The Economy’s Shift from Hot to Normal
In the early stages of the recovery, the economy was fueled by loose monetary policy and stimulative fiscal policy, creating massive tailwinds that made growth seem inevitable. However, as policymakers turned hawkish to contain inflation, the economy cooled down, and growth is no longer a guarantee.
Cooling Metrics
Several once-hot metrics have lost steam. Orders for nondefense capital goods, a leading indicator of economic activity, surged from 2020 to 2022 but have plateaued since then. Job openings, which represent future economic activity, peaked in March 2022 and have been declining ever since. While the number of job openings remains elevated, the pace of job creation has slowed down.
Labor Market Trends
The labor market continues to add jobs, with 256,000 jobs added in December. However, the hiring rate has been trending lower, which could be a sign of trouble. The quits rate has also followed a similar trajectory, suggesting that workers may be less likely to switch jobs. This could be a positive sign for investors, as companies may be getting more productivity out of their workforces.
Mortgage Rates and Housing
Mortgage rates have increased significantly, making it more expensive for homebuyers. The average 30-year fixed mortgage rate has hovered around 7%, up from below 3% in 2020. This has led to a cooling of home sales activity.
Household Finances
Household finances remain strong, but debt levels have increased, and excess savings have been spent. Household debt service payments as a percentage of disposable personal income have trended higher, suggesting that consumers may not have the financial flexibility they once did.
The Big Picture
While the data suggests that the economy has cooled down, it’s essential to remember that growth remains positive, and the economy is still characterized by low unemployment and rising earnings. The labor market continues to add jobs, and consumer spending remains strong. However, investors should be aware of the risks and uncertainties that can impact the economy and markets.
Investment Outlook
The long-term outlook for the stock market remains favorable, driven by expectations of years of earnings growth. Demand for goods and services is positive, and the economy continues to grow. However, investors should always be prepared for short-term volatility and potential risks. The key is to focus on the hard economic data and not get swayed by soft sentiment-oriented data.
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