Economic Crosscurrents And Geopolitical Risks Abound

Since we last spoke with Morgan Slade, alternative data expert and CEO of CloudQuant, we have witnessed the US long bond breach the 5% yield, a spike in crude oil and gold prices in sympathy with the ongoing strife in Middle East and some progress on the Fed’s long march against inflation. We sit down for an in-depth conversation to unpack these elements and explore their implications for the future.

Gary Drenik: Morgan, it’s a pleasure to have you with us again. The economic terrain is rife with new data about inflation, with CloudQuant’s Core CPI forecast now at 3.95% YoY growth, or slightly retreating from September’s actual of 4.1%. Can you contextualize this for us within the broader economic picture?

Morgan Slade: Absolutely, Gary. The slight relaxation in the Core CPI is indicative of the ongoing progress the Fed is making against inflation, which will be a sigh of relief for both consumers and policymakers alike. However, it’s crucial to acknowledge that while the numbers are encouraging, they don’t signify an immediate resolution to ongoing inflation concerns. They’re part of a larger, more complex economic narrative that includes evolving supply chain issues, global market conditions, and consumer behavior changes.

Drenik: That’s interesting. The Wall Street Journal recently highlighted that economists are now more confident about avoiding a recession, with the Fed seemingly ready to put a pause on interest rate hikes. What’s the significance of this shift in perspective?

Slade: The decision to cease raising interest rates comes at a pivotal moment, Gary. It’s a balancing act for the Fed, reflecting both the resilience of the U.S. economy and the fragility of global economic recovery. By keeping rates steady, the Fed is signaling cautious optimism, aligning with indicators of economic expansion, such as the projected 2.2% rise in inflation-adjusted GDP for this year. However, this optimism is tempered by the recognition that over-tightening could stifle growth and potentially trigger the very recession everyone is keen to avoid.

Drenik: The global lens reveals a more complicated scenario, especially with high U.S. interest rates and a robust dollar potentially stifling growth in other nations. How does this play out, especially for countries like China, grappling with internal economic pressures?

Slade: The global economy is indeed in a precarious state, Gary. The strength of the U.S. dollar which among other things is being driven by rising US interest rates, will begin benefiting export driven economies and will also aid the Fed in its attempt to put a wet blanket on inflation. China, for instance, is navigating a trifecta of economic headwinds: a cooling property market, faltering exports, and subdued consumer demand. The stronger dollar may assist China in the exports department despite the political headwinds to that trend. Furthermore, geopolitical tensions, evident in supply chain disruptions and national security-focused economic policies, are creating a backdrop of uncertainty that could impede global economic recovery.

Drenik: Bringing it back home, there’s been an intriguing trajectory for American household savings during the pandemic. How does this rollercoaster affect the broader U.S. economy?

Slade: The pandemic induced a rather anomalous scenario where we witnessed savings rates skyrocket due to stimulus checks and reduced spending opportunities during the lockdowns. But the landscape has altered dramatically. No matter what metric you look at, these savings have dwindled, raising questions about future consumer spending patterns, debt acquisition, and overall financial security for American households. It’s crucial, though, to delve deeper into the distribution dynamics of these savings—are they concentrated among the affluent, or have they trickled down to middle and lower-income households as well?

Drenik: Employment seems to be another high-contrast area, with substantial job additions in September, yet a notable slowdown in private sector job growth. How do we reconcile these trends, and what do they portend for economic health?

Slade: The job market metrics indeed present a dichotomy. On one hand, the surge in job openings and hiring suggests economic vitality and employer confidence. Conversely, the deceleration in private sector job growth signals potential caution, perhaps attributed to emerging market conditions or anticipation of policy shifts. We’re still seeing strong hiring in the services sectors such as healthcare, as these were hit hardest in the pandemic and are still trying to get back to equilibrium. Looking at the job posting data from LinkUp, we’re seeing a sharp decline in net created minus deleted job postings. So, while hiring was strong last month, we’re expecting to see that fall off in the near future as it appears companies are beginning to scale back the candidate search process and yank more of their existing job listings.

Drenik: On the topic of spending, despite robust September figures, there’s speculation about a cooling demand. How does this align with the broader economic indicators?

Slade: Consumer spending, often a bellwether for economic health, shows resilience. However, the narrative isn’t uniform. We’re observing restraint among lower-income consumers and a noticeable pivot towards more affordable options among the middle class. You can see the effect of this in the market with two dozen retailer stocks in the S&P 500 hitting 52-week lows in the last month. One outlier is Costco, which reported increased earnings, but its customer base tends to be more well-off. The “revenge travel” phenomenon is waning, indicating perhaps that initial post-lockdown vacationing is normalizing. Furthermore, the strain on retailers—ranging from thefts to reduced discretionary spending on big-ticket items—even in higher-income segments, is telling. These trends necessitate close monitoring as they may presage shifts in economic stability.

Drenik: We talked last month about the resumption of student loan payments. How have you seen that play out so far?

Slade: If you look at consumer survey data from one of our partners, Prosper Insights & Analytics, you can see that around 67% of consumers with student loans weren’t making payments during the forbearance period. With the average payment being between $200 and $300 a month per consumer, the end of the grace period is likely to have a hand in the pullback in consumer spending, consumer confidence and feeling that they are not saving enough for the future we are seeing in the middle-income households according to Prosper.

Drenik: Healthcare inflation is another critical concern, with projections of further increases in insurance costs. Concurrently, we’re looking at potentially the most sluggish year for home sales since the housing bust. How do these sectors influence the economic outlook?

Slade: Healthcare costs are escalating, driven by labor shortages, increased demand for services, and high demand for new and expensive diabetes and weight loss medication. This trend is likely to impose a further financial burden on households and the economy at large. The housing market, meanwhile, reflects the repercussions of high- rates and affordability challenges, limiting market participation to high earners and cash-rich buyers. This in turn is keeping rental rates high as many would-be homebuyers are opting to continue renting. Both sectors significantly contribute to the cost of living and, by extension, the inflation landscape, thereby influencing consumer confidence and spending patterns.

Drenik: Morgan, this has been an enlightening discussion. Your insights provide a nuanced understanding of the multifaceted economic challenges and dynamics at play.

Slade: I appreciate the opportunity, Gary. As we tread this uncharted economic terrain, the key to resilience lies in adaptive strategies, informed decision-making, and a holistic understanding of global and domestic economic indicators. The journey ahead is complex, necessitating vigilance and proactive engagement from all economic stakeholders.