By: Russ Colbert
Summer 2022 (Vol. 40, No. 2)
It is now officially goofy season. This happens each election period, when we get within a few months of mid-term elections. Unfortunately, there are many analysts who currently see everything political as we get closer to the election date. They see the data through a political lens first, and unbiased economic analysis second. It started with those saying we were in a recession before we had the two negative GDP consecutive quarters. They avoided any positive news such as the unemployment rate dropping below 4% so far for this year. They also failed to mention that Payrolls were up 471,000 per month and industrial production was up an annual rate of 5.2% over the first six months of the year.
We also saw gross domestic income increase the first quarter of the year and we are still waiting on second quarter results. Our view is that a recession is coming, and monetary policy will have to get unusually tight for the Federal Reserve to bring inflation back down to it’s 2.0% target. The total number of U.S. Job openings reached 11.2 million jobs open for hire in July, so far this year. That is positive news and shows businesses have job openings and are looking for workers. That figure outnumbers the unemployment rate.
So, we do have some bright spots within the continuous pounding of the negative news that fail to get much attention. Consumers have continued to come back from the lockdown days of COVID with strong recoveries in consumer spending on services, now up 62% of total spending, and big recoveries in health care, recreation, travel, restaurants, bars, and hotels. We expect this trend to continue. Inflation has continued to rise over the past two years. It has primarily been caused by the bottlenecks of supply lines that started during the COVID period of 2020 and the cutting of oil production by the Biden administration, forcing prices upward on gasoline and oil-based products. The Federal Reserve seems determined to bring inflation down.
Home prices soared during COVID, with the national Case-Shiller home price index up a total of 41.4% in the past 28 months. That is the fastest increase for that period on record. For a while, the government prevented landlords from evicting tenants and rent payments grew unusually slow during the first 20 months of COVID. Now the rent payments are catching up.
We expect to see a transition over the next few years with rents continuing to grow rapidly, while home prices grow more slowly by year end and remain close to unchanged over the following year. What a mess…more employment at large companies, less employment at small ones. More renters, fewer owners. Lower inflation adjusted incomes. Distorted economic data. The cost of the lockdowns - arguably one of the biggest economic mistakes in U.S. history - is huge.
Voters will react soon as November approaches, and we feel at least one house of Congress is likely to go to the opposition party in November. If that happens, we usually have legislative gridlock for a few years as the nation tries to figure it all out. We may even see things start to settle down with the stock market and the economy slowly improve as we move forward.
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Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.