There’s been a lot of recent talk about a pending recession or an economic slowdown, so we wanted to go over a recent report showing economic activity in the US. The report indicates that the economy is growing at the fastest pace in 13 months. The Purchasing Managers Index deposit outlook is a weighted average of the Manufacturing Output Index and the Services Business Activity Index. We follow this report because it is an important leading economic indicator that provides valuable insight into the state of the US economy, specifically the manufacturing sector. This indicator hit 54.5% in May, which came in better than expected and was the highest in 13 months. Any reading above 50% on this indicator represents expansion, and it currently being over that is great news and shows economic growth. However, for investors hoping for the Federal Reserve to pause rate hikes, this report might pose a problem because of how a growing economy could lead to higher inflation. We will continue to watch this and how positive economic reports might impact the market.
Consumer Stress Indicator
We’ve been tracking the Consumer Stress Indicator that was created by our research friends at Strategas. It takes food, inflation, mortgage rates, and gasoline inflation and compiles a common indicator to show how much stress the consumers are under. The bad news is that we’ve been over 10% for 20 consecutive months. That’s the longest stretch going back to 1970. The good news is while we’re still elevated, we are way off the low of 23.6% from earlier this year. We’re currently sitting right around 17%. That’s partially due to lower mortgage rates and largely due to falling gasoline prices as well as a little reduction in food inflation. This is a great sign for the consumer as we head into the summer driving season. We don’t want to be overconfident in this because, as we’ve mentioned before, there is a risk of potentially higher gas prices due to cuts in OPEC production. There will be an increase in demand and a cut in supply which typically leads to higher prices. This current environment may not be a permanent relief of consumer stress. On the other hand, mortgage rates have started to pick back up with a risk of higher interest rates. There’s a chance that they may not be cutting rates because the economy is doing so well. That pushes interest rates back up. You want a good economy, but that good economy comes with higher interest rates which then can cause consumer stress. It’s a delicate balance we’re dealing with right now, but something to be thankful for while we get it. We’ll take low prices now. It just may not be permanent.
The Debt Ceiling Debate
The debt ceiling decision is expected to be made in early June. They’re shooting for June first, but our research partners are telling us that it may be June seventh or eighth. June first is an encouraging sign that they’re coming to the negotiating table early. Hopefully, we can get something passed soon. Once it is raised, it’ll be a big change. Right now, we have the Fed doing quantitative tightening. They paused that for the time being, and we expect them to pick back up. The Treasury general account, where Janet Yellen operates, is pumping liquidity into the system. However, the balance in their account is down to roughly $68 billion. That’s a level where the June date comes into play and the point where the government will look into issuing one trillion dollars’ worth of treasuries. What that is going to do to rates is unsure, but what it is going to do is take the liquidity out of the system. When they issue bonds, people must pay for those bonds with money which they’re collecting at that point. That’s going to change the market attitude and something we’re going to look at going forward to try to navigate. As the debt ceiling comes across, they’re going to have to up the treasury general account from $68 billion to at least $500 billion, if not more.
Treasury General Account
We run a deficit in the US. It’s like the saying that you borrow money from Peter to pay Paul. That’s how the government works. When we hit the debt ceiling, we can no longer borrow from Peter to pay Paul, but we’re still paying Paul. The Treasury is just putting money into Paul’s bank account without taking money out of Peter’s bank account. When they raise the debt ceiling, the Treasury goes back and tells Paul they need all the money they’ve given him. They then take the money they would have taken from Paul out of his bank account to refund the money they gave to Peter. For the last six months, we’ve had nothing but treasury money going into the banking system and the economy without a counterbalance. Once we raise the debt ceiling, it comes back into balance. What happens in the market is unknown, but it is an extensive rebalancing of liquidity. We got down to $68 billion and took money back from Paul, and we see the rapid rise of what we expect to happen to refund that general account.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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