🧭 The Weekly Scoop

Hey friends, I hope you’re enjoying the sweet bliss of a Friday before a long weekend. Summer is here! Markets are closed on Monday, so we’ll be back with our regularly scheduled scoops on Tuesday.

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

The market had another meh week this week, with investors still floating around looking for a strong story to tell. The clear narrative is that the economy is slowing down from its over-stimulated recovery and returning to a more normal pace. The unclear part is whether that slowdown turns into a crisis. Corporate reports this week seem to show that this challenging transition will separate the good companies from the bad, rewarding operational excellence and cost efficiency.

This week’s big unknown is the debt ceiling. [🤓] The President and House Speaker seem to be moving closer to a deal, but that still has to be reviewed and approved by both the House and the Senate. While we all want to assume that our public servants are not irresponsible enough to push the country into dramatic financial uncertainty, it's a little concerning that the headlines and comments seem to be focused on diminishing the risks of breaching the projected "X Date." Very few, if anyone, actually knows what could happen, and the best-case scenario seems to be something akin to a government shutdown that freezes core support and infrastructure programs for millions of Americans. The worst-case scenario could look something more like a global financial crisis. Neither sounds good. So while we’re in the same camp as everyone else, optimistically assuming there will be a resolution in time, rational and expedient aren’t always the most appropriate adjectives for our government.

So what are they even arguing about? Well, the President wants to spend the money Congress already approved, and the House Speaker wants to cut back that spending. The negotiations seem to be specifically focused on cutting non-defense discretionary spending - things like education, environmental protection, domestic law enforcement, and civilian infrastructure that make up less than 15% of the total budget. The White House says cuts there would impact those programs significantly but not have a huge impact overall. There doesn’t seem to be any discussion of higher taxes, cutting defense spending, or addressing the biggest growing spending categories: medicare and social security.

Hopefully, they’ll have a deal figured out by the time you’re reading this. If not, we’ll have to hope for the best next week. Beyond the debt ceiling drama, next week will be a big one for jobs data. We’ll get a pulse on hiring, firing, and wages.

🐻 Reasons to be pessimistic:

• President Biden and House Speaker McCarthy still have not negotiated a deal to raise the limit on the country’s borrowing. Treasury Secretary Yellen warned the country could run out of money by June 1st, and any deal would still have to be approved by the House and Senate, who are about to break for Memorial Day Weekend.

• Economists say we might already be in a recession. The Conference Board’s Leading Economic Index fell for the 13th straight month in April, signaling a worsening economic outlook. The group predicts a decline in economic activity starting this quarter, “leading to a mild recession by mid-2023.” Since there are only five weeks left until mid-2023, they’re saying the recession might have already started. [🤓]

• Rising mortgage rates are deterring home buyers. The Mortgage Bankers Association reported a 4% drop last week in new home purchase applications, now down 30% from a year ago. The average 30-year mortgage rate is down from its 7% peak but has started climbing again, now 6.7%.

• High mortgage rates are also keeping sellers on the sidelines. Homeowners are reluctant to give up their existing low-rate mortgages. Homebuilder Toll Brothers said roughly 35% of homes currently for sale are newly constructed, more than double the historical proportion.

• Home sales have stalled. The National Association of Realtors reported pending home sales stayed flat in April at the lowest level since December. Low home supply and low affordability have scared away buyers.

• US economic growth slowed in the first three months of the year. The Commerce Department reported real gross domestic product rose at an annualized rate of 1.3% in the first quarter, slower than the 2.6% growth rate for the fourth quarter.[🤓] Consumer spending, which powers about two-thirds of the economy, stayed pretty strong, despite higher living costs. Businesses invested in less equipment and machinery. Spending on home construction continues to slump.

🐂 Reasons to be optimistic:

• Layoffs have been low this month. The Labor Department reported initial jobless claims ticked up slightly to 229,000 last week but also revised numbers from earlier in the month downward. Apparently, the big spike in layoffs a couple of weeks ago was driven by fraud. Officials revised the layoff count for two weeks through May 13 downward by a combined 50,000 claims. Massachusetts found 171,000 false claims over three months. Weekly layoffs are still at or below pre-pandemic averages.

• Business activity picked up this month. S&P Global’s Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to a 13-month high in May. Businesses received more orders, hired more people, and reduced costs, particularly in the services sector.

🏡 For your home

6.7% = Average 30-year mortgage rate

That’s up from 6.4% a month ago and up from 5.5% a year ago. _{Mortgage Bankers Association, 5/18/23}

$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

229,000 = Layoffs Last Week (Initial jobless claims)

That’s up from 225K the week before and in line with pre-covid averages. _{Labor Dept., 5/18/23}

253,000 = New jobs added last month

That’s up from 165K the month before and slightly above pre-covid averages. _{Labor Dept., 4/30/23}

3.4% = Unemployment rate

That’s down from 3.5% the month before and the lowest rate in 50+ years. _{Labor Dept., 4/30/23}

9.6M = Available jobs

That’s down from 10M the month before and well above pre-covid averages of ~7M. _{Labor Dept., 3/31/23}

Who’s hiring: Education, leisure, and hospitality

Who’s firing: Construction, technology, 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 $3.66 a month ago and lower than $4.60 a year ago. _{AAA., 5/25/23}

💰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

-1% = This past week’s change in the US Stock Market

+1% past month, +6% past year, and +52% over 5 years. _{S&P 500 Index, 5/25/23}

3.83% = The yield on the 10-Year US Treasury Bond

Yields are +5% this past week, +12% this past month, and +39% over the past year. _{US Government Bonds, 5/25/23}

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

-4% in the past month and -11% in the past year. _{Coinbase, 5/25/23}

-1% = This past week’s price change for Ethereum

-2% in the past month and -7% in the past year. _{Coinbase, 5/25/23}

Recession

For many of us, the word recession means economic crisis. The last two recessions were the most severe economic disasters of the last half-century. In 2008, the global financial system collapsed. In 2020, the global economy was completely shut down.

Not every recession is a financial crisis. Recessions are a natural part of the economic cycle. The economy grows, slows, and contracts. We're in unprecedented times, so it's hard to say what comes next, but financial commentators aren't necessarily talking about an impending economic collapse. A recession can be defined as two quarters of less economic production (GDP) than the previous. That technically occurred in the first half of 2022, but no one has named that an official recession yet because unemployment was at historic lows. Don’t get too hung up on the semantics. The critical thing to know is that people are worried about the economy, which leads to more businesses cutting back.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is how we track how much stuff the economy is producing. The actual number (~$26 trillion) doesn't matter as much as the direction and magnitude. We track the growth rate of real GDP (inflation-adjusted) to know whether the economy is expanding or contracting from the previous quarter.

The reporting style can be a bit confusing. The main number you hear will be an annualized growth rate (+1.3%), representing how much the GDP would increase/decrease if the economy hypothetically grew at that rate for an entire year. It's different from how much our production increased/decreased quarter-to-quarter (+0.3%) and not representative of the growth/decline over the past year (+1.6%). Annualizing the past quarter’s change makes the backward-looking number a little more forward-looking.

Debt Ceiling

Regardless of the political party in power, the US government regularly faces the risk of defaulting on our debt and being unable to pay our bills.

Every year, Congress directs the Treasury to spend money (on defense, infrastructure, etc.), and the Treasury pays from its income (taxes) or charges bills to the credit card (issues Treasury bonds). Congress regularly directs the Treasury to spend more than it can afford, and the Treasury hits its credit limit. When that happens, only Congress can raise the Treasury’s borrowing limit. Raising the debt ceiling doesn’t approve more spending; it just allows the Treasury to pay for the spending Congress already approved. Congress has lifted the debt limit 78 times since 1960.

Suppose Congress chooses not to raise the limit. In that case, the US government will be unable to pay its bills, potentially ceasing all government operations, freezing all social benefits, and defaulting on debt payments. Besides the direct impact of halted government function, US government default could destabilize the entire financial system.

The impacts of that are unprecedented and could push the US economy and the world into a downward spiral. So it’s doubtful Congress would choose not to raise the debt ceiling, but risks are high.