Happy Hump Day! This will drop before the Federal Reserve Open Market Committee announces its decision on interest rates today. Prediction: Rates will remain unchanged. The Fed will be a bit hawkish however, about rate policy reminding everyone that they are poised, if necessary, to hike rates to fight inflation. Thus, the title for today – economics rollercoaster.
While not directly giving my age away while giving my age away, I studied economics when CPI included mortgage and various loan costs such as car loans. In 1983, the housing component of CPI changed from collecting data on what homeowners actually spend to buy and maintain their homes, to estimates on how much homeowners would have to pay to rent their homes from a hypothetical landlord. This “imputed rent” is used to estimate the inflation rate for owner-occupied housing. Housing is the greatest weighted component in the CPI calculation. For readers that have “geek” like tendencies like me, a paper on the CPI housing/shelter cost (formula) revisions is available here: CPI Housing Cost Revision
As we near the end of the first quarter of 2024 and begin the theatrics of a national election cycle, the economy becomes a must watch, at least for me. I always pay close attention to the economy but given the overall impact economic conditions will have on the election and the status of huge (and growing) deficits, entitlement programs such as Medicare and Medicaid, and the labor markets, all things very important to the healthcare industry, my focus will increase. I’m still waiting for one of the major candidates to present policy positions on the debt (approximating 125% of GDP, most ever since WW II), on the pending bankruptcies of Social Security and Medicare (without reform), and the rolling deficit spending that has escalated to a debt addition of $1 trillion per every 100 days (yep, each 100 days, we add an additional $1 trillion to the national debt). Simply carrying and paying for the deficit, as the cost for doing so grows via added interest costs, is inflationary. Private capital also becomes crowded out of the investment picture and today, given what the federal reserve is paying on bank deposits, lending has cratered leaving businesses and consumers alike, in a bind for access to credit (mortgages for example and longer-term credit facilities for businesses).
Gathering forecasts from various sources is an activity I undertake. I like looking at forecasts from the investment banks, rating agencies like Fitch and Morningstar, and of course, from the government, particularly the Federal Reserve. I would say that among the first quarter forecasts that I have analyzed, Morningstar’s has to be the most optimistic. For anyone interested, their first quarter “guess” is here: U.S._Economic_Outlook_Q1_2024 Within the next few weeks. I’ll match my thoughts to Morningstar’s and post what I think the economic results will be up to mid-year. For now, my comparisons to Morningstar’s outlook are below.
- Morningstar is more bullish on rates than I am, forecasting a downward trend that I don’t see until late in the year, if at all now.
- Morningstar is forecasting inflation to fall and stabilize in 2024 at 2%. Realizing that they haven’t seen recent data, I suspect that they would change this outlook. Inflation has trended up the last three months, and Brent oil is now approaching $90 per barrel and West Texas, $83 per barrel. Energy will no longer help in suppressing inflation, as it has. Further, we still have a national and state spending problem (see above regarding $1 trillion in new debt every 100 days).
- Morningstar is forecasting GDP growth to be equal to or modestly greater than inflation. The question that begs is how much of the GDP picture will be bolstered by government spending vs. private investment and spending. Stripping out government spending, I think the GDP could push near zero in terms of growth.
- The signs of a rapidly slowing economy are present, one that could in fact, dip into recession. Wages declined this past month. Consumer confidence is low while consumer debt is at an all-time high. Retail sales have bogged down. Housing remains “hot” as does food and now, maybe energy. Consumers that can’t consume much more than the basics, don’t add much if any measure, to GDP growth.
- My near-term picture, and I lived this reality once before, is looking more and more like stagflation. Stagflation is a condition that exists where inflation is higher than GDP growth by at least a point and unemployment is also high. Right now, the signs are showing as CPI is creeping back up, unemployment is ticking up as well and first quarter GDP trend looks to be below 2%, closer to 1.5%. I hope I’m wrong.
So, with all of this econ data, and results of late that feel like riding a roller coaster, Fed rate news forthcoming sometime today, Happy Hump Day! Good news? Spring is just a few days away!