Are the Winds of the Economy Shifting?

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Are the Winds of the Economy Shifting?

I love being on the lake – especially when the water is calm, and the wind is low. But there are times where I notice a shift in the direction of the wind. Sometimes it is a sign that the weather is about to change. I want to carry that analogy into today’s episode to talk about the economy. For the last couple of years, we have been used to higher rates, higher inflation, a growing economy and a higher stock market. There seems to be a shift taking place in the economy. In today’s episode I’m going to highlight five of these shifts and then close with some advice on what you might want to do in light of those shifts.

• Shift #1 – The inflation picture. The Consumer Price Index, also called the CPI, came in lower than expected in the month of June. That means that the rising prices we have been experiencing for some time were less if you compare the inflation in the month of May to the month of June. Also, comparing it to the previous year, it was the lowest increase since April 2021. That news changed the expectations of the market. Before the CPI number came out, the market was expecting a .25% cut in the Fed Funds rate in December. This news shifted expectations to expect an earlier cut in September and another cut in December. To be clear, 3% inflation compared to the previous year is still inflation. But that number has fallen dramatically from the 8% number we saw in months past.

• Shift #2 – The employment picture. The jobs report last week was much weaker than expected. And with more people entering the workforce to look for a job, the unemployment rate ticked up to 4.3%. This also grabbed the Fed’s attention and, in their meeting, last week they nodded that the job front was an area of concern. To be sure, the labor market is still tight. Ask any small business owner and they will still tell you that hiring is tough. But the job market is loosening up just a bit.

• Shift #3 – The stock market. As of the recording of this podcast, global stocks have had a rough few days. As of Monday, August 5th, the S&P 500 is down 7% over the last month. Even though the S&P 500 is still solidly positive overall in 2024, there has been a sharp increase in volatility. And certain sectors that have been winners for some time, particularly technology, have been hit especially hard. Japanese stocks had a horrible Monday, down over 12% in a single day. They bounced back quite a bit on Tuesday. But it is clear that the calm waters we’ve become accustomed to in recent months are no more.

• Shift #4 – Earnings comments – The consumer is starting to spend less money, according to recent companies reporting earnings. McDonalds reported their same store sales were down 1% from the previous quarter. This is not tragic, but it is the first time it has happened since the pandemic. PepsiCo also reported that sales from their Frito-Lay division in the U.S. are down 4% from the previous quarter. Proctor and Gamble had similar comments after their recent earning call, saying that the consumer seems to be slowing down. Even the coffee juggernaut, Starbucks, reported same store sales down 2% from the last quarter in the U.S. It makes sense. Eventually prices get so high that people start to adjust their spending. When you can’t get out of McDonald’s for less than $10, you might start grilling hamburgers from home, right? You’re not the only one.

• Shift #5 – Mortgage and Bond Rates – These moved down significantly over the last few days, with the 1-year treasury reaching its lowest rate in more than a year. Mortgage rates are hovering around 6.5% as of the recording of this episode. It would not be unreasonable to assume that rates may have peaked for this cycle and will begin to head back down over time. However, I think it is unlikely we will see 2% mortgages again. The next couple of years will help us recalibrate what is normal when it comes to interest rates. While lower rates are welcome news for borrowers, it could be forecasting a general slowdown for the U.S. Economy. 

Now some comments. This isn’t the first time we’ve seen sharp weakness in a short amount of time. One month does not a trend make. Economic expansions and contractions rarely happen in a straight line. So it could be that these shifts are merely blips that resolve quickly and we resume economic growth. That being said, I think it would be wise for listeners to prepare at the very least for a cooling economy. Whereas the money supply grew in greater percentages than we have ever seen in 2020 and 2021, it shrunk in 2022 and part of 2023. I cannot help but think that such dramatic whiplashes in the money supply will eventually result in side effects – some of which will be negative. For quite a long time I have been urging listeners to be prepared for leaner times. As I always say, no one can predict, but everyone can plan. Not being caught flat footed is the key.

The Federal Reserve has a tough job ahead. They are likely to begin lowering rates, maybe as much as a full 1% by the end of 2024 in an effort to accomplish a soft landing. But if they go too far, we could have inflation reignited, much like it did in the 1970’s. What we don’t want to happen is a period of stagflation, where growth is low, and inflation is high.

This episode is not meant to be gloom and doom. I actually intend for it to be an exhortation toward preparing for opportunity. Paying down debt and raising cash have been the two most important activities for small businesses and consumers in 2024, and that’s what I would continue to encourage. Warren Buffett disclosed that his company sold half of its massive holdings in Apple stock recently, raising more cash than Buffett has ever had. Buffet knows cash is king in tough times. I’m far from certain that tough times are ahead, but having cash and little or no debt gives you options. And having cash puts you in a position to seize opportunities that might be present in the days ahead. In a transitional economy like I believe we are entering; you must be nimble and flexible. Reducing debt and having higher reserves than is typical allows you to do this. Keep your eyes open for opportunities but be very selective and picky and don’t overextend yourself. Good financial stewardship is a marathon, not a sprint. It’s not primarily about running fast – it’s about being able to keep running.

Speaking of running, have you even been running, dropped your phone and cracked your screen? Did you know that our Foundation Benefits with High Interest Account includes cell phone protection, which allows you to have up to $400 protection on your cell phone. Terms and conditions apply to this account, so why don’t you contact us to find out more. Start a financial conversation with us today by visiting foundationbank.org. We also hope you’ll subscribe to this podcast to it in your favorite podcast app and share it on social media. This episode is not a recommendation specific to your own unique circumstances. Please consult your own advisor for guidance. Foundation Bank and MBC are a member FDIC and an equal housing lender, and until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank on August 6, 2024. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. Foundation Bank is an Equal Housing Lender, Member FDIC.