Consumer Spending Set for Slower Growth
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
November 20, 2023
Now that we’re about to enter the Christmas shopping season, expect even more focus than usual on the consumer over the next several weeks.
We are supply-siders and so usually cringe when we hear analysts and investors dwell on consumption as if it were the ultimate arbiter of economic growth. Ultimately the economy depends on production, which, in turn, hinges on entrepreneurship and innovation, the labor supply, as well as the health of cultural institutions like property rights and freedom of contract.
The government can affect these factors by raising or reducing tax rates, increasing or lowering spending, and adding or cutting regulations. Meanwhile, monetary policy can lead to temporary deviations from these long-run factors, with a policy that raises or reduces inflation.
On top of all this, the wild policy response to COVID – with enormous government checks sent directly to bank accounts – left consumers with more purchasing power than they’d normally have, given output. In turn, that has meant following the consumer is one way to gauge the extra inflationary impulse still remaining in the US economy, as well as the timing of the onset of the tighter monetary policy – the M2 measure of the money supply has dropped 4.4% – that the Federal Reserve began implementing last year.
In the year ending in September, “real” (inflation-adjusted) consumer spending is up 2.4%, no different than the growth rate in the ten years immediately prior to the onset of COVID. However, there are multiple reasons to believe that growth rate should soon decline.
First, much of the increase in spending in the past year has been driven by increases in jobs. Total payrolls are up 243,000 per month in the last year, which is unusually fast given an unemployment rate below 4.0%. A slowdown in job growth should limit the growth in consumer purchasing power.
Meanwhile, consumers have been eating into the excess saving they were able to accumulate during COVID, back when the government was passing out checks with reckless abandon. Immediately prior to COVID, in February 2020, US consumers, in the aggregate, were accumulating savings at a $1.28 trillion annual rate. That’s personal income, minus taxes, minus consumer spending. By contrast, in September 2023, consumers were saving at a $690 billion annual rate.
For the time being, accumulating savings at a slower rate makes sense; the government showered consumers with checks during COVID and so they got used to not having to save for themselves. But eventually we expect that old pace of saving to reassert itself. Even if it takes two years to do so, an increase in the pace of saving back to $1.28 trillion per year should trim consumer spending by about 1.5 percentage points per year. That alone could take a pace of real consumer spending growth of 2.4% per year down to less than 1.0% per year. Ouch!
Then there are student loan payments that have finally re-started. By itself, that’s unlikely to be a major issue; we estimate the effect at about 0.2% of consumer spending. But it should be a small headwind.
None of this means that consumer spending has to plummet anytime soon. But we don’t need consumer spending to drop in order to have a recession. That’s what happened in 2001, for example, when real consumer spending rose a respectable 2.0%, while the unemployment rate rose almost two percentage points, as well.
Some economists are already taking a victory lap because they didn’t forecast a recession and a recession hasn’t started yet. But we think they’re declaring victory too early. Some of them say that we never should have been worried about a recession while inflation fell because the surge in inflation was due to supply-chain issues, and then the reduction in inflation has been due to fixing those issues.
The problem with their theory is that they ignore the link between the surge in the money supply in 2020-21 and the inflation that followed, as well as the drop in money and the reduction in inflation this year. They think it’s a coincidence, but we think they’re going to get a rude awakening in the year ahead.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
The Election Outlook is a Tax Outlook
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
November 13, 2023
We’re now less than a year away from a presidential election and control of the White House, Senate, and House are all up for grabs. One of the biggest issues facing the winners is going to be how to handle the federal budget.
As we set out a couple of months ago, the US is currently running the most reckless budget in the history of the country. Never before has the deficit soared so quickly to such a high level when the US is still at peace and not in recession.
No wonder Moody’s just announced it was downgrading the outlook for US debt to “negative” from “stable.” They claim it’s because of political “polarization” on top of the deficit itself, but that seems odd. Moody’s makes it sound like we’d be better off if no one on Capitol Hill cared at all about the deficit, because then our institutions wouldn’t be polarized! The way we see it, thank goodness there are some politicians focused on the deficit, even if that’s what’s causing more polarization.
For the presidency, we think 2024 is likely to be a rerun of 2020, Biden versus Trump, although retiring Senator Joe Manchin may throw a monkey-wrench into the election if he can find a Republican to run with. At this point, we think Trump would be a slight favorite; but will face constant challenge given how much of the electorate dislikes him. Meanwhile, the House of Representatives is likely (but not definitely) going to go to the party that wins the White House.
The Senate is an easier call, with the GOP in excellent political position to win for fundamental reasons. At present the GOP has 49 seats. But Republicans don’t have to defend any seats in blue (Democratic) states and only have to defend one seat in a purple state, Florida, which is very unlikely to suddenly lurch back toward the Democrats, given the recent popularity of Republican governance in that particular state. In other words, we do not see a route for the Democrats to win any seats now held by the GOP.
However, there are multiple seats where the Democrats are vulnerable. Now that Joe Manchin is retiring, it’s extremely likely that the GOP picks up West Virginia with popular Governor Jim Justice having thrown his hat in the ring. Republicans are also favored to knock off an incumbent Democrat in Ohio, plus have a shot in Montana as well as in Arizona, and Nevada.
In turn, the election will have a major influence on what happens to the Trump tax cuts originally enacted in 2017 and which are set to expire at the end of 2025. We think the odds of a GOP sweep are about 30%, which would probably result in a full extension of those tax cuts and the GOP pushing through substantial reforms to Medicaid as well as major budget cuts outside of national defense. If the Democrats sweep – we put those odds at about 20% – look for substantial tax hikes, on individuals and businesses, alike, and not just on the “rich.”
That leaves a 50% chance of mixed government, in which case expect modest tax hikes, with a slightly higher top rate for individuals, a slightly higher rate on companies, but with lots of talk and little action on cutting government down to size. And without spending cuts, expect negative outlooks to turn into outright and deserved downgrades in the years ahead.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Government Is Too Darn Big
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
November 6, 2023
Two weeks ago, the yield on the 10-year Treasury Note was hovering around 5%, and the S&P 500 was in contraction territory, down over 10%. But last week, the 10-year yield dipped to 4.6%, while the S&P 500 saw a 6% gain. This market volatility is attributed to changing sentiments: 1) There was a belief that the Federal Reserve had lost control, but now, 2) it seems the Fed has achieved a "soft landing," bringing a semblance of stability.
While this may hold some truth, we remain cautious. If we step back and look at the US economy from a distance, things don’t really look so great. Our worries have roots all the way back in 2008, when the Fed altered its approach to monetary policy. The Fed shifted from a "scarce reserve" model to an "abundant reserve" model when it initiated Quantitative Easing, fundamentally changing how interest rates are determined.
In the past, banks occasionally lacked the reserves they were legally required to hold, prompting them to borrow from other banks with excess reserves through their federal funds trading desks, thus determining the federal funds rate through an active market. Today, banks are flush with trillions of excess reserves, eliminating the need for borrowing and lending reserves. Consequently, the federal funds trading desk has become obsolete.
So…if banks are not creating a market for federal funds, were does the rate come from? The answer: the Fed just makes it up. Literally makes it up. And, over the past fifteen years, the Fed has held the funds rate below inflation 83% of the time.
The last time the Fed kept rates artificially low was in the 1970s. The result was inflation, but even more importantly, banks and Savings & Loans lent at rates lower than they should have. The ultimate result was the dramatic downfall of the S&L industry, along with many banks, as the losses incurred from offering high interest rates to depositors while getting low rates from borrowers steadily eroded their capital.
Today, US commercial banks carry an estimated $650 billion loss in their “held to maturity” assets…but they don’t have to mark them to market. Just imagine if this was 2008 and Treasury Secretary Hank Paulson, Fed Chair Ben Bernanke and FDIC Chair Sheila Bair were in charge. They would have insisted on mark-to-market and we would need TARP 2.0 to bail out the banking system.
What the Fed will do is pay these private banks and other institutions roughly $300 billion this year just to hold reserves. Without this payment from the Fed to the banks, profits would be much lower and the losses on their books would be more painful.
The point we are making is that the Fed has made a mess of the banking system. While we've averted major crises thus far, it's the taxpayers who ultimately bear the burden. The $300 billion the Fed pays to banks doesn't appear out of thin air, and unless interest rates decrease significantly, these losses will accumulate. Why isn’t Elizabeth Warren fuming over this?
Like the 1970s and 1980s – because we don’t have mark-to-market accounting on these held-to-maturity assets – the banks can eventually earn their way out of this abyss. So, this doesn’t mean the economy will suffer, other than the fact that banks have less ability to make new loans.
This is exacerbated by the Fed engineering a decline in the M2 measure of money, which has fallen by 3.6% in the past year, the most substantial drop since the Great Depression.
Some of this decline is because since 2008 the Treasury Department has started holding a great deal of cash in its checking account at the Fed. For decades it held just $5 billion as a cash management tool. This number soared after QE started, and as of November 1, 2023, the Treasury General Account (TGA) at the Fed held $820 billion. This money is part of the Fed’s balance sheet, but does not count as M2. So, when the Treasury borrows from, or taxes the private sector, and then puts that money aside in its own TGA, it will lower M2. In other words, the Treasury has helped engineer a decline in M2. The Treasury could use this $820 billion to reduce debt, but it hasn’t, and taxpayers will pay roughly $40 billion per year in interest, just so the Treasury/Fed can hold this cash.
This new method of managing monetary policy appears fraught with risks. Instead of stabilizing banks, it has introduced instability, proved costly to taxpayers, and contributed to the worst inflation since the 1970s.
We aren’t saying that the economy can’t survive, but the idea that everything will turn out perfectly seems like wishful thinking. The government has expanded significantly since 2008, with federal government spending growing from 19% of GDP in 2007 to 25% last year, and the Fed's balance sheet has expanded from 6% of GDP in 2007 to 33% of GDP.
It's evident that we no longer operate in a free-market capitalist system. While government involvement in the economy is not new, it has reached unprecedented levels.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Three on Thursday
November 2, 2023
In this week’s edition of “Three on Thursday,” we investigate the most recent IRS tax data from 2020 to gain a comprehensive understanding of the federal income tax landscape in America. Amid the ongoing public discourse, you often encounter discussions about the wealthy not contributing their “fair share” or instances like Warren Buffet paying a lower tax rate than his 20 office colleagues, which some view as evidence of a tax system that’s not progressive enough. But what do the actual data reveal? It may hold some surprising revelations. To offer deeper insights, we’ve included three informative charts below.
The most recent IRS data from 2020 underscores the highly progressive nature of the federal income tax system. Individuals in the top 1% (those with an adjusted gross income of $548,336 or higher) paid an average of 26% of their income to the Federal government. Meanwhile, those in the bottom 50%, (earning $42,184 or less) had an average income tax rate of 3.1%. This significant difference shows that the top 1% pay an average federal income tax rate that’s 8.4 times higher than the bottom half of all taxpayers.
The top 1% is comprised of roughly 1.6 million income tax returns, and make 22.2% of total adjusted gross income, but they shoulder a significant 42.3% of the overall federal income tax burden. Conversely, the bottom half, consisting of nearly 79 million income tax returns, make 10.2% of total adjusted gross income, yet their federal income tax burden is comparatively light at 2.3%. It’s worth noting that the bottom 96% of taxpayers, accounting for approximately 151.2 million tax returns and 64.8% of the adjusted gross income, collectively bear 40.5% of the total federal income tax load. This still falls short of the share carried by the top 1%.
Over the past four decades, those within the highest income quintile have consistently witnessed their portion of the federal income tax burden increase, rising from 65.0% in 1979 to 89.7% in 2019, the most recent year recorded by the Congressional Budget Office. In stark contrast, those in the lower four income quintiles have experienced a different trajectory. The lowest and second quintiles have reduced their tax liability share to -4.8% and -1.6% in 2019, respectively, down from -0.1% and 4.2% in 1979, meaning that now the bottom 40% not only pay no federal income tax, but also receive additional income. The middle income quintile has also experienced a decline, falling to 3.5% in 2019 from 10.7% in 1979. Similarly, the fourth income quintile has decreased to 13.1% from 20.2% over the same period.
Source: Congressional Budget Office, First Trust Advisors. Data from 1979-2019.
This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Markets Haunted by Looming Uncertainty and Volatility
Raymond James
Markets & Investing
October 31, 2023
Equities pulled back for a third straight month in October while navigating through persistent headwinds.
Many words have been published about the U.S. economy plowing through conventional expectations amid the Federal Reserve’s (Fed) campaign to lower inflation by raising interest rates. Through October, this theme would continue as headline economic data told the tale of an ultra-resilient U.S. economy, even as volatility churned financial markets.
Among those data: Third-quarter retail sales were higher than expected. September saw 336,000 nonfarm jobs added (a robust number) as unemployment remained at 3.8%. And the biggest of all, the U.S. economy grew at an annualized rate of 4.9% in the third quarter, more than twice the second quarter’s 2.1%.
Does this mean a recession is off the table? While these results will likely change some analysts’ expectations, one should be cautious when using backward-looking indicators to develop a forecast. History, here, provides an antidote to exuberance.
“The question is: can the economy pivot that fast from robust growth to a recession? History says it can,” said Raymond James Chief Investment Officer Larry Adam. “In fact, in the last 12 recessions, the quarter before the recession begins, GDP growth averaged 2.6%. The quarter the recession began, growth was down 3.5%. That’s a quick turnaround.”
The Raymond James Investment Strategy Committee continues to expect a mild recession in early 2024.
Interest rates, world events and underlying economic conditions suggest more uncertainty to come, and thus more volatility. We’ll dive into those details below.
*Performance reflects index values as of market close on October 31, 2023. Bloomberg Aggregate Bond and MSCI EAFE reflect October 30, 2023, figures.
A look at equities underneath
Though buoyed by a narrow vanguard of seven high-flying tech stocks, equities continued to pull back through a volatile October as headwinds stacked up against them: high Treasury yields, weak corporate earnings, geopolitical conflicts and energy prices among them. The significant influence of those leading stocks on the S&P 500 has also hidden what has been, underneath, a more challenging equity market than seen at first glance. The average S&P 500 constituent stock is down 3.1% for the year, and nearly half are in a bear market against their respective 52-week highs. As lessons of too many eggs and too few baskets will tell you, this one-dimensional market is primed for volatility.
Reading the Fed's furrowed brow
Fixed income markets weathered a volatile October as strong economic data left investors wondering if the Fed will raise interest rates beyond expectations. Meanwhile, high yields produced further downward pressures on the secondary market, with the 10-year Treasury closing the month at 4.90%. The ongoing yield curve inversion – when short-term yields are higher than long-term yields – began to reduce as Treasury yields with maturities two years and under declined through October, slightly, and as yields for maturities five years and out increased anywhere from 21 to 36 basis points. A yield curve inversion is seen as a reliable predictor of a future recession.
International appetite for risk plummets
While the economic impact of the conflict in Gaza will likely be limited, the risk of escalation across the region has led investors to seek the traditional safe havens, including gold and U.S. dollars. Amid surging sovereign bond yields and falling stock markets, the dollar’s performance stands out, a reflection of the sudden increase in the importance of risk sentiment and sensitivity to equity market weakness.
U.S. House selects new leader as old issue looms
The election of Mike Johnson of Louisiana to the House of Representatives speakership lessens the likelihood of a government shutdown in mid-November after the prior speaker, Kevin McCarthy of California, was ousted from the seat October 3 after making a stopgap deal to prevent a shutdown. Current expectations are for another short-term funding bill to fund the government beyond the current November 17 deadline. A key thing to watch will be the ability of Congress to pass all 12 Appropriations bills to avoid a 1%, across-the-board spending cut that is triggered in January.
Conflicts create energy uncertainty
The impact on energy markets of the current confrontation between Israel and Hamas will likely be less far-reaching than that of the long-running conflict between Russia and Ukraine, or of the Yom Kippur War of 1973, in which an ensuing oil embargo drove a material spike in the price of crude, driving many economies into recession while simultaneously generating a surge in inflation.
While direct involvement of Iran in the Gaza conflict seems unlikely given its careful, 44-year track record of avoiding all-out war with Israel. If such a scenario were to occur, it would lead to much larger-scale geopolitical turmoil, of which disrupted energy supplies would be only one of the side effects.
The bottom line
October is typically a month when slumping late-summer markets perk up, but this year those markets reflected significant global headwinds. It is easy to read these challenges through a gloomy lens, but also worth noting that the U.S. economy has remained a bastion of strength in the world through this time, inflation continues to trend downward and evidence suggests that if there is a recession in 2024, it will be a mild one.
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting intermediate-term (2 -10 years) obligations of the U.S. government. Companies engaged in business related to the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.
Material created by Raymond James for use by its advisors.
It’s the Same Bear Market
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
October 30, 2023
The S&P 500 closed at 4,117 on Friday, more than 10% below its recent peak in late July. Some are saying it’s a brand-new bear market for stocks. In this view there was a bear market in 2022, a bull market from October 2022 through July this year, and a new bear market that started in August.
We don’t think this is the appropriate way to look at things. This is not a new bear market. Instead, it’s the same bear market. We had a bear market in 2022, a temporary rally, and then the bear market reasserted itself.
The driving forces behind the ongoing bear market have not changed. Federal policy of easy money and extremely loose fiscal policy during COVID kept a serious recession at bay. That is basically over now. The M2 measure of money is down 3.6% in the past twelve months. Second, the massive episodes of COVID-era government spending/stimulus had to eventually wear off, which is revealing lots of malinvestment and now generating economic headwinds.
We think much of the headwinds from these shifts are still in front of us. Yes, the economy grew at a rapid pace in the third quarter but that includes contributions from consumer spending and inventory accumulation that were unsustainably hot. Meanwhile, business investment should slow as companies can earn robust returns by hoarding cash with little to no credit risk. Speaking of interest rates, they are now above inflation across the yield curve. The artificial boost from artificially low rates is gone.
This is why we remain bearish. At the end of last year we forecast that the S&P 500 would finish 2023 at 3,900 and we haven’t budged since, remaining bearish throughout the rally that took the S&P 500 all the way up to 4,600 this summer.
It hasn’t been easy taking this position. Equities tend to trend upward over long periods of time, as the real economy and profits tend to grow, and the price level rises, as well. We still believe the US future is relatively bright: entrepreneurs are still creating and innovating, and artificial intelligence shows great promise. We are also hopeful that sometime in the next few decades there will be major technology breakthrough in the energy sector. Our natural tendency is toward bullishness.
Clearly, we are not “permabulls” and never have been. From 2009, all the way through 2021 we remained bullish. We didn’t run with the herd of other forecasters worried that the world had come to an end in 2008. And, while we are bearish today, we don’t think it’s the end of the world now.
Eventually, stock prices will reflect fair value. More importantly, we expect the political pendulum to swing back toward the center. Big government directed economies eventually suffer…then recover when policy shifts back.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Growth Surge in Q3 Masks Weak Trend
First Trust Monday Morning Outlook
Brian S. Websury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
October 23, 2023
We still think a recession is coming, but it definitely didn’t start in the third quarter. Instead, as we set out below, it looks like real GDP expanded at a 4.7% annual rate. If we are right about that number, that would be the fastest pace of growth for any quarter since 2014, with the exception of the re-openings from COVID in 2020-21.
Keep in mind, though that even with growth that fast, the growth rate since the end of 2019 – the pre-COVID peak – would be only 1.9% per year, reflecting an underlying trend that is still slow.
Why do we still think a recession is coming? Because after the surge in money creation in 2020-21, monetary policy started getting tight in 2022. In the past year the M2 measure of the money supply is down 3.7%. Meanwhile the yield curve (we like to compare the 10-year Treasury yield to the target federal funds rate) has been inverted since late 2022 and is likely to stay that way for at least the next several months.
Higher short-term interest rates mean businesses have the ability to lock in healthy nominal returns on cash with minimal risk. In turn, this should lead to a reduction in risk-taking and business investment.
Meanwhile, jobs are still expanding rapidly. Payrolls are up 2.1% in the past year. During the economic expansion that happened before COVID (mid-2009 through early 2020), a pace that fast (2.1% or more) only happened when the unemployment rate was about 5.5%, which meant plenty of workers still available for hire. Now it’s happening when the unemployment rate is less than 4.0%. This suggests employers are out over their skis and vulnerable to any softness in demand.
The bottom line is that the economy grew rapidly in Q3 but Q4 and beyond are likely to be much slower.
Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector rose at a 3.7% annual rate in Q3 while it looks like real services, which makes up most of consumer spending, should be up at about a 4.0% pace. The one weak spot was autos and light trucks, which declined at a 2.5% rate. Putting it all together, we estimate that real consumer spending on goods and services, combined, increased at a strong 4.1% rate, adding 2.8 points to the real GDP growth rate (4.1 times the consumption share of GDP, which is 68%, equals 2.8).
Business Investment: We estimate a 4.5% growth rate for business investment, with gains in intellectual property and equipment leading the way while commercial construction was roughly unchanged. A 4.5% growth rate would add 0.6 points to real GDP growth. (4.5 times the 14% business investment share of GDP equals 0.6).
Home Building: Residential construction is showing some resilience in spite of some lingering pain from higher mortgage rates. Home building looks like it grew at a 7.5% rate, which would add 0.3 points from real GDP growth. (7.5 times the 4% residential construction share of GDP equals 0.3).
Government: Only direct government purchases of goods and services (not transfer payments) count when calculating GDP. We estimate these purchases – which represent a 17% share of GDP – were up at a 1.8% rate in Q3, which would add 0.3 points to the GDP growth rate (1.8 times the 17% government purchase share of GDP equals 0.3).
Trade: Looks like the trade deficit shrank in Q3, as exports expended rapidly in spite of foreign economic weakness. We’re projecting net exports will add 0.5 points to real GDP growth.
Inventories: Inventories look like they grew a little bit faster in Q3 than in Q2, suggesting they’ll add about 0.2 points to the growth rate of real GDP. When a recession hits, we expect inventory declines to play a significant role in the drop in GDP.
Add it all up, and we get a 4.7% annual real GDP growth rate for the third quarter. Look for much slower growth in the fourth quarter.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Big Government Weighing on Growth
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
October 16, 2023
At the end of October we will get our first look at real GDP growth for the third quarter and it looks like it was very strong. We’ll have a more exact estimate a week from now – after this week’s reports on retail sales, industrial production, and home building – but it looks like the economy grew at about a 4.5% annual rate.
Even if that turns out right, however, the underlying pace of growth is much slower than what happened in Q3. From the end of 2019 through the third quarter, the average rate of growth would be 1.9%. From the end of 2007 – right before the Great Recession and Financial Panic – through the third quarter, the average growth rate would be 1.8%. Both these figures pale in comparison to the growth of the 1980s and 1990s.
Raising the long-term growth rate of the US economy ought to be a key focus of policymakers. Unfortunately, we seem to be moving in the opposite direction, with the government expanding, which means more redistribution.
According to the Congressional Budget Office, federal spending should total $6.131 trillion in the fiscal year that ended on September 30. But that includes the effects of the Supreme Court striking down much of President Biden’s plan to forgive student loans. That decision created a $333 billion “negative outlay” for Fiscal Year 2023. Without that decision, which didn’t affect the government’s cash flow, total federal spending would have been $6.464 trillion. We estimate that would translate to 24.0% of GDP, in a year when the jobless rate averaged 3.6%.
Let’s put that in historical perspective. In FY 2019, the last year prior to COVID, the jobless rate averaged 3.7% and federal spending was 21.0% of GDP. Back in 2000, at the peak of the first internet boom, federal spending was 17.7% of GDP. Some of this increase is due to higher interest costs, but most of it is not and the trend is not good.
In turn, this reminds us of one of our fundamental ways of thinking about the economy. Imagine ten people stranded on an island, living at subsistence, each person using a spear or even her hands to catch two fish each per day, barely surviving. Then two of them decide to risk it all and build a boat. They go out one day and bring home twenty fish. Hallelujah! Enough to feed everyone.
With this bounty, the others use their talents to find easier ways to get their two fish. Some of them climb the trees, bring down coconuts, and trade for fish. Others build fires to cook the fish just right. Others build better huts. And so on and so forth. In other words, the innovation of making that boat and net didn’t just help those original two; it helped everyone. Life is better.
But one of those islanders isn’t happy. He watches all that trading and realizes that the two owners of the boat and net who took the big risk are better off than the rest. It wasn’t like it was before, where all everyone had was two fish per day, barely eking out survival, but at least they were equal.
The unhappy islander – let’s call him Sernie Banders – comes up with a plan to bring “equity” to the island. He gets them to impose an 80% tax on the “rich” boat/netmakers! That way when the boaters bring in their haul of twenty fish, the rest of them get their “fair share” of sixteen (two fish per person, eight other people), with no extra work.
Common sense tells us what happens next. The inventors have little incentive to maintain or repair the boat or fix the net. Why waste your time or take a risk when the rest of the islanders are just going to seize the extra value you’ve created? In the end, the islanders are eventually back where they started. Or maybe worse, because they forgot how to fish.
The US isn't at 80%, yet. But Federal, State and Local spending are already roughly 42% of GDP. If we don’t get spending under control, tax rates will eventually go much higher. Bigger government means less innovation, less investment in and maintenance of capital, and less economic growth.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Make Your Final Tax Saving Moves Before Dec 31
Raymond James
Tax Planning
Proactive investors know that the months before year-end can be an ideal time to make strategic adjustments.
While keeping in mind your long-term investment goals, meet with your advisor and coordinate with your tax professional to examine nuances and changes that could impact your typical year-end planning.
Mind your RMDs
Be thoughtful about required minimum distributions (RMDs) to ensure that you comply with the rules – especially as some of those rules have shifted throughout the pandemic.
Investors who reach a certain age are required to take RMDs from their IRAs. You’ll face a hefty 25% tax penalty on amounts not withdrawn from your IRA to meet the RMD, so be sure to speak with your advisor to ensure you’ve met your obligations.
A few reminders for future distribution planning:
RMDs can be automated with your advisor to help ensure you don’t miss applicable deadlines.
Your first RMD can be delayed until April 1 of the year after you reach 70 1/2, 72 or 73 (depending on your year of birth). If you delay, however, you must also take your second RMD in the same tax year. This can inflate your income, which may affect your tax bracket. Check with your advisor to determine what is applicable and best for you.
Subsequent RMDs must be taken no later than December 31 of each calendar year.
Qualified charitable distributions allow traditional IRA owners who are 70 1/2 and older to gift up to $100,000 from their IRA to a qualified charity.This is a non-taxable distribution from their IRA and can be used to satisfy an RMD.
Be mindful of how taking a distribution will impact your taxable income or tax bracket. If you are in a low tax bracket, discuss with your financial advisor and tax professional about taking an additional strategic distribution at that lower rate.
To harvest or not to harvest
Evaluate whether you could benefit from tax-loss harvesting – selling a losing investment to offset gains. If your capital losses exceed your capital gains, your excess losses up to $3,000 (single or married filing jointly) can be used to offset ordinary income. Any additional losses can be carried forward to future years. With your advisor, examine the following subtleties when aiming to decrease your tax bill:
Short-term gains are taxed at a higher marginal rate; aim to reduce those first.
Don’t disrupt your long-term investment strategy when harvesting losses.
Be aware of “wash sale” rules that affect new purchases before and after the sale of a security. If you sell a security at a loss but purchase another “substantially identical” security – within 30 days before or after the sale date – the IRS likely will consider that a wash sale and disallow the loss deduction. The IRS will look at all your accounts – 401(k), IRA, taxable, etc. – when determining if a wash sale occurred.
Manage your income and deductions
Those at or near the next tax bracket should pay close attention to anything that might bump them up and plan to reduce taxable income before the end of the year.
Determine if it makes sense to accelerate deductions or defer income, potentially allowing you to minimize your current tax liability. Some companies may give you an opportunity to defer bonuses and so forth into a future year as well.
Certain retirement plans also can help you defer taxes. Contributing to a traditional 401(k) allows you to pay income tax only when you withdraw money from the plan in the future, at which point your income and tax rate may be lower or you may have more deductions available to offset the income.*
Evaluate your income sources – earned income, corporate bonds, municipal bonds, qualified dividends, etc. – to help reduce the overall tax impact.
Evaluate life changes
From welcoming a new family member to moving to a new state, any number of life changes may have impacted your circumstances over the past year. Bring your financial advisor up to speed on major life changes and ask how they could affect your year-end planning.
Moving can significantly impact tax and estate planning, especially if you’ve relocated from a high income tax state to a low income tax state, from a state with a state income tax to one without (or vice versa), or if you’ve moved to a state with increased asset protection. Note that moving expenses themselves are no longer deductible for most taxpayers.
Give thought to your family members’ life changes as well as your own – job changes, births, deaths, weddings and divorces, for example, can all necessitate changes – and consider updating your estate documents accordingly.
Next steps
Consider these to-do’s as you prepare to make the most of year-end financial moves, and discuss with your financial advisor and tax professional:
Manage your income and deductions, paying close attention to your marginal tax bracket.
Evaluate your investments, keeping in mind whether you could benefit from tax-loss harvesting.
Make a list of the life changes you and your family have experienced during the year.
*Withdrawals from qualified accounts, such as an IRA, prior to age 59 1/2 may also be subject to a 10% federal penalty tax. RMDs are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
This material has been created by Raymond James for use by its financial advisors.
Crisis Management Government Leads to No Good
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
October 9, 2023
Back in 2008, Ben Bernanke and Hank Paulson, using fear of financial collapse, convinced President Bush and Congress to 1) pass a $700 billion bailout of banks (called TARP) and 2) allow the Federal Reserve to pay banks interest on reserves at the same time the Fed moved from a scarce reserve model of monetary policy to an abundant reserve policy. These policies, to spend and print massive amounts of money, were super-sized during COVID.
Both policies proved incredibly damaging. The 2008 financial panic could have been addressed by changing mark-to-market accounting. In the six months following the passage of TARP and the institution of Quantitative Easing, the S&P 500 fell another 40%. Only when mark-to-market accounting was changed in early March 2009 did the panic end.
But, because so few people understood this, the idea that any kind of crisis requires trillions of dollars of spending and money printing became the roadmap for government in a crisis. We fully understand that early on during COVID, fear that we were facing another 1918 flu pandemic was real. But by the end of 2020, there was enough data to show that government shutdowns were harming education, small business, and supply chains, while it was also creating inflation.
But government kept spending and printing money in 2021 and 2022. And then, rather than returning spending back to pre-crisis levels, government spending has ratcheted higher. Between 2000 and 2007, non-defense federal spending averaged 15.3% of GDP, between 2008 and 2019 it averaged 17.6% of GDP, and now from 2020-2023 it is 24.5% of GDP.
For perspective, non-defense government spending was just 10.1% of GDP in the five years between 1965 and 1969. Total government debt is now $33.5 trillion, and with interest rates rising, the total cost of this borrowing is lifting government spending even more.
According to an August 3, 2023 CNN article, “The public remains broadly negative about the state of the country, with just 29% saying things are going well in the US and 71% that they’re going poorly….” We think we know why. Keynesians think government spending can boost growth, but, if so, that extra growth is just temporary. Every dime the government spends is created in the private sector, and the more the government redistributes, the less growth the economy will experience. Potential real GDP growth was roughly 3.5% per year in the 1980s and 1990s…today, we estimate it is just 1.5%.
Meanwhile, monetary policy is a mess. Quantitative Easing signaled a shift to an abundant reserve monetary policy. In 2007, the Fed’s balance sheet was roughly $800 billion. Today it is near $8 trillion. This money creation ended up as deposits on bank balance sheets.
In turn, banks have been forced to hold more deposits than would have existed without QE. And when banks hold more deposits, they also hold more assets. To complicate matters, in an abundant reserve monetary policy, the Fed basically sets rates wherever they want. And in the past fifteen years, the Fed has held short-term interest rates below inflation 84% of the time. In other words, banks (and the Fed itself) are holding assets that they bought at much lower interest rates than exist today.
If the banking system was forced to mark all their assets to market today, many banks would be underwater. In other words, the policies put in place to supposedly save banks have actually created a less safe banking system.
But there are other strange developments as well. One, is that the Treasury Department has a bank account at the Fed, called the Treasury General Account. On October 4 the TGA held $679 billion. The TGA is not new, but for decades through 2007, it held an average of only $5 billion. It was designed as a cash management tool.
Why the Treasury needs hundreds of billions in this account makes no sense. Using an interest rate of 5%, Americans are paying $34 billion a year so that the Fed can hold this cash. The cost of big government just keeps going up and up. It needs to be reversed.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The stock indexes mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
Making the Most of Medicare's Open Enrollment Period
Raymond James
Retirement & Longevity
October 2, 2023
Ask yourself a few questions to make sure you're getting the most from Medicare.
Mark your calendar for Medicare’s open enrollment season: between Oct. 15 and Dec. 7, you are able to make changes to your Medicare Advantage plan and prescription drug coverage.
During this time, you can change from Original Medicare to a Medicare Advantage plan or vice versa or switch from one Medicare Advantage plan to another Medicare Advantage plan. You can also join a Medicare Advantage or Medicare prescription drug plan for the first time, or drop your drug coverage completely.
Even if you’re satisfied with your current plan, open enrollment presents a great opportunity to make sure you’re getting the most out of Medicare. Every year you should compare your current plan to other plans in your area in case another plan offers better health and/or drug coverage at more affordable prices.
The coverage provided by insurance companies often changes each year and could result in paying more out-of-pocket on healthcare expenses throughout the year. Here are some tips to help you get started.
Ask yourself some important questions: Have your needs changed? Is your current coverage adequate? Will the cost of your current plan be going up? Are there comparable, lower-cost plans available?
Review the annual notice of change from your current plan provider. You should receive this in September.
If you have a Medicare Advantage plan, make sure your doctor is still accepting your particular plan next year. If your doctor is out of network, you will have to choose a new plan or pay higher out-of-pocket costs.
Carefully review your plan for prescription drug coverage and determine your copayment and coinsurance costs.
If you switch from a Medicare Advantage plan to Original Medicare, you will want to join a stand-alone Part D plan to get Medicare drug coverage.
Compare plans using the Medicare Plan Finder at medicare.gov.
Get one-on-one assistance from the State Health Insurance Assistance Program.
Call the Medicare Rights Center at 800.333.4114 for free counseling.
All changes to your Medicare plan will take effect Jan. 1 of the next year.
Medicare decisions can be complicated. If you have any questions about open enrollment, or if you’d like to discuss how healthcare costs factor into your overall financial plan, please contact your financial advisor.
Here We Go Again: Showdowns and Shutdowns
Raymond James
Economy & Policy
September 29, 2023
Chief Economist Eugenio J. Alemán discusses current economic conditions.
While government shutdowns impact the economy directly and indirectly, the magnitude of the impact is determined by the length and scope of the shutdown. Some operations can continue in a “partial shutdown” scenario, and thus impact the economy differently. During a shutdown, the government temporarily pauses nonessential operations and furloughs nonessential federal workers and halts appropriations of what is called discretionary spending, which is about 27% of total federal expenditures. Meanwhile, mandatory spending like Social Security and Medicare will continue, as they do not require annual congressional approval. However, some of the services associated with the provision of these essential services could be affected if workers are furloughed.
GDP (Government Spending Component):
Over the past 3 years, government spending has represented about 6.6% of total GDP. Out of that 6.6%, about 2/3 goes to mandatory spending—according to the U.S. Treasury—which would be marginally impacted by the shutdown (e.g., Medicare, Social Security, etc.). The remaining 1/3 that goes to discretionary spending would be more impacted. Also of note, shutdowns don’t cancel spending but delay it. If the shutdown is short-lived, spending will catch up within the same quarter-reporting period and no subsequent measured effect will be felt on GDP.
Historical example from the Congressional Budget Office (CBO): The CBO estimated the GDP impact in 2019 to have been about -0.2 PP percentage points from the headline number (1Q19), but they also mentioned that this negative impact was made up for in subsequent quarters. (This government shutdown lasted about 1 month.)
Employment (Federal Employees):
To put things in perspective, federal employees make up, on average, ~2% of the total U.S. nonfarm payrolls. Even if the government does shut down, not all these workers will be impacted as ‘excepted’ workers will continue to contribute to the limited functions of the government. Those impacted will be ‘furloughed’ and not laid off, which is an important distinction since they will receive the pay back after the shutdown ends. Thus, their contribution to GDP may, in a worst-case scenario, be detracted from the current period but added back once the government reopens.
Perhaps the biggest issue for furloughed federal government employees will be dealing with the payments of debts, especially if they are living paycheck to paycheck.
Other Indirect Effects:
PCE: Personal Consumption could fall as government workers’ delayed paychecks would cause a temporary pullback in their personal spending.
Employment other than federal employment: Although federal government employees will go back to work once the shutdown is over, that will probably not be the case for workers in other industries that service the Federal government as suppliers as workers in retail businesses that provide services to those federal employees, especially in the Washington DC area. These disruptions are hard to measure and will also depend on the duration of the shutdown.
Investor sentiment: From process disruptions and deteriorating confidence in the government, different asset classes could be harmed. However, we expect that impact to be very limited and short- lived.
Credit Rating: As seen in news headlines, credit ratings such as Moody’s expect an impact on their U.S. ratings should Congress allow a government shutdown to take place. This could mean putting the U.S. debt in review for a downgrade and/or going ahead with the downgrade. The impact of such an event is very hard to measure because it could, potentially, severely affect investor confidence.
Federal Data Reporting Agencies: Federal agencies that report economic data including the Bureau of Labor Statistics, the Bureau of Economic Analysis, etc., will not release economic data during a shutdown. This would add several layers of uncertainty to the ‘data-dependent’ Federal Reserve as important economic indicators are used to determine its monetary guidance. In fact, in just over a month, the next FOMC meeting will take place, and members of the Fed will certainly be eager to look at what economic data such as inflation (10/12), employment (10/6), and other indicators have done since its last meeting in order to steer its monetary policies in the right direction.
Federal Reserve: Although it is too early to tell because we don’t know the length of the shutdown, the Federal Reserve will probably not increase the federal funds rate during its October/November Federal Open Market Committee meeting if the shutdown is still in place as it will try to not add more uncertainty to an already uncertain environment. Furthermore, if the shutdown remains in place well into December, the Federal Reserve will probably skip increasing interest rates during the last meeting of the year. Once “normalcy” is restored and data is once again available, the Fed will decide on the path going forward.
Economic and market conditions are subject to change.
Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.
Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.
The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.
The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.
ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.
ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.
Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.
The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.
Source: FactSet, data as of 7/7/2023
Economy and Markets Slow as Headwinds Build
Raymond James
Markets & Investing
October 02, 2023
As heightened inflation has lingered, the Federal Reserve diminished hopes of 2024 interest rate cuts and economic data suggests a mild recession in the first half of 2024.
Throughout the run of the Federal Reserve’s (Fed) inflation-fighting, rate-raising program, the equity market has shown uncommon enthusiasm supported by a growing economy, a strong labor market and healthy consumer spending. Contrary to the expected way of these things, inflation continued to cool even as the economy and the markets remained hot.
However, in September, “We believe the economic cycle may be reaching an inflection point,” Raymond James Chief Investment Officer Larry Adam said. “The S&P 500 had its second-best start to a year since 1997, and we’ve warned that equity markets were due for a pullback. Our view is that the economy is slowing, not imploding.”
Inflation remains persistently higher than the Fed’s 2% target. And while the Fed declined to raise interest rates at its September meeting, it left the door open for another rate increase by the end of the year.
A potential government shutdown, softer consumer confidence, a slowdown in home sales and home starts, higher oil prices, persistent inflation and the Fed’s message that the fed fund’s rate will be higher for longer combined to bring the S&P 500 down 4.87% for the month.
We’ll dive into some of these details, but first let’s review the year-to-date results:
*Performance reflects index values as of market close on Sept. 29, 2023.
Congress reaches last minute funding deal
By the end of the month, uncertainty about whether Congress would meet the October 1 deadline to fund the government for fiscal year 2024 without interruption faded into near certainty that a shutdown was imminent. However, a compromise deal approved in the final hours in the fiscal year created a 45-day stopgap. Significant challenges lie in the path of a longer-term funding bill, but this measure suggests they are not insurmountable.
Treasury yields surge on Fed’s words
The 10-year Treasury yield remained elevated through September and hit a 15-year high after the Fed’s steadfast language suggested it would keep interest rates higher for longer than investors have expected. Compared to August, rates for notes beyond seven years were up 40-49 basis points while two-year rates went up 19 basis points and five-year rates increased 34 basis points. “Higher for longer” interest rates are expected to weigh on the economy but have also created opportunities to lock in elevated yields.
Suppliers’ discipline pushes oil higher
Oil prices ended September above $90 a barrel, a 10-month high, demonstrating that the macroeconomic backdrop is not everything. While there is no escaping worldwide weak economic headlines creating headwinds for oil demand, the supply side of the equation is currently driving prices. The OPEC+ group, led by Saudi Arabia and Russia, is actively curtailing oil supply, and for longer than originally expected. OPEC+ has been disciplined with supply from the first days of the COVID-19 pandemic, and even with global demand having surpassed pre-COVID levels, that discipline remains visible.
Britain and EU reach potential interest rate plateaus
While avoiding being boxed in by statements claiming their aggressive interest rate raising strategies have reached a “keep high and hold” stage, the positions of both the Bank of England and European Central Bank were similarly hawkish as the U.S.’s Federal Reserve as they adopted no change to their current, heightened rate in the U.K., and a quarter-percentage point raise in a single currency area in the euro zone.
Japanese markets suggest ending of “ultra-easy” money
Financial market pricing suggests the Bank of Japan may end its 16-year run of negative interest rates as part of its “ultra-easy” monetary policy stance. If Japan is going to depart from its long-held policy position it seems unlikely before January, at the earliest. Given that local financial institutions are nursing losses on local sovereign bond holdings, any further adjustment in the country’s monetary policy position is thought more dependent on any offsetting moves in the stock market than on inflation’s future pathway.
The bottom line
September saw some investors’ hopes for a “soft landing” – a corrective to inflation without a recessionary side effect – challenged, pulling air out of the equity market. Though the economy and labor market remained strong in the third quarter, data continue to suggest a mild recession in the first half of 2024.
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting intermediate-term (2 - 10 years) obligations of the U.S. government.
Material created by Raymond James for use by its advisors.
Tax Policy Outlook
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
October 2, 2023
The fiscal year ended last week, alarms went off both literally and figuratively, and a last-minute deal was reached to keep the government open for another forty-five days. Later in October the Treasury Department will figure out the final budget numbers for last year and we estimate the deficit will come in a little north of $1.7 trillion, or 6.5% of GDP.
In a fiscal year when unemployment averaged only 3.6%, that’s a horribly high budget deficit to run, and a sign that something is deeply wrong with US fiscal policy. Worse, this past year’s deficit was artificially and temporarily held down by the Supreme Court striking down much of President Biden’s plan to forgive student debt. Without that decision, the deficit would have been close to 8% of GDP.
The bottom line is that the US is approaching a fiscal reckoning sometime in the next few years where it will need to either reduce future spending or find more future revenue. Even tougher, this will have to happen in a geo-political backdrop where the US may have to ramp up military spending to project more power in the Pacific.
We root for spending cuts, particularly to entitlements. But, given that politicians who advocate for spending cuts using any tool they can find (debt ceiling or shutdowns) are verbally flayed by the establishment, we are not holding our breath. The establishment wants tax hikes, and that’s likely what we will get.
The good news is that we don’t think tax hikes will hit until at least 2026. Why that year? Because significant parts of the tax cuts enacted in 2017 under President Trump are set to expire at the very end of 2025. That expiration will focus the minds of politicians running for federal office in 2024, House, Senate, and President. In turn, in 2025, depending on the outcome of the election, some sort of deal will be reached about extending those tax cuts.
We think there’s about a 35% chance of a Republican sweep in 2024 (the presidency and majorities in both House and Senate). If that happens, we will likely get an extension of all the Trump tax cuts. However, unless that extension is coupled with aggressive spending cuts or entitlement reforms, it will be tough to sustain those tax cuts well beyond 2026.
We also think there is about a 20% chance of a Democratic sweep. If that happens, we’re likely to get significant across-the board tax hikes. Policymakers will claim they are only raising income tax rates on “the rich,” but we think other kinds of tax hikes would be on the table, like higher gas taxes or maybe a carbon tax like the Clinton Administration proposed in 1993. In addition, taxes would likely go up on corporations, even though much of the burden from such a tax hike would be felt by their workers and their customers.
That leaves a 45% chance of having mixed government in 2025-26, with each party having control of at least one of the White House, the House or the Senate. In that case, expect most of the Trump tax cuts to be extended, except at upper income levels, where tax rates would likely revert to where they were under President Obama. This would be similar to the compromise that was reached for 2013, when the Bush tax cuts enacted in 2001 and 2003 were set to expire.
The one thing we know for sure is the US is on an unsustainable path. If we don’t cut spending, tax hikes are eventually on the way.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Succession planning at all stages
It turns out that no matter what stage of business you are at, it’s never too early to think about succession planning.
For most business owners, especially entrepreneurs who have founded their business, the word succession is inextricably linked with retirement. For that reason there are many myths around succession planning – including the most prominent “I’m not ready to retire.” However, it turns out that no matter what stage of business you are at, it’s never too early to think about succession planning.
Early stage
Exiting a business for an early-stage entrepreneur is somewhat unusual and may be focused at this point on preparing for some type of unplanned exit. For that reason, it’s good to have succession contingency plans in place for leadership, as well as life insurance to provide for loved ones. To take a more sophisticated approach, however, making sure there are legal structures in place to protect an operating business is equally as crucial. Wills and even complex estate planning tools often do not cover an operating business.
Protecting an operating business in the event of an unplanned exit achieves two goals. First, it provides a harmonious realignment and ensures value and equity in the company remain intact by reassuring customers, clients and employees that your business will continue to run as usual. Second, it preserves equity and potential income from your business for loved ones.
Do:
Seek out a professional for life insurance, estate planning and trusts
Create an early stage exit plan
Talk to an attorney to make sure your business operations are protected
Don’t:
Leave succession an unplanned question
Rely on life insurance and estate planning to take care of loved ones and protect the operation of your business
Put planning off because retirement is years in the future
Middle stage
At this stage you may have a robust business – you’re out of the early or startup period and operations are running smoothly. You may be in a growth phase, possibly acquiring other businesses or expanding by investing in technology or infrastructure.
The middle stage may have a long runway for succession planning. It blends the practicality of having plans in place in case of a sudden, unplanned exit and looking ahead at the course and growth of your business over the long haul.
Do
Revisit plans put in place at the start of your business to make sure they’re still relevant
Consider your ideal time frames for exiting your business
Develop talent at your company who could take over when you decide to exit
Don’t
Put off planning until months before you’ve decided you want to exit
Become so focused on day-to-day operations that you lose sight of the big picture
Assume that plans you may have had in place five or 10 years ago still apply
Exit stage
In this stage, you’ve decided you want to exit the business you’ve worked so hard to build. You’ve created a timetable and may have a date in mind for exiting that’s one to five years out. Valuation, equity and how you can continue to realize income are top of mind.
But first, how are you feeling?
This stage comes with a lot of emotions. Not only are you attached to a business you’ve nurtured from idea to startup to maturity, you’ve likely got your identity wrapped up in your role as a business owner and are emotionally connected to its history of growth and success.
Redefining yourself post-exit, whether you are retiring or going on to new ventures, is important. Take some time during succession planning to attend to this normal mix of emotions and think through what the next act looks like for you. Careful planning about your life in tandem with succession planning can mitigate a sense of loss and add excitement to looking forward to what’s next.
Key financial issues
The key financial issues you’ll want to work through with your advisors, accountant, attorney and family are many.
How much is enough, after taxes, with plenty left over to fund your desired lifestyle and estate planning objectives. Home in on your lifestyle goals and the associated expenses.
Who will you sell to or pass the business on to? A key employee group, family or third party? What are the tax implications of a sale or transfer?
Will you immediately exit or transition out over time?
Your options
You and your advisor can tap in to strategies that will help refine your plan. Options could include specialized trusts (e.g., revocable living trusts, intentionally defective grantor trusts, grantor retained annuity trusts) and self-canceling installment notes and intra-family loans. Some assets will require more legal coordination to handle properly during the legacy planning process, such as real estate, intellectual property, and certain types of stock, business partnerships and promissory notes. Your advisor can help you understand the advantages and considerations of each.
Together, you’ll also want to think through how to provide an inheritance for a child who is unwilling or unable to be active in the business, as well as your plans should you have to leave the business before you’re ready (e.g., disability, divorce, distress or disagreement).
Raymond James and its advisors do not offer legal or tax advice. You should discuss any legal or tax matters with the appropriate professional.
Sources: HBR.org; columbusceo.com; due.com; foundr.com; yourstory.com; exitplanning.com; sba.gov; forbes.com; investopedia.com; hbr.org; vistage.com; succesionresource.com
Focus on Philanthropy This Fall
Raymond James
Estate & Giving
Review key market dates and timely financial planning tasks.
Market Closures
Nov. 23: Thanksgiving Day
Dec. 25: Christmas Day
Dates to remember
For deadlines that fall on a weekend, action may need to be taken by the preceding weekday.
Oct. 1: Last day to establish a SIMPLE IRA plan or a safe harbor 401(k) to be effective for 2023.
Oct. 15: Open enrollment for Medicare Parts C and D begins. Make any changes to your coverage by Dec. 7.
Oct. 15: The final day to file a 2023 income tax return for those issued an extension.
Nov. 30: Observe Information Security Day – keep your personal information secure by updating your operating system; visit ready.gov/cybersecurity for more tips.
Dec. 31: New Year’s Eve is the year-end charitable gift deadline for check and wire transfers.
Dec. 31: Last day to take annual required minimum distribution, unless you turned 72 in the current year.
A legacy of generosity - National Philanthropy Day is Nov. 15. To take the celebration a step further than writing a check, consider how you can teach the joy of giving to the next generation. If you want your charitable spirit to have more influence in your estate plan, connect with your advisor.
Things to do
Confirm cost of living: Next year’s Social Security adjustment is typically announced in October.
Adjust your coverage: Ready your documents for Medicare open enrollment, if eligible. If you’re working and your employer offers benefits, take the time to understand them.
Refresh your plan: It’s important to review your retirement and investment accounts regularly and make adjustments to insurance and estate plans as needed. The holidays can be a good time to do this if you want to discuss what you’re planning with close friends or relatives.
Fend off fraud: Start by tracking and reviewing all of your bank and credit card statements for irregular activity. You can also request a copy of your consumer credit profile and stay on the lookout for scams asking you to confirm or update your account information via email.
Tend to your portfolio: If you’re invested in mutual funds, don’t forget about capital gains distribution dates that typically fall in December. Consider balancing your realized capital gains with losses where appropriate. Talk to your advisor about whether this strategy might help lower your tax liability.
Engage in smart giving: As deadlines for year-end gift and charitable contributions approach, make a strategy for your philanthropic goals. Consult with your advisor if you’re interested in donating appreciated stock or bunching a few years’ worth of donations in a donor advised fund to help you meet the threshold for itemizing on a tax return.
Revisit your resolutions: Before beginning your New Year’s celebrations, review the financial planning you did for the past year. Did you make progress toward your goals?
Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value. © 2023 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. © 2023 Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James financial advisors do not render legal or tax advice. Please consult a qualified professional regarding legal or tax advice.
Fed Elects to Skip Rate Hike at September 2023 FOMC Meeting
Raymond James
Markets & Investing
September 20, 2023
For the second time in four months, the central bank decided to not increase interest rates but indicated another hike in 2023 is likely.
The Federal Reserve (Fed) elected to skip raising the federal funds rate at the September 2023 Federal Open Market Committee (FOMC) meeting.
One more rate hike in 2023 is likely, either at the October/November or December meeting.
It is the second skip in four months by the Fed, which ended its run of 10 consecutive interest rate hikes dating back to March 2022 in June.
The federal funds rate remains 5.25%-5.50% and the Fed's cumulative total increase holds at 525 bps since March 2022, with a total increase of 100 bps occurring in 2023.
Fed Chair Jerome Powell reaffirmed that the central bank is strongly committed to bringing inflation down to its 2% target.
Aligning with market expectations, the Fed elected to skip raising the federal funds rate at its September 20, 2023, FOMC meeting, which keeps the federal funds rate at 5.25%-5.50% – the highest range in over 22 years.
It is the second time in four months the central bank has skipped raising interest rates after a 10-meeting stretch of rate hikes dating back to the onset of the tightening cycle in March 2022. The Fed’s cumulative total increase remains at 525 bps, with a total increase of 100 bps occurring in 2023.
The median federal funds rate in the Summary of Economic Projections (SEP) and dot plot still estimates that Fed officials are expected to increase the federal funds rate once more before the end of the year. Furthermore, the Fed median federal funds rate for 2024 went from an estimate of 4.6% in June to 5.1% for this new dot plot while the median for 2025 went from an estimate of 3.4% – 3.9%.
“The new projections show a still very hawkish Fed as they took away two rate decreases that had been in place during the release of the June SEP and corresponding dot plot,” said Raymond James Chief Economist Eugenio Alemán. “This is a clear signal to markets that it is committed, at least for now, to keeping interest rates higher for longer, as it has continued to convey in every meeting since it started to increase interest rates in this cycle.”
The new SEP forecast also showed that high interest rates are not expected to bring the economy into a recession next year, meaning that the Fed is now expecting a soft landing. No longer having a recession in its SEP forecast is consistent with the Fed’s mantra of higher interest rates for longer as it doesn’t see its 2% inflation target being achieved until 2026.
The Fed’s Q4 2023 year-over-year projection for GDP increased from 1.0% during its June SEP to 2.1% for its latest SEP. Meanwhile, headline PCE inflation was upped from a Q4 year-over-year rate of 3.2% in June to a rate of 3.3% in September while the core PCE inflation was lowered to 3.7% in the September SEP compared to a rate of 3.9% in June.
“This decision and expectations going forward are not going to give certainty to markets while, at the same time, the Fed is trying to continue to prevent markets from starting to price in lower interest rates in the near term,” said Alemán. “The fact that it is no longer forecasting a recession will help support its view of higher rates for longer.”
All expressions of opinion reflect the judgment of the Raymond James Chief Economist and are subject to change.
There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected.
Don't Fall for the Q3 Head-Fake
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
September 25, 2023
We have plenty of data reports to go, but, so far, the third quarter is shaping up to be a strong one for the US economy. The Atlanta Fed’s GDP Now model is tracking a Real GDP growth rate of 4.9% for Q3, which would be the fastest quarterly growth rate since the earlier part of the COVID recovery.
Our models aren’t tracking quite so high but are projecting growth at about a 4.0% rate, still strong by the standards of the past couple of decades.
However, we would not get too excited about what’s happening in the third quarter and don’t think one quarter of strong economic growth means a recession is off the table.
With all the oddities of the COVID era – first overly strict lockdowns and then overly gradual re-openings – it’s entirely possible the GDP reports are exhibiting some “seasonality,” where certain quarters look better than the underlying economy really is. The third quarter is when children typically go back to school, for example, but, unfortunately, they did that less so during COVID. As a result, normal back-to-school behaviors might make the economy look extra strong for now.
To put some numbers on this, statistical adjustments to retail sales (called seasonal adjustments) subtracted 1.8% from reported sales in July 2019, prior to pandemic shutdowns. Back to school spending in July (much like Christmas) makes for some big spending months, and the statisticians adjust the numbers down. But in 2020, 2021 and 2022 July sales fell because so many schools were closed. This reversed the seasonals and this July (2023) seasonal adjustments added 1.4% to reported sales. We think this is distorting our view of the economy.
Meanwhile, the economy is likely feeling the last positive remnants of the surge in the money supply in 2020-21. The lags between monetary policy and the economy have always been long and variable, as Milton Friedman taught us. Beyond the third quarter, the economy is likely to show more of the effects of the drop in the M2 measure of the money supply from mid2022 through early 2023.
Another reason we think the third quarter is a head-fake is that deficit spending by the federal government is very unlikely to expand in 2024 like it has in 2023. Were it not for President Biden announcing his student loan debt forgiveness plan last year the budget deficit would have been 4.0% of GDP in Fiscal Year 2022, high but not extraordinary.
And if it hadn’t been for the Supreme Court striking down that plan this year, the deficit would have been about 7.8% of GDP for Fiscal Year 2023, well beyond even the highest deficit under President Reagan in the 1980s and all while the unemployment rate is averaging about 3.6%.
The rise in the deficit of almost four percentage points of GDP with the unemployment rate so low is unprecedented. Other prior leaps in the deficit of this magnitude have been during major wars or recessions, not when the US is at peace and the unemployment rate is unusually low.
In particular, the way some of the extra deficit spending is structured looks designed to temporarily and artificially boost economic growth. The CHIPS Act, for example, is encouraging private investment in chip manufacturing facilities in the US. So far this year (through July), private spending to construct manufacturing facilities in the computer, electronic, and electrical sector are up 228% versus the same period in 2022.
But these buildings don’t have to be rebuilt every year. Sometime soon the gains in this sector will dwindle and reverse, with collateral damage to other sectors, like trucking.
To be clear, we do not believe government spending is a positive for long-term growth. In fact, it often distorts and diminishes overall activity. However, in the short-term, as we saw during COVID (and apparently this year as well) it can make the economy look stronger than it really is. A price will be paid, and as all this extra stimulus wears off a recession is highly likely. We don’t see how it is avoided.
The next recession is unlikely to be as devasting as the ones in 2008-09 or 2020. But our view remains that a recession is on the way.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Higher Rates & A Shutdown On The Menu
First Trust Monday Morning Outlook
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
September 18, 2023
The University of Colorado Buffaloes are undefeated and suck up a lot of oxygen in the college football world. After just three games as the new head coach, Deion Sanders was interviewed by 60 Minutes. For now, the Buffs have gone from irrelevant to essential in the college football world. In the competitive arena of sports or business you need to stand out to be noticed. But, when you’re the government, standing out isn’t hard to do.
This week, the Federal Reserve is set to release a new statement on monetary policy. And, by the end of this month, Congress is supposed to either pass a new budget or possibly shutdown non-essential government services. Investors will be watching intently.
We don’t think the Fed will provide many surprises. As of the Friday close, the futures market was putting the odds of a rate hike at this week’s meeting at less than 1%. That may be too low, but the Fed won’t surprise on this front. It will release a new batch of economic forecasts as well as “dot plots” that show where policymakers see short-term interest rates heading.
This could be the surprise: The futures market’s odds of a rate hike by the December meeting are roughly 45% and we think that’s too low. Oil prices are lifting inflation once again, and rising health insurance rates will keep inflation elevated later this year. Meanwhile, real GDP growth looks solid in Q3. Mixing stubbornly high inflation with solid economic growth is not a recipe for a prolonged pause by the Fed, at least not yet.
We think the Powell presser and the dot plots will make it clear the Fed is leaning toward one more rate hike before the year is through. Our greatest hope is that someone asks Powell about the money supply and he acknowledges its importance for conducting monetary policy, but if that happens we’d be (happily) surprised.
Instead, we expect to hear at least one question for Powell about the looming possibility of a government shutdown at the end of September. The media and investors are starting to focus on this issue. We don’t think this is time well spent. History shows no relationship between federal shutdowns and the performance of the economy.
We had two shutdowns in late 1995 and early 1996, and saw no recession either time. There was a shutdown in 2013, no recession. There was a brief shutdown early in 2018, no recession. The most recent shutdown was the longest, thirty-five days from December 2018 through January 2019. You guessed it, no recession. The last time a shutdown coincided with a recession was in October 1990. That was only a four-day shutdown, but money was already tight and a recession was inevitable either way.
Here's another way to think about it: In the last forty years, the government has been shut for 91 days. Among those days, the US was in recession for four days and not in recession for eighty-seven. By contrast in the past forty years the US has been in recession about 8% of the time. That means the economy was more likely to be growing when the federal government was shut than when it was open!
This doesn’t mean a recession can’t start in the fourth quarter. But if we do get a recession it’ll be a coincidence, due to the lagged effects of the tighter monetary policy of the last year, not a shutdown itself.
Note that unlike some other budget confrontations in the past, this one does not involve paying the federal debt. For better or worse the debt limit has been suspended until January 2025. This means that even if the government is shut all the debt will get paid on time; there will be no default.
Social Security checks and other benefit payments will still go out. The mail still gets delivered. Essential government workers keep working, including those needed for national defense. The government is not the economy, even though many in DC (and many voters) think it is. But, those that produce wealth are the ones who have to pay for it. And that cost keeps going up. In 1930, the federal government (without defense) was about 2% of GDP. Today that percentage is 22%. The government has grown about 10 times more than the economy as a whole. Debt is at a record high and, with higher interest rates and rapidly rising entitlement costs, we are on an unsustainable path.
As we said two weeks ago, the federal government is running the most reckless and irresponsible budget in US history. Even John Maynard Keynes’ would not support such massive deficits with the unemployment rate so low. This can’t go on now that interest rates have returned to more normal levels. If a shutdown is the price we pay to start moving in the direction of less government spending, investors should be eager to see that happen. The shutdowns in the mid-1990s caused the government to become more fiscally responsible and led to Clinton era surpluses. And that was good for everyone.
The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.