Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 

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Signs of Softening

“Regardless, for those of you who care about the question ‘Are we in a recession now?’ consider the 6 elements that the NBER uses:

1. Real personal income (less transfers);

2. Nonfarm payroll employment

3. Household survey employment

4. Industrial production

5. Real wholesale + retail sales

6. Real consumer spending

 [All] six monthly indicators that the NBER uses to make its recession call have expanded since last December.”

U.S. real gross domestic product decreased at an annual rate of 0.9% per the advance estimate from the Bureau of Economic Analysis on Thursday. That’s the 2^nd consecutive quarterly decrease which historically has been a practical rule of thumb for an economic recession. However, the National Bureau of Economic Research is the entity in charge of officially declaring recessions. Their elements for consideration are noted in the article above.

It’s a meaningless debate, but the heat got turned up this week with political gamesmanship on the line. The bottom line is that economic activity is softening, but it’s too early and not accurate to call it a recession.

Has the Fed Shifted More or Less Hawkish

“The Federal Open Market Committee (FOMC) voted to raise the Federal funds rate by 0.75% to a range of 2.25%-2.50%. This was the second consecutive increase of this size and the fourth hike this cycle, and the Fed signaled 'ongoing increases' would be appropriate at coming meetings. As evidenced by the June FOMC median dot plot and recent Fed speak, the committee still appears on track to raise rates to a range of 3.25%-3.50% by the end of the year. However, this does imply less dramatic increases in the next three FOMC meetings than in the last two. Moreover, further increases beyond that point may conflict with inflation and labor market dynamics which currently signal the need for a more cautious approach into next year.”

On Wednesday, the Fed hiked interest rates another 0.75%, mimicking last month’s policy decision. The stock market appeared to favor the decision with the S&P 500 rallying 2.6% on the day.

Why the positive reaction to further policy tightening? Well, it was already priced in. There was the possibility of a 1% increase and some less hawkish language in their statement including highlighting softening spending and production data and improving global supply chain issues.

Why Are Cars So Expensive Now?

“A bunch of related bad economic news has hit car buyers pretty squarely: Rising inflation has pushed prices up, the Federal Reserve’s interest rate jumps have pushed auto lending rates higher, and supply chain issues have squeezed the availability of new cars, further driving prices up…

Grid compared the data for an average car purchase — average price, loan rate and term length — for 2018 and 2022, and found a net increase of nearly $13,000 in the cost of a new vehicle… The average cost of a new car purchase has jumped from just $39,000 in 2020 to more than $48,000 this year, according to Kelley Blue Book historic data.”

Some interesting data was in this article on the auto market. Double-digit inflation on new and used cars coming out of the pandemic is making an impact on consumer balance sheets and debt servicing costs. Consumers are spending more on sticker prices due to shortages, paying higher interest rates on loans (5.2% on 72-month loans), and stretching out loans longer (84-month loans now account for 18% of new auto loans). 

The vaunted 60% S&P 500 Index / 40% Bloomberg US Aggregate Bond Index portfolio has come under severe stress this year – declining as much as 18% intra-year and 16% as of June 30. It has been the negative contributions by both major asset class indexes that have led to a magnified drop in this “diversified” portfolio.

“While it has been a painful ride down, the reset in valuations creates opportunity for subsequent returns. If we look at a valuation measure of the 60/40 based on blending the earnings yield (inverse of P/E ratio) on stocks and the yield-to-worst on bonds (higher = less expensive), valuations have cheapened from 3.5% to start the year to 5.3% at the end Q2. These lower starting valuations imply an average annualized return over the next decade of 6.1% compared to just 2.6% to start the year.”

Thanks for reading. Have a great weekend!