There are three kinds of lies; lies, damned lies and statistics.
– Mark Twain; North American Review; 1907
S&P Dow Jones Indices, in its commentary for March 2024, headlined “Despite uncertainty surrounding potential Fed rate cuts, economic strength and diminishing recession fears led to the best Q1 U.S. market performance since 2019, with the S&P 500 up 11%.” The S&P 500 returned 3.2% for the month, but the equity markets revealed some evidence of a rising tide lifting all ships. The Value share of that index returned 4.6%, twice that of Growth’s 2.1%. Energy stocks powered higher by 10.6% versus Info Tech’s 2%. Foreign Developed Markets and Mid Cap stocks outperformed the S&P 500, rising 3.8% and 5.6%, respectively.
Lawrence H. “Larry” Summers has a résumé that would impress even the least impressionable. He served as Secretary of the Treasury from 1999 to 2001 under President Clinton, was President of Harvard from 2001 to 2006, and was Director of the National Economic Council under President Obama from 2009 to 2010. In other words, he is a citizen viewed as accomplished, very wise, and with opinions worth respecting. So, on March 23rd, when the former Treasury Secretary sent out the following tweet, it became a subject of much discussion:
“I don’t know why the Federal Reserve is in such a hurry to be talking about moving toward the accelerator (cutting interest rates). We’ve got unemployment, if anything, below what they think is full capacity. We’ve got inflation, even in their forecast, for the next two years above target. We’ve got GDP growth rising, if anything, faster than potential. We have financial conditions, the holistic measure of monetary policy, at a very loose level.”
With all due respect to the former Secretary, I would like to suggest that he could scarcely be more wrong—and why the Fed should start aggressively lowering interest rates very soon if they don’t want to push the U.S. economy into an economic problem largely of its own creation.
First, unemployment. The report that commentators tend to focus on is the Bureau of Labor Statistics (BLS’s) household employment survey. It has indeed been reporting robust increases in employment. Prior to the pandemic, ADP, the nation’s largest payroll predecessor(s), the household employment survey, Challenger & Gray’s number of businesses reporting job cuts, and the ISM manufacturing and non-manufacturing employment indices all tended to align with one another. Post-pandemic, that is no longer the case. Of the five cited here, four indicate an economy now growing slowly, with ADP’s household survey showing employment growth in the past year of 642,000 in contrast to the BLS’s 2.93 million. The ISM and Challenger & Gray align with the ADP data. It is the BLS data that is the outlier. This is seemingly confirmed by financial markets no longer responding meaningfully to BLS’s monthly reports.
Second, inflation. The most hotly debated of all current economic topics, let’s see if we can bring a measure of clarity to this noisy subject. Goods represent 40% of what we consume. Year-over-year goods inflation is 1.1%, so the issue resides on the 60% services side, which employs 70% of US workers; thus, wage rates are the crux of the inflation bears’ arguments. On a quarter-over-quarter basis, as measured by the Bureau of Labor Statistics (BLS) Employment Cost Index for Private Wages & Salaries, that index peaked at 6% at the end of Q3 2021. It was just over 5% at the end of 2022 and is now at 3½%. At its current rate of descent, it may well be at 2% by year’s end. It correlates with a lag of approximately three months to the Fed’s preferred inflation measure, Core PCE Services ex Rent. That would lead that measure, currently at 2½%, to fall below 2% later this year.
Third, the economy is growing above its potential. This is another statistical anomaly. As measured by production (GDP), the US economy is indeed growing, but as measured by growth of income (GDI), there isn’t any. US retail sales growth has mostly disappeared, growing 2.4% from June to September 2023 but just 0.2% from October 2023 through February 2024. Mortgage rates are near 7%, existing home sales are down 33% from their best levels of the past five years, and with interest rates on auto loans reaching 10%, vehicle sales are off 14% from their best levels in five years.
Fourth, financial conditions are at a very loose level. He must be talking about the stock market. The interest rate on small business loans is at 10%. Small companies need bank credit to grow, and the supply of that credit is 1% below its level of a year ago. For our economy to grow, the supply of money must be rising, and it isn’t. As measured by M2, that level has fallen by 4.3% in the past two years. Increasingly, it looks like deflation that should be concerning us.
60/40 portfolio investors can celebrate 7.8% returns for the quarter, with 8.2% returns on the 60% equity side and 7.2% on the 40% fixed income. For the month, portfolio returns were 3%, with equal contributions from equity and fixed income. The fixed income side was notably aided by the 6%+ rise this quarter in commercial-backed security values.
Mark H. Tekamp