Fed Watch – 4/5/2024

The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hello, I’m Brian Beaulieu from ITR Economics. Today is April 5th. And you are watching Fed Watch. Just really four highlights I want to go over. And I’m going to try and layer them in the sequence that I think it matters.

One, there is some weakening going on in the consumer sector. It’s not real evident in the overall retail sales numbers as yet, but we noticed that real personal income slowed in its rate of rise. At the same time, the savings rate dropped and the amount of money people have in their savings accounts really dropped also. And that suggests that we’re probably going to see some headwinds in terms of the strong consumer continuing on. And that means GDP will slow down.

The Fed’s pretty sure that the first quarter GDP number is going to be a much slower growth rate than what happened in the fourth quarter, and that seems certain, based on the numbers that we are looking at anyways. And because of the consumer trends, I think we’re going to see even more deceleration. This is part of that slowing down in 2024 that we’ve been talking about.

One of the most recent signs of that is in automobile retail sales. The number went up still, and by the number, I mean the February to March data. But the rate of rise continued to slow. It’s in a full-fledged phase C, so deceleration is going on. And the February to March growth was the mildest we’ve seen in 22 years with the sole exception of COVID, when it was negative. So really, it was a number that jumped out at us and indicates, “Okay, things are indeed just slowing down. We don’t see them breaking down as yet, just slowing down.”

The employment numbers that just came out this morning and the layoff numbers that came out earlier this week, continuing to show a strong labor market. We’re getting just a hint around the edges of a little bit of rate-of-change erosion. The 312 is at 1.7 and it’s still in phase C, but it’s only going down a few basis points, really, at a time.

The only point that made me look a little bit was that the month-to-month change came in a little bit weaker than normal, so we could be seeing that 1.7% growth rate in employment slip to 1.6, 1.5 as we go forward. But there’s no dire warnings there. Layoffs are not an issue at this time. The unemployment rate, and we use the not seasonally adjusted number, declined from 4.2% last month to 3.9% this month. So the employment side of things remains strong and that balances out some of that consumer weakness. No one’s apparently worrying about losing their job. They’re just seeing a slowdown in their incomes and they’re drawing down on their savings, and that usually doesn’t last forever. Can’t last forever, obviously.

Looking beyond that, the ITR leading indicator, our proprietary leading indicator, is still rising. It’s been rising for 11 months now, which is good. It’s a bonafide rising trend telling us better things are going to be happening, probably on a slightly longer than median basis. We look at the timing of all these things. The index itself, leading indicator index itself is still below zero. It’s still a negative number. It would be if there was already change in phase A. And it should be above zero by now. It wasn’t so low that it should still be below zero. So that’s telling us this is going to be a gradual transition from this sluggishness of 2024 into what we still see as ascent in 2025.

So, we’ve talked about the consumer. That was number one. We talked about labor. That was number two. I just mentioned the ITR leading indicator, number three. The fourth point I wanted to talk about is even further into the future looking. We have talked before about there’s a whole nother wave of inflation coming. And we came across some data, and some of you may know Connor Lokar who works for us. He’s a speaker. He’s a senior forecaster. Really good economist, really good speaker. And he brought the data to our attention.

We looked at US Treasury grossed issuance of debt. And we thought it was high during COVID? They’ve just exceeded COVID numbers. They are now issuing more debt than we have ever done in our republic in nominal dollar terms. And I understand it makes a difference because of inflation. But to go above what we spent or issued in debt even during the worst of COVID blows my mind.

And it means that that’s the starting point of the whole new round of inflation that we’ve been talking about. They’ve already made the vibrations that are going to agitate inflation out there in the future. It’s pretty clear to us. So take advantage of the interest rates. When they decline, as they decline, if you’re going to leverage up, do so. Still keeping in mind that you want to be unleveraged to a very large extent come 2030, because we’re still on track for that.

Thank you very much for watching this edition of Fed Watch. See you next week.