🧭 The Weekly Scoop

Hey friends, happy summer Friday. Welcome to our 234 new subscribers!

Here’s what you need to know this week.…

It was a short week, but it had a lot of personality.

The debt ceiling is pretty much taken care of, and we can soon put the whole political sideshow behind us.

But without the political drama, we’re back to the will-it, won’t it recession debate. The jobs market is still looking strong. The clear shifts the week came from corporate announcements. We’re finally heading into the turning point of the inflation vs. consumer vs. corporate profits battle.

The big concern with inflation is not that price tags grow. They’ve been growing forever. The thing economists and investors really care about is consumption. What makes people stop buying? Consumers power two-thirds of the economy, so recessions really hit when shoppers cut back.

Corporations will raise prices as much as they can, whenever they can. The only thing keeping costs down is our willingness to buy, which is mostly determined by how much faster costs rise relative to our incomes. So while the last few years have been unusual, the economy has followed a pretty rational price cycle.

1. Business supplies, materials, and workers got more expensive (harder to produce and less available).

2. Companies raised prices to cover their higher costs.

3. Companies took advantage of the excuse that everyone was raising prices, so why not raise prices a little extra?

4. Consumers had a bunch saved, and wages went up, so they kept buying.

5. Corporate expenses stopped climbing as supply chains cleared up and wage costs slowed, so corporate profit margins increased.

6. Prices kept rising faster than wages, while consumers spent their extra savings, and borrowing got more expensive.

7. Consumers started cutting back on big-ticket purchases, focusing budgets on necessities and stuff they really wanted, like travel and experiences.

Now, we’ve reached the turning point:

1. Will shoppers start cutting back completely, or will they become comfortable with the price tags now that they’re not rising as noticeably?

2. Will corporations be forced to discount to compete for shoppers, eating into profitability and thus their stock value?

3. Will cleared-up supply chains, layoffs, and cost-cutting be enough to keep corporate profits rising if sales shrink?

Remember, the biggest driver of the stock market is corporate profits.

Corporate reports from retailers like Victoria's Secret, Advance Auto Parts, and Foot Locker made it clear that the discounting to compete for sales has already started in some areas. But service sectors like restaurants and airlines are talking about record sales. Card processors like Mastercard and Visa, along with banks, cited pretty healthy consumer spending overall this week.

So the consumer is still spending - not quite as much as in the boom days, but it hasn’t dropped off. As business costs cool off, it will be up to the companies to win customers. We’ll see who the winners and losers are.

🐻 Reasons to be pessimistic:

• Wages aren’t keeping up with living costs. The Bureau of Labor Statistics reported average hourly compensation rose only 3% in the 12 months ending March 31st, well below the pace of inflation. Real wages, adjusted for inflation, have declined -2.6% in one year, meaning the money we’re paid buys less stuff. So we’re actually earning less value for our work. The same report showed employees are working 2.2% more time and creating 1.4% more output than a year ago.

• China's economy is not snapping back as quickly as expected from the recently-lifted covid restrictions. China’s factory activity, measured by the official manufacturing purchasing managers' Index, shrank unexpectedly in May. Last month, imports contracted sharply, and retail sales and industrial output didn’t jump as much as economists expected.

• Living costs are still rising. Policymakers’ preferred inflation gauge, the Commerce Department’s core Personal Consumption Expenditures (PCE) Price Index, climbed 0.4% in April from spiking energy costs and higher services costs. Core living costs are still 4.7% higher than a year ago.

• Home prices trended higher in March. The S&P CoreLogic Case-Shiller US National Home Price NSA Index climbed 0.5% in March from February, the second straight month of gains. The Commerce Department last week signaled a drop in prices for brand-new homes in April, so it might be short-lived.

🐂 Reasons to be optimistic:

• Hiring picked up in May. The Labor Department reported US employers added 339,000 new workers in May and revised its April jobs growth up to 294,000. A report from payroll service provider ADP showed private-sector companies expanded their workforce by 278,000 people last month. Wages aren’t growing as quickly. [🤓]

• Layoffs are still pretty low. The Labor Department reported initial jobless claims ticked up slightly to 232,000 last week, still near pre-pandemic averages. Weekly layoffs haven’t risen much in the past 18 months. [🤓]

• There are still a ton of job openings. The Labor Department’s Job Openings and Labor Turnover Summary reported an increase in total job openings in April to 10.1 million. That’s millions higher than before the pandemic, showing companies still don’t have enough workers to meet demand.[🤓]

🏡 For your home

6.9% = Average 30-year mortgage rate

That’s up from 6.5% a month ago and up from 5.5% a year ago. _{Mortgage Bankers Association, 5/25/23}

$388,800 = Median existing home sales price

That’s up from $375K a month ago and down from $396K a year ago. _{National Association of Realtors, 4/30/23}

💼 For your work

232,000 = Layoffs Last Week (Initial jobless claims)

That’s up from 230K the week before and in line with pre-covid averages. _{Labor Dept., 5/25/23}

339,000 = New jobs added last month

That’s up from 294K the month before and above pre-covid averages. _{Labor Dept., 5/31/23}

3.7% = Unemployment rate

That’s up from 3.4% the month before and still near the lowest rate in 50+ years. _{Labor Dept., 5/31/23}

10.1M = Available jobs

That’s up from 9.7M the month before and well above pre-covid averages of ~7M. _{Labor Dept., 4/30/23}

Who’s hiring: Retail, healthcare, and transportation

Who’s firing: Manufacturing and business services

👜 For your wallet

4.9% = Cost of living increase (1-Year Inflation)

Living costs are 0.4% higher than the month before. Normal inflation sees prices rise by 0% to 0.2% per month, 1-2% per year. _{Bureau of Labor Statistics, 4/30/23}

7.1% = Groceries cost increase (1-Year inflation)

Groceries are -0.2% less expensive than a month ago. _{Bureau of Labor Statistics, 4/30/23}

$3.57 = National Gas Price/Gallon

That’s down from $3.61 a month ago and down from $4.67 a year ago. _{AAA., 6/1/23}

💰For your savings

0.40% = Average interest banks pay on a savings account_{, FDIC, 5/15/23}

5.25% = Interest rate banks earn on their savings accounts_{, Federal Reserve, 5/3/23}

The Federal Reserve has raised baseline interest rates from 0% to 5.25% in the past year. Make sure your bank is paying you higher interest on your savings.

Find a high-yield savings account.

💸For your investments

+2% = This past week’s change in the US Stock Market

+1% past month, +2% past year, and +55% over 5 years. _{S&P 500 Index, 6/1/23}

3.60% = The yield on the 10-Year US Treasury Bond

Yields are -6% this past week, +5% this past month, and +24% over the past year. _{US Government Bonds, 6/1/23}

+2% = This past week’s price change for Bitcoin

-4% in the past month and -10% in the past year. _{Coinbase, 6/1/23}

+3% = This past week’s price change for Ethereum

+2% in the past month and +2% in the past year. _{Coinbase, 6/1/23}

Employment reports

People watch four main reports to understand trends in the labor market. 

The main "jobs report" comes from the US Bureau of Labor Statistics on the first Friday of each month. It highlights the unemployment rate, new jobs added, and wage growth.

The Labor Department also releases the Job Openings and Labor Turnover Survey (JOLTS) each month but on a one-month lag. That report helps us understand how many open positions there are, how many people quit their jobs, and how many were hired.

There's also a monthly private-sector survey from payroll services company ADP that doesn't include government jobs and the weekly initial unemployment claims (a proxy for layoffs) report from the Labor Department.