MacLellan: The Good, The Bad, The Ugly – May 2023

Following are my nominees for the captioned for the month of May. There were good candidates for all of them but these are the ones I chose.

The Good. The most recent labor market report showed that the jobs market in the US remains strong despite high inflation, rising interest rates and the banking turmoil. The labor market added 235,000 jobs in the month of April, up from relatively flat months of job growth in both February and March. This job growth resulted in a drop in the unemployment rate to 3.4%, the lowest level of unemployment since 1969. Additionally, the wage growth came in at 4.4% over April of last year which was up slightly from 4.3% increase in March. All of this happened despite some of the economic headwinds mentioned in the opening sentence. The market continues to hold up much better than most of us expected at this stage of the economic cycle.  Sectors that showed the most growth in the past month included the following: Health care and social assistance, Professional and business services, Food Services and drinking places, Financial activities, and Government.  This strong report runs counter to what the Fed is looking for from the labor market.  Its rate increases are intended to slow down the labor market to take the pressure off wage increases thus helping the inflation fight. Wage growth peaked at 5.9% in March of 2022 and is down to its current rate of 4.4% which is still considerably higher than the approximate 3% in 2019. There is work to be done in this area of the economy if we are going to get inflation under control.

The Bad. The housing market is suffering from the Fed’s actions to control inflation. Sales of homes fell in April from the previous month and prices declined by the most in the last 11 years. Housing sales dropped by 3.4% in April from the prior month and were down 23.2% from April of last year according to a report from the National Association of Realtors.  The national existing median home price fell 1.7% from a year earlier to $388,800.  The two drivers of this decline in sales and prices are mortgage rates that have more than doubled and the lack of housing inventory.  As a matter of fact, many Americans are locked into their existing homes by historically low mortgage rates, they simply cannot afford to give up the low rates. This phenomenon may keep housing prices higher by continuing to keep housing inventories low. On a comparable basis, for the first quarter in Boone County (April statistics have not yet been posted for the Columbia Board of Realtors), sales are down 20%, somewhat better than the national numbers. Prices are holding up better in this market as they are up 4% this year versus last.  I don’t know what percentage of homeowners have a low-interest rate in the 2.5-3.5% range but I do know the percentage is very high since we had historically low-interest rates for 12 years plus. The housing market is going to continue to suffer from this phenomenon until rates come down allowing people to trade up or buy new.

The Ugly.  The clear winner here is the ongoing dysfunction seen in the debt ceiling negotiations. The current debt ceiling is $31.4 trillion, a number we have already exceeded as the national debt clock shows a level of $31.8 trillion.  While this is a display of highly partisan and political dysfunction and drama, I will focus on the potential economic consequences of various scenarios. There was a recent article in the Wall Street Journal that focused on three potential outcomes and the potential economic consequences: A last-minute deal, a post-deadline deal and no deal.  Following is a heavily plagiarized paraphrasing of those potential outcomes. A last-minute deal: The economy is already slowing because of rising interest rates and many forecasters are expecting a recession later this year. This creates uncertainty for consumers, businesses and investors. This could cause people and entities to put off purchases. As the June 1 deadline nears, the stock market could show price declines as it is currently doing. When this happened in 2011, the stock market fell and took months to recover. A post-deadline deal:  If a deal is not reached by June 1, economists expect a more severe reaction from the financial markets as the risk of default becomes more real.  Consumers could curtail spending significantly and they account for 2/3 of the GDP.  Businesses could stop hiring and curtail investments. As the government prioritizes debt payments over other expenditures, government workers, social security and Medicare payments could be delayed. GDP could contract. If no deal is reached and the government cannot pay all its debts and bills, the consequences can be enormous.  There could be disruption in the global financial system as the dollar and treasuries play such a pivotal role in international settlements. There could be a deep recession. The value of Treasuries could fall. The government would be unable to stimulate the economy as it did during Covid as it could not borrow. I think the likelihood of the no deal is pretty remote.  I cannot imagine the US defaulting on its debt. We will probably have a last-minute deal or a quick post-deadline deal.

This article originally appeared on Columbia Daily Tribune: MacLellan: The Good, The Bad, The Ugly – May 2023