🧭 The Weekly Scoop

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

Markets haven’t done much of anything for the past month because investors have no clue how the rest of the year will play out. This week was all about figuring out how the consumer is doing, and the narrative swung from “the economy is crumbling, and we’re headed for a hard landing recession” to “the economy is running too strong, and the Federal Reserve will have to raise rates again and push the economy into recession.” So why is it so hard to know what’s going to happen? Well, we’re in unprecedent-…. Okay, we won’t say it again.

Everyone cares about the consumer because the consumer powers at least two-thirds of the economy. If people stop buying stuff, everything stops. This week’s data and corporate updates painted a mixed picture. People are still spending, but spending more frugally - cutting back on big-ticket items.

The big question: What would cause consumers to stop spending?

It doesn’t look like it’s going to be unemployment. Unemployment is at the lowest level in over fifty years. The flow of massive layoff headlines at the start of the year has slowed, overall weekly layoffs are still low, and hiring is strong. That’s likely because there are still 2 million more available jobs than there were pre-pandemic, almost two for every unemployed person. Small businesses, which make up half of all employment, are still saying they can’t find people.

Consumers are in pretty good financial health. Banks are reporting savings balances higher than before the pandemic. Consumer debt is at an all-time high, but defaults and late payments are still lower than before the crisis.

It could be higher interest rates. It’s much more expensive to lease a car or take out a mortgage, so those big-ticket items could feel it.

The most significant risk to people not buying stuff, as you likely feel, is the rising costs of everything. Inflation has dramatically shifted our budgets. Inflation seems to be headed in the right direction. Prices aren’t rising at the breakneck speeds they were last year, but they’re still rising, and our wages aren’t keeping up. It’s really all about sentiment and timing. Will consumers get used to rising prices if they fall more in line with wages?

The boom is definitely over, but we can’t boom forever. Can we lose a little speed without going backward? The debate continues.

🐻 Reasons to be pessimistic:

• Consumers are losing optimism. The University of Michigan's consumer survey showed sentiment slumped to a six-month low this month as people worried about inflation and government default. People expect living costs to rise by 4.5% over the next year and for inflation to stay high at 3.2% in 5 years. Inflation expectations are important because they can influence behavior that becomes self-fulfilling.

• Manufacturing slumped this month. The Federal Reserve Bank of New York’s Empire State Manufacturing Survey index plunged in May nearly nine times more than economists expected. New orders and shipments fell as economic activity slowed.

• Rising mortgage rates are deterring home buyers. The Mortgage Bankers Association reported a 5% drop last week in new home purchase applications, now down 26% from a year ago. The average 30-year mortgage rate is down from its 7% peak but has started climbing again, currently at 6.6%.

• Fewer people are buying homes. The National Association of Realtors reported fewer existing homes sold in April for the second month in a row. Low home supply and low affordability have scared away buyers. The median home price rose to $388,800, the highest since November.

• Bitcoin’s rally has lost enthusiasm over the past month after an 80% surge to start the year. US regulators have taken a relatively negative view of cryptocurrencies, causing many large financial institutions to pull back from operating in the space. Adding to that, recent technology updates enabling more functionality, like NFTs on the Bitcoin blockchain, have driven up transaction costs. Low liquidity in the market could turn into a positive if sentiment improves.

🐂 Reasons to be optimistic:

• Fewer people got laid off last week. The Labor Department reported initial jobless claims fell to 242,000 last week after jumping unexpectedly the week before. Layoffs have been inching up this year but are still roughly in line with average rates before the pandemic.

• Household debt is rising, but people are still managing their payments. The New York Federal Reserve’s consumer survey reported total household debt rose to over $17 trillion in March. People have still been managing the debt well. Home foreclosures are still low, and delinquent payment rates are at or below pre-pandemic levels.

• People spent more in April after pulling back in March. The Commerce Department reported retail sales rose 0.4% in April after a 0.7% drop in March. Households searched for deals online and splurged more at restaurants and bars. Consumer spending powers two-thirds of the economy, so spending trends are essential to watch.

• Optimism has returned to the housing market. The National Association of Home Builders reported the first positive reading of its homebuilder sentiment index since July. Sentiment has improved for five straight months. Construction permits for new single-family homes rose to a seven-month high in April, and new home construction also gained. Home supply is meager, so more construction could help bring prices down.

• Leaders in Washington signaled progress on debt ceiling negotiations. [🤓] The White House and Congress are working to agree on terms for raising the limit on the country’s borrowing. Treasury Secretary Yellen warned the country could run out of money by June 1st. 

🏡 For your home

6.6% = 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, 5/11/23}

$388,800 = Median existing home sales price

That’s up from $376K a month ago and down from $395K a year ago. _{National Association of Realtors, 4/30/23}

💼 For your work

242,000 = Layoffs Last Week (Initial jobless claims)

That’s down from 264K the week before and in line with 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 $3.67 the month before and lower than $4.57 a year ago. _{AAA., 5/18/23}

💰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, +4% past year, and +54% over 5 years. _{S&P 500 Index, 5/18/23}

3.7% = The yield on the 10-Year US Treasury Bond

Yields are +8% this past week, +2% past month, and +26% over the past year. _{US Government Bonds, 5/18/23}

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

-8% in the past month and -6% in the past year. _{Coinbase, 5/18/23}

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

-13% in the past month and -5% in the past year. _{Coinbase, 5/18/23}

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.