the economy over the past year are not expected to come back.  Might this have something to do with the alleged AI revolution that we are in the midst of witnessing?


Source: Hedgeye Risk Management, LLC


In closing, while the economy seems to be modestly moving forward in a positive manner, with easing conditions, relatively stable growth and volatility around the pace of inflation staying low, this should bode well for stocks, credit and other securitized bonds, such as mortgage backed securities.  However, if the Fed decides to start cutting interest rates prior to having a high conviction that inflation is under control, we think that they run the risk of reigniting inflation, which is precisely what happened in the 1970's and 1980's.  The chart below shows the path of inflation from 2014 to today, overlayed with the path of inflation from 1966 to 1982.  The two data sets are highly correlated, so should the Fed make the same mistake of prematurely raising rates, as what happened in the 1970's, we have a fairly good guide of what we can expect.

Source: Apollo

Have a great week!


Gordon Asset Management, LLC Investment Policy Committee