🧭 The Weekly Scoop

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

This week didn’t provide any decisive win for the fearmongers or the optimists. The economy is still in a steady slowdown from the stimulant-filled, post-pandemic boom. Whether that slowdown becomes a recession or whether that recession would be a crisis has yet to be determined. Either way, don’t get caught up in the semantics because we might already be in some sort of recession. These are strange times.

This week marked the end of earnings season, CNBC’s SuperBowl four times per year when most public companies report on their financial health and profits (aka earnings). Even though investors are more pessimistic than ever lately, America’s biggest companies proved they were holding up better than feared. Corporate profits have been in decline, but many pointed to a rebound in April and promised better months ahead, primarily thanks to significant cost-cutting.

Economies don’t typically just drift into recession. Usually, something starts to get out of balance, then something breaks, kicking off a sequence of negative repercussions. Those expecting a recession are looking out for the thing that’s going to break. That’s what’s happening right now with regional banks. People are also watching commercial real estate.

You’ve heard the term thrown around a lot in the past few years, but we truly are in an unprecedented economic situation. It doesn’t do any good to freak out over each economic data point each week, but we will continue to monitor the trends. So far, the economy is holding up pretty well, unemployment is still lower than ever, corporate execs are optimistic, and inflation is trending in the right direction. We’ll keep watching and keep you posted.

🐻 Reasons to be pessimistic:

• Layoffs spiked last week. The Labor Department reported initial jobless claims rose by 22,000 to 264,000 last week, the highest level since October 2021. While it’s a big jump in a week, it’s not that much higher than average. Pre-pandemic averages were around 200,000-240,000.

• The trouble isn’t over yet for regional banks. Last week, First Republic Bank went under and reignited panic about the stability of regional banks. It was the second-largest bank failure in US history. Thursday, PacWest Bank reported withdrawals of 10% of its deposits in 48 hours. PacWest says it has plenty of cash, but no bank can withstand mass withdrawals. Panic about possible bank failures can quickly turn into real bank failures if depositors flee.

• Most living costs are still on the rise, but not all. The Bureau of Labor Statistics’ Consumer Price Index [🤓] rose 0.4% in April after rising only 0.1% in March. The most significant contributor was rising rent and home prices, though government statistics tend to run on a lag for real estate. More real-time indicators have pointed to stalling or declining home and rent prices in recent months. Gas and used car prices jumped in April, but grocery costs have stopped climbing. Airline ticket prices actually fell.

• The US government is trying to figure out its spending problem amidst the approaching financial catastrophe of US default. The White House and Congress met today to negotiate terms for raising the debt ceiling. Treasury Secretary Yellen warned the country could default on its bills as early as June 1st if Congress does not approve an extension of the debt limit. [🤓]

• Small businesses are losing faith amidst a competitive hiring market. The NFIB's Small Business Optimism Index declined in April for the 16th straight month below average. The biggest concern is finding qualified workers to fill open roles. Nearly half of small businesses reported jobs they could not fill last month. Of that, 92% reported few or no qualified applications for the positions they were trying to fill.

🐂 Reasons to be optimistic:

• Big companies aren’t slowing down as much as investors feared. We’re most of the way through first quarter corporate financial updates, and 80% of the market has reported better earnings than expected. Three quarters have posted higher sales than expected, according to Factset. Analysts had projected the biggest 500 companies to suffer a 7% decline in profits, but they’re on track to shrink by only 2%.

• Hiring picked up in April, and unemployment fell. The Labor Department said US employers increased staff by 253,000 workers last month, far more than economists expected and higher than March and February. The unemployment rate declined to 3.4%, the lowest level in over fifty years.

• Overall, living costs are 4.9% higher than a year ago. That’s the lowest one-year inflation number in two years, but prices are still rising month-to-month. Normal annual inflation is around 1-2%, with monthly inclines up to 0.2%. Prices are no longer rising at the breakneck pace of last year, but inflation may take a long time to get back to pre-pandemic speeds, if ever. Make sure your income and savings are growing at least as fast as your living costs.

• Consumers are a little less worried about inflation. The New York Federal Reserve's consumer survey highlighted a decline in one-year inflation expectations. People expect living costs to rise by 4.4% over the next year. Inflation expectations are important because they can influence behavior that becomes self-fulfilling. Businesses raise prices to keep up, and consumers spend before things get more expensive.

• Businesses are starting to get a break from inflation. The Labor Department’s Producer Price Index [🤓] rose 0.2% in April, with wholesale supply costs now only 2.3% higher than a year ago. A jump in gas prices pushed costs higher for businesses, but egg prices fell 36% in a month.

• The US consumer is still healthy but spending less. Bank of America reported the first year-over-year decline in debit and credit card transactions in April, though transaction numbers were up from March. America’s second-biggest bank said savings buffers are still fairly high. Median checking and savings balances are more than 40% higher than in 2019 across all income levels. Consumers power 70% of the economy.

🏡 For your home

6.5% = Average 30-year mortgage rate

That’s up from 6.3% a month ago and up from 5.4% a year ago. _{Mortgage Bankers Association, 5/4/23}

$375,700 = Median existing home sales price

That’s up from $364K a month ago and down from $379K a year ago. _{National Association of Realtors, 3/31/23}

💼 For your work

264,000 = Layoffs Last Week (Initial jobless claims)

That’s up from 242K the week before and slightly higher than pre-covid averages. _{Labor Dept., 5/11/23}

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}

$3.54 = National Gas Price/Gallon

That’s down from $3.61 the month before and lower than $4.40 a year ago. _{AAA., 5/11/23}

💰For your savings

0.39% = Average interest banks pay on a savings account_{, FDIC, 4/17/23}

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

+1.2% = This past week’s change in the US Stock Market

+1% past month, +4% past year, and +52% over 5 years. _{S&P 500 Index, 5/11/23}

3.4% = The yield on the 10-Year US Treasury Bond

Yields are unchanged this past week, -1% past month, and +17% over the past year. _{US Government Bonds, 5/11/23}

-7% = This past week’s price change for Bitcoin

-11% in the past month and -7% in the past year. _{Coinbase, 5/11/23}

-5% = This past week’s price change for Ethereum

-6% in the past month and -14% in the past year. _{Coinbase, 5/11/23}

Producer Price Index (PPI)

The Producer Price Index (PPI) is another important indicator for economists tracking inflation. Inflation is the rate at which things get more expensive.

Unlike the Consumer Price Index (CPI), which looks at a set basket of stuff your average consumer spends money on and tracks how much it costs each month, the PPI tracks the prices of wholesale goods - like how much Ford pays for the tires it installs in its cars before selling them to you. The rate of change in those prices is inflation.

Prices rarely decline. Inflation, aka rising prices, is only a problem when it's really fast. Business supply costs increasing by 5-10% per year is not manageable, but 1-3% should be.

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.