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The Phillips Curve Ball

The rates of unemployment and inflation aren’t always inversely correlated, as the Phillips Curve model posits. Historically, they have often been; in recent times, not so much. The problem with the model is that it doesn’t account for the effects of productivity growth on price inflation. … The high rates of goods inflation experienced after the pandemic proved to be transitory, as we had anticipated. Services inflation has been more persistent but is moderating too. Pulling both down are assorted disinflationary forces. … Consumer sentiment fell in early June. We’re not sure why exactly but suggest some possibilities related to inflation, the labor market, and the uninspiring presidential race options.
June 17, 2024

2024

The Phillips Curve Ball

The rates of unemployment and inflation aren’t always inversely correlated, as the Phillips Curve model posits. Historically, they have often been; in recent times, not so much. The problem with the model is that it doesn’t account for the effects of productivity growth on price inflation. … The high rates of goods inflation experienced after the pandemic proved to be transitory, as we had anticipated. Services inflation has been more persistent but is moderating too. Pulling both down are assorted disinflationary forces. … Consumer sentiment fell in early June. We’re not sure why exactly but suggest some possibilities related to inflation, the labor market, and the uninspiring presidential race options.
June 17, 2024

To Tell The Truth

How the labor market is doing is critical to the Fed’s setting of monetary policy given its dual mandate to steer the economy away from both too-high unemployment and too-high inflation. But gauging how the labor market is doing can be a stumper: Two different employment indicators point in different directions. … Less ambivalent are the indicators of wage inflation: All point to continued moderation. … We believe the labor market has been normalizing to its pre-pandemic state and remains robust. But what the Fed makes of the labor data and may do in response is another stumper. We’d like to see it keep monetary policy as is for now.
June 10, 2024

Earnings Tales

Our economic and S&P 500 forecasts are underpinned by our forecasts for corporate revenues, earnings, and profit margins. We often compare them to industry analysts’ consensus estimates for S&P 500 companies in aggregate and how they change over time in response to earnings reports. Today, we illustrate this process by showing how data from Q1’s earnings season have fed into our own annual and forward EPS estimates, which multiplied by target forward P/Es produces our S&P 500 targets for year-end 2024, 2025, and 2026 of 5400, 6000, and 6500. Notably, Q1’s reported revenues and earnings edged down from their recent record highs, but analysts’ estimates for the future rose, showing that the quarter’s results were much better than expected.
June 3, 2024

Will There Be Peace In Our Time?

Geopolitical events can shake up the stock market, sometimes providing buying opportunities. The current geopolitical landscape is unsettled and unsettling, with potentially seismic ramifications on several fronts and lots of uncertainties: Is Putin’s call for negotiations with Ukraine a nonstarter? Is it even real? Are US efforts at brokering peace in the Middle East progressing toward that end or is that notion wishful thinking? Does the heightened pitch of China’s barking at Taiwan indicate a bite is imminent? Will G7 nations’ efforts to insulate their supply chains and economies from the harmful effects of China’s trade policies work? Is the US’s open-border policy a terrorist attack waiting to happen?
May 28, 2024

Dow 40,000 & Counting

Boomer-led households’ collective net worth has skyrocketed 19-fold since 1990. As the generation has lived long and prospered, so has the stock market (rising 40-fold over their adulthood) and the US economy (with nominal GDP up eightfold since 1982). … Looking ahead, our Roaring 2020s scenario assumes faster-than-average growth for S&P 500 earnings, GDP, and productivity. Faster productivity growth should depress unit labor costs and inflation in a process that began last year. More of the same, as we forecast, should boost profit margins to new record highs. … Also: Just ignore the doomsaying LEI. … And: China’s latest attempt to hoist its economy.
May 20, 2024

Are Consumers Cracking?

Today, we look at cracks in the story that consumers are cracking. Crack proponents expect consumers to start saving more and spending less because they’ve depleted their excess saving from the pandemic years. We expect personal saving rates to stay low and consumer spending to stay high as Baby Boomers, done with paying college tuitions and mortgage loans, spend their sizable nest eggs. (Many apparently are buying big-ticket items such as light trucks, for cash!) As long as consumers’ purchasing power keeps rising along with employment and real wages, our money is on the consumer. … While consumers remain in good financial shape, inflation has depressed consumer sentiment, particularly at the gas pump.
May 13, 2024

Almost ‘Everything’s Coming Up Roses’

Investors in both stock and bond markets are suddenly blooming with optimism. Both markets rallied on Friday’s (mostly) positive employment report, including yet another sub-4.0% jobless rate and despite some negatives in the report. Stoking the optimism, perversely, has been economic news suggesting weakening: Cheery investors have focused not on that but on the potential ramification of it, that interest rates won’t be kept higher for longer after all. Both good and bad news are being met as great news! … One fact that indeed warrants optimism: The Fed’s 2.0% inflation target has been reached by one relevant measure.
May 6, 2024

Stagflation? Not!

One quarter does not stagflation make. True, the March quarter’s real GDP growth rate was down from the December quarter’s, while inflation was up—a combination that calls to mind “stagflation.” But the current economic scenario is nothing like the stagflationary environment of the late 1970s, when the combination of anemic GDP growth and out-of-control inflation crippled economic activity. … Today, we look at data confirming that economic activity is continuing apace—with consumers consuming, housing recovering, and businesses investing—and that PCED inflation remains on a moderating track, within our target range for the year.
April 29, 2024

House Of Mirrors

Today, we rant about rent and the housing market. Like a fun house mirror without the fun, several housing-related forces are distorting economic activity. There’s the distortive way rent inflation is measured in the headline CPI; if the BLS’s new All Tenant Rent index were used instead, the Fed would be fighting too-low inflation! … There are the forces messing with supply and demand, depressing the supply of homes for sale (Baby Boomers aren’t moving) and elevating demand for rental units. … Housing affordability has suffered as a result, with home prices up 46% just since the lockdown ended. The good news is that new rental supply is ameliorating rent inflation.
April 22, 2024

Inflation: The Ugly, The Good & The Bad

As the war in the Middle East escalates, it could send the oil price flying toward $100 per barrel and wipe out our expectations of continued moderation in US inflation (notwithstanding March’s anomalous CPI). … Barring that ugly scenario, our inflation outlook is good, with continued moderation to the Fed’s 2.0% target—which, notably, we wouldn’t view as justifying Fed easing this year. … But there are flies in the ointment: A few pesky elements of the inflation picture aren’t easily subdued, e.g., rent, health insurance, and auto-related costs.
April 15, 2024

Hooray! The Recession Is Over

There was no recession last year, but the widespread expectation of one depressed certain economic activities, like hiring. With that depressant now lifted, several labor market indicators shot to record highs in March. … Consumer spending has been strong, especially by Baby Boomers and especially on services, keeping demand for service workers robust. Strong employment and wage growth in turn have boosted consumer spending. … Real average hourly earnings has resumed its long-term uptrend after stagnating during the pandemic years. … Also: A look at recent years’ heavy influx of on-the-books foreign-born workers.
April 8, 2024

The Amazing Flying Machine

The US economy is flying high and should continue to do so. It has defied the past two years’ widespread expectations that it would land hard or fall into recession. In fact, last year’s real GDP growth of 3.1% matched the 48-year average. Fiscal stimulus has helped, but the major engine has been robust consumer spending as Baby Boomers spend their wealth. With consumption per household near its record high, Americans have never been better off. … Corporate America is thriving too, with record cash flow, capital spending, and profits. … Plus, inflation by some measures is at the Fed’s 2% target.
April 1, 2024

Another Post On Our Post-Modern Monetary Theory

Is the “Fed Put” back? Might the Fed’s assurances that interest rates will be brought down this year (as long as inflation behaves as expected) fuel irrational exuberance among investors? And what if interest rates really don’t need to come down, because the notion that they do rests on a faulty premise—the “long and variable lag” thesis? Our Post-Modern Monetary Theory suggests that monetary tightening doesn’t cause recessions because of a lagged demand-choking response of the economy. Tightening usually causes recessions when it triggers financial crises that turn into credit crunches that bring on recessions. That sequence of events is unlikely now that the Fed knows how to play Whac-A-Mole in the financial markets.
March 25, 2024

Post-Modern Monetary Theory

Unlike in January, investors’ rate-cut expectations now appear to be in sync with FOMC members’ projections. Both seem to be anticipating two or three 25-basis-point cuts over the coming months. … Whether the apolitical Fed might time its rate cuts with any consideration for election-year politics is unclear, but we list some political considerations that it might be weighing if so. … Also: We explain the theoretical framework we use to forecast the economy. For lots of reasons, we are not proponents of Friedman’s Monetarism or Kelton’s Modern Monetary Theory, favoring instead what we call “Post-Modern Monetary Theory.”
March 18, 2024

‘Pent-Up Exuberance’

Is Bostic on to something? We think the Atlanta Fed president is right to warn about “pent-up exuberance,” the business community’s readiness to pounce on opportunities en masse the minute interest rates drop. Demand then could surge, triggering resurgent inflation. The Fed should be wary of tripping that wire by lowering interest rates too soon. … Yet Fed Chair Powell sounded ready to ease soon last Thursday. We don’t think the recession threat (of keeping rates higher for longer) is as worrisome as the pent-up exuberance threat (of easing too soon). … Our Roaring 2020s scenario is right on track. Fingers crossed the Fed doesn’t mess with success.
March 12, 2024

The Elephant (& The Donkey) In The Room

Bouts of geopolitical or domestic political strife usually don’t derail the US stock market. Investors tend to divorce politics from their decision making, counting on wars to end and gridlock to keep regulation-happy lawmakers in check. Only when geopolitical problems disrupt supply chains, trade, and global energy markets or when domestic partisanship prevents the government from functioning do these considerations matter to companies and their investors. We’re closely monitoring these risks and think it’s time for a heads-up: They could cloud our optimistic Roaring 2020s outlook in 2025. … For now, no such concerns are impeding the bull market; it’s currently thriving by multiple measures.
March 4, 2024

The Roaring 1990s: Déjà Vu All Over Again?

Many of this decade’s economic and financial market trends bear a striking resemblance to those of the 1990s. That was a decade in which a stock market meltup preceded a meltdown (in the early 2000s), so monitoring meltup indicators today is well worthwhile. Now, as then, stock market strength is translating to significant wealth effects that should keep the economy resilient and monetary policy restrictive for longer. Today, we highlight the two periods’ similar economic conditions (comparing the trajectories of real GDP growth, productivity growth, inflation, unemployment, and the federal funds rate) and financial market paths (bond yields, the stock market).
February 26, 2024

Earnings Bullseye, More Bullish Targets & More On Meltups

Today, we analyze the analysts, noting that they tend be influenced by stock market meltups—thus fueling the meltups—and during meltups tend to raise their long-term earnings growth rates unrealistically high. Nevertheless, we explain why we follow their forward earnings, revenues, and profit margin projections closely. We also give our projections for the S&P 500 companies’ operating earnings, revenues, profit margins, as well as the index’s the forward P/E and our S&P 500 price targets now through 2026, when we expect the S&P 500 price index to reach 6500.
February 20, 2024

Why Were Economists So Wrong?

High inflation rarely has been tamed without precipitating a recession. Few economic prognosticators thought it could be done. Yet the Fed has steered inflation down toward its 2.0% target while allowing the US economy to fly, avoiding a hard landing. Today, we look at the projections of economists who expected a hard landing of the economy and why their trusty models and indicators failed them.
February 12, 2024

Productivity Is Roaring Back

The pandemic distorted the economy in many ways, including derailing the productivity boom that we’d been expecting would characterize this decade—our Roaring 2020s scenario. That boom now may be back on track; productivity growth was well above the historical average during the past three quarters. If so, the ramifications for economic growth would be profound, as GDP growth is a function of labor force growth plus productivity growth. … We track the impact of productivity growth by monitoring inflation-adjusted wages, unemployment, unit labor costs, and price inflation rates. … Also: Productivity seems to be on the mind of Fed Chair Powell.
February 5, 2024

Fairy Tales Can Come True

It doesn’t take a recession to bring down inflation to the Fed’s target! “Immaculate disinflation,” widely dismissed as a fairy tale, has come true. In fact, the current economic picture is enchanting, with GDP growth remaining robust, inflation moderating, unemployment remaining low, and consumer spending holding up even as pandemic-era saving depletes. The fairy dust that’s enabled this ideal economy: productivity growth, three quarters strong and counting. … Fed Chair Powell now faces the high-stakes decision of when to lower the federal funds rate. Too soon risks stimulating asset bubbles. Too late risks overly restrictive real interest rates now that inflation is down.
January 30, 2024

Let’s Party Like It’s 1999!

Now that investors’ recession fears have abated, they’re focusing on company fundamentals again, so good corporate news is having a stronger bullish impact. Additionally, investors are excited about the potential of AI and the prospect of Fed easing. The possible result: an exuberant meltup phase, which might already be under way and might become irrational. … Unless Fed Chair Powell stresses that he’s in no rush to ease, a speculative bubble could inflate, funded by money moving from interest-paying vehicles into stocks and bonds. … Also: The economy is nearly as good as it gets. Unemployment, inflation, and gas prices are down; consumer sentiment and retail sales are up.
January 22, 2024

Powell’s Inflation Nightmare

The runaway inflation of the 1970s was whipped only after Paul Volcker took over as Fed chief, doing the deed but not without precipitating a recession. Powell’s efforts to engineer “immaculate disinflation,” lowering inflation without a recession, have gone well so far, as we’ve been expecting. But the specter of 1970s inflation’s twin peaks must keep him up at nights now that Middle East hostilities raise the risk of resurgent energy inflation. … Globally, inflation has been dropping, with China’s economic woes effectively working to export deflation to the rest of the world. But war in the Middle East could jeopardize that scenario if it disrupts oil supplies.
January 16, 2024

The True Story About Long & Variable Lags

The point between Fed tightening and easing is a good time to reconsider the widely accepted long-and-variable-lags theory of monetary policy. Is the economy still vulnerable to recession from the lagged effects of the 2022-2023 tightening round? We don’t think so. The markets have already started to ease, which should offset some lagged tightening effects. Furthermore, lagged tightening effects don’t invariably cause recessions. Our work shows that recessions result when tightening rounds cause credit crunches, not when they merely tamp down demand, and that credit-crunch precipitated recessions descend quickly, not with lags. … Also: Recent unemployment stats support rising consumer spending, in our view.
January 8, 2024

A Dozen Reasons To Be Bearish In 2024 (Not!)

How likely is the stock market to have a down year in 2024? Since down years tend to be associated with recessions, and since a recession is unlikely now that inflation has been approaching the Fed’s target, and since the Fed looks more likely to ease than not, it’s hard to see the stock market ending 2024 lower than it began. … Our last Morning Briefing of 2023 provided a dozen reasons to be bullish in 2024. This first one of the new year provides a dozen reasons not to be bearish. … Also: Dr. Ed reviews “Maestro” (+ +).
January 2, 2024

2023

A Dozen Reasons To Remain Bullish In 2024

The bears who still expect a recession base their arguments on historical precedents: At times in the past when economic indicators were flashing the signs they are today, recessions occurred. But we see good reasons not to apply past rules of thumb to the current set of circumstances. Moreover, our Roaring 2020s thesis that widespread adoption of new technologies will set off a productivity boom is unfolding. As a result, we’re bullish on the outlook for the US economy and stock market. Today, we present the bears’ talking points and our rebuttals, including 12 good reasons for optimism as we enter 2024. … Also: Dr. Ed reviews “Archie” (+ +).
December 18, 2023

Hard Luck For Hard Landers

The economy has proven resilient, defying all the reasons it shouldn’t be, to which diehard hard landers still cling. We expect that it will remain resilient and that inflation will continue to fall to the Fed’s target (a.k.a. “immaculate disinflation”). In this scenario, the Fed won’t be rushing to ease and won’t ease by much. The Fed’s policy stance is perhaps better cast as “normalizing” than tightening that requires undoing. Labor market supply and demand are coming into better balance, as the Fed would like, though November employment data attest to the labor market’s continued strength. Also: What to make of the fact that GDI is weaker than GDP.
December 11, 2023

Ho! Ho! Ho!

The stock market’s Santa Claus rally has been turbocharged by a rallying bond market, subsiding inflation, lower oil and gasoline prices—in turn fueling consumers’ purchasing power—diminished fear of the Fed, and China’s economic weakness, which lowers the prices Americans pay for goods imported from there. … Jamie Dimon is right to warn that geopolitical dangers are great, but we don’t ascribe to his view that inflation remains troublesome, the Fed might tighten more, and the consumer’s strength likely isn’t sustainable. We think the economic evidence suggest otherwise on each score. … More good news: The sticky services inflation rates that have concerned the Fed are coming unstuck.
December 4, 2023