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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5 Numbers That Will Tell Us How the U.S. Economy Does This Year

“This continues to be one of the more confusing economic environments in history. Every other day the narrative switches between an imminent recession and a soft landing…

This is not an exhaustive list but gets us pretty close to telling the story of the 2023 economy:

1. Mortgage rates. Housing makes up roughly 20% of the U.S. economy so activity in this market will have a big impact on how things shake out this year...

If mortgage rates go back to 5% or so and remain there, housing market activity will likely pick back up in a big way from all those millennials waiting in the wings to form households.

If mortgage rates go back to 7% or so and remain there, housing market activity will likely remain slow.

2. The inflation rate. Things are heading in the right direction...

The hope would be inflation falls to the 2-3% range because of a soft landing.

3. The unemployment rate. If the labor market remains strong the economy will remain strong...

Fed officials have stated numerous times that they would like to see the unemployment rate rise in order to slow inflation. Their forecast is an increase from the current level of 3.5% to 4.6%. I think having this as your goal is playing with fire… The lowest increase in the unemployment rate was 2.2% in the 2001 recession.

If the labor market remains strong and the unemployment rate stays near record lows, that would be a good sign...

4. Fed funds rate. If the labor market remains strong, the Fed is the biggest risk to the economy this year.

If they keep raising rates too aggressively that’s probably the biggest headwind to the economy because the probability of a recession is elevated.

The Fed cutting rates this year is probably also not a great sign either because it would mean they caused a recession.

The best-case scenario is probably one more 0.25% raise next month and then stand pat for the rest of the year...

5. The dollar. The dollar has been in a bull market for a number of years now as the United States has been the strongest developed market economy for some time. But in the 4th quarter of last year, the dollar began rolling over in a big way. 

A weaker dollar would potentially be a good thing for the global economy if it happened because other countries can avoid an economic slowdown as well. The U.S. has been seen as the cleanest dirty shirt in the economic laundry hamper ever since the 2008 financial crisis. It would be nice if the rest of the world played catch-up.

This would be a good thing for corporations in the U.S. who have sales overseas along with U.S. investors who hold foreign stocks in their portfolios.”

This was a nice plain English read of major economic and market drivers for 2023. You may note that they are all interrelated. Inflation has been directing Fed policy, which sets the Fed funds rate, which impacts mortgage rates and potentially the U.S. dollar. All of which has an impact on the economy and employment.

Stop Worrying About All Those Tech Layoffs…

“Let’s start with some numbers:

Microsoft 22,000 (10%)

Amazon 18,000 (1%)

Google 12,000 (6.4%)

Salesforce 7,000 (10%)

Tesla 10,000 (10%)

Twitter 3,700 (50%)

Apple 0 (0%)

Keep in mind a few things as you consider those big tech layoffs:

First, as Sam Ro reminds us, Tech employment represents about 3% of the workforce. The big scary tech layoffs are a small portion of the overall workforce. It’s a classic case of context-free data…

Second, what looks like giant layoffs are in fact a tiny percentage of just the recent hiring (to say nothing of the total workforce) of these same firms. Amazon, now has 1.5 million employees, more than half of whom were hired in 2020-2022. Google just fired 12,000 people; they hired 57,000 over the past two years. Microsoft laid off 10% of its 221,000 workforce bringing headcount back to mid-2021 levels. Tesla, Netflix, Salesforce, and others seem to be undoing a modest percentage of the recent (excess) hiring over the past two years.

Last, the Labor market remains very robust. Unemployment is low, job openings are still high, and many salaries are still rising.”

Layoffs, especially in tech, picked up steam at year end and now again with corporate earnings season. The technology sector is a large piece of the stock market and U.S. earnings, but not the biggest employer.

It’s a wait-and-see approach to see if it ripples through the broader economy. Small businesses were burned with labor shortages in the post-Covid economic reopening, and will likely be reluctant to cut staff.

Per Tom Lee of Fundstrat, if this period is a rewrite of the early 80’s inflationary environment with resulting stock market implications, next month might be the equivalent of August 1982.

In the current period, inflation measures started to moderate in October of last year as the stock market hit a new low point on October 12, 2022 (S&P 500 down more than 25%). As inflation has improved from 9% to 6% (year-over-year CPI), there are now indications of the Federal Reserve altering their policy course at the next FOMC meeting in February.

In the 1980s, the stock market declined 27% between November 1980 and August 1982. By August of 1982, inflation had fallen from 15% to 6%, and Fed Chair Paul Volcker suggested that the Fed may shift tactics. The stock market erased its losses in 4 months’ time.

Thanks for reading. Have a great weekend!

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