More Good News.... Darn

The media and analysts are back to the good news is bad news routine. Meaning that when economic news is positive the bad news is the Federal Reserve may not be lowering interest soon. The media and analysts are adamant in their messaging that the Fed’s will and need to lower interest rates for three key reasons:

1. The economy is not performing well

2. Consumers are at financial risk, and

3. Only lower interest rates will save America

1. The Economy is Not Performing Well.

Without question there are many communities in the US that are experiencing financial challenges. Especially those cities such as San Francisco, Milwaukee, Portland, St Louis, and New York, etc where politicians have sabotaged their communities with harmful social policies. However, on a national level, employers continue to add more people to their payroll. The US Bureau of Statistics released its non-farm payroll report on Friday, and to the chagrin of the media, the Bureau reported job gains in March of 303,000. This is the highest increase in jobs in ten months and surpasses February's non-farm job increase of 270,000. January non-farm jobs were revised upward from the originally reported 200,000 payroll increase. These monthly job gains are similar to job gains prior to the pandemic. The significant damage to the employment marketplace in 2020, which included over 20,500 jobs lost in the month of April 2020, is still taking years to recover. The bounce back of new hires was strong the following two years and, since early 2023, has been stabilizing in line with historical monthly changes.

However, the continued growth of new jobs reduces the potential for the Federal Reserve to lower rates. Strong labor markets force employers to raise payrolls to keep their employees, who will have more money to spend in the economy on payday. This is good news for the economy but bad news for those predicting a pending recession.

However, the continued growth of new jobs reduces the potential for the Federal Reserve to lower rates. Strong labor markets force employers to raise payrolls to keep their employees, who will have more money to spend in the economy on payday. Increasing payrolls is a form of inflation that the Fed wants to see decline. This is good news for the economy but bad news for those predicting a pending recession.

More good (I mean bad) news is that employers still have over 8.756 million job openings, as announced by the same Bureau in their February Job Openings and Labor Turnover (JOLT) report. The number of job openings is nearly double the number of job openings in 2019 prior to the pandemic.

If the condition of the economy is declining, then why are employers continuing to add more employees to their payroll? Also, why are there still 8.756 million job openings? Employees are expensive and it is painful to downsize. Senior executives of companies are confident about their current and future revenue prospects and need to add to their labor force to meet customer demands.

Our conclusion is the economy remains stable.

2. US Households and Consumers

With more people working in US history and 8.756 million more jobs available, it is understandable to learn that consumers' sentiment has been recovering since the low reached during the summer of 2022. Ironically, consumer sentiment dropped shortly after the news of the worldwide coronavirus in early 2020, but not as significant as when the Federal Reserve hit their pocketbooks with their rate hike campaign. Consumer sentiment plummeted in 2022 to the lowest recorded level since the 1940s when the University of Michigan started tracking consumer sentiment.

However, after hitting a sentiment low in mid-2022, the University of Michigan reported solid improvements in consumer sentiment regarding their financial situation and the prospects of the US economy. Consumer spending represents 66% of the US economy's commerce. If consumer sentiment continues to be positive with the current strong labor market and inflation remains moderately stable, the prospects are strong for increasing consumer spending, which is good news for corporate sales and profits.

Our view is consumers are in stable condition.

3. Lower Interest Rates Will Save the America

First is the question of what will lower interest rates save America. Yes, lower interest rates benefit anyone wanting to borrow money at lower costs. The housing and commercial real estate market would instantly experience a boom in sales and refinance. The credit market would also be a big recipient of lower interest rates with an immediate pop in demand for loans.

However, it is debatable that boosting the lending industry with lower interest rates for the benefit of cheaper debt for individuals and companies is beneficial. We saw the result of easy money in the years leading up to 2008 with massive foreclosures in the real estate market that collapsed financial institutions across America, including Lehman Brothers and Countrywide Mortgage. During the 2008 Great Recession that almost rolled into the Great Depression, the Federal Reserve implemented an aggressive rate reduction campaign to save the financial markets and the economy. Currently, the US economy and financial markets do not appear to be in a similar situation. It seems lowering interest rates is a solution in which there is no apparent economic problem other than providing investors, companies, and the government with low-cost debt.

Lowering interest rates reminds me of battery-controlled paper towel dispensers. This invention was a solution to the apparent problem of people dispensing too many paper towels. My observations are that trash cans are just as full of discarded paper towels as they were before. However, the "solution" did solve one problem, and that was how to boost revenue for manufacturers and contractors with fat contracts to install paper towel dispensers in public restrooms across America.

Our conclusion is the Federal Reserve will not be lowering rates soon.

What Does This Mean to Me?

We maintain a favorable view of the US economy and stock market. As mentioned, we do not expect the Federal Reserve to be lowering rates in the next several Federal Open Market Committee (FOMC) meetings. We anticipate continued stability in the business and consumer sectors.

The stock market may soften during the spring and summer months, as typical after a strong first quarter. Investors may become conservative with their strategy due to concerns about the next administration, war, and Federal Reserve not lowering interest rates. However, once the election is complete the focus will be the prospects of retail holiday sales and profits. If economic conditions remain stable into the fourth quarter, we will anticipate another solid holiday season of retail sales that may prompt a similar 2023-yearend rally.

Let us know your thoughts on this Weekly Brief. Also, we welcome the opportunity to discuss strategies for you and your family to achieve your financial and personal goals.