Friday, September 22, 2023

The U.S. Economic Situation – September 22, 2023 Update

Perhaps the main reason that I write of our economic situation is that I continue to believe, based upon various analyses, that our economic situation is in many ways misunderstood.  While no one likes to contemplate a future rife with economic adversity, current and future economic problems must be properly recognized and rectified if high-quality, sustainable long-term economic vitality is to be realized.

There are an array of indications and other “warning signs” – many readily apparent – that current economic activity and financial market performance is accompanied by exceedingly perilous dynamics.
I have written extensively about this peril, including in the following:
Building Financial Danger” (ongoing updates)
My analyses continues to indicate that the growing level of financial danger will lead to the next stock market crash that will also involve (as seen in 2008) various other markets as well.  Key attributes of this next crash is its outsized magnitude (when viewed from an ultra-long term historical perspective) and the resulting economic impact.  This next financial crash is of tremendous concern, as my analyses indicate it will lead to a Super Depression – i.e. an economy characterized by deeply embedded, highly complex, and difficult-to-solve problems.

For long-term reference purposes, here is a chart of the Dow Jones Industrial Average since 1900, depicted on a monthly basis using a LOG scale (updated through September 20, 2023 with a last value of 34,440.88):

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

DJIA since 1900

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4343.69 as this post is written

Thursday, September 21, 2023

Jerome Powell’s September 20, 2023 Press Conference – Notable Aspects

On Wednesday, September 20, 2023 FOMC Chairman Jerome Powell gave his scheduled September 2023 FOMC Press Conference. (link of video and related materials)

Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of September 20, 2023, with the accompanying “FOMC Statement” and “Summary of Economic Projections” (pdf) dated September 20, 2023.

Excerpts from Chairman Powell’s opening comments:

Since early last year, the FOMC has significantly tightened the stance of monetary policy.  We have raised our policy interest rate by 5-1/4 percentage points and have continued to reduce our securities holdings at a brisk pace.  We have covered a lot of ground, and the full effects of our tightening have yet to be felt.  Today we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings.  Looking ahead, we are in a position to proceed carefully in determining the extent of additional policy firming that may be appropriate.  Our decisions will be based on our ongoing assessments of the incoming data and the evolving outlook and risks.  I will have more to say about monetary policy after briefly reviewing economic developments.

also:

As I noted earlier, since early last year, we have raised our policy rate by 5-1/4 percentage points.  We see the current stance of monetary policy as restrictive, putting downward pressure on economic activity, hiring, and inflation.  In addition, the economy is facing headwinds from tighter credit conditions for households and businesses.  In light of how far we have come in tightening policy, the Committee decided at today’s meeting to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent and to continue the process of significantly reducing our securities holdings.

Excerpts of Jerome Powell’s responses as indicated to various questions:

COLBY SMITH.  Thank you. Colby Smith with the Financial Times. What makes the Committee inclined to think that the fed funds rate at this level is not yet sufficiently restrictive, especially when officials are forecasting a slightly more benign inflation outlook for this year? There’s noted uncertainty about policy lags. Headwinds have emerged from the looming government shutdown, the end of federal childcare funding, resumption of student debt payments, things of that nature. 

CHAIR POWELL.  So I guess I would characterize the situation a little bit differently. So we decided to maintain the target range for the federal funds rate where it is, at 5.25 percent to 5.5 percent, while continuing to reduce our securities holdings. And we say we’re committed to achieving and sustaining a stance of monetary policy that’s sufficiently restrictive to bring down inflation to 2 percent over time. We said that. But the fact that we decided to maintain the policy rate at this meeting doesn’t mean that we’ve decided that we have or have not at this time reached that stance of monetary policy that we’re seeking. If you look at the SEP, as you obviously will have done, you will see that the majority of participants believe that it is more likely than not that it will be appropriate for us to raise rates one more time in the two remaining meetings this year. Others believe that we have already reached that. So it’s something where we’re not making a decision about that question by deciding to just maintain the rate and await further data. 

COLBY SMITH.  So right now it’s still an open question about sufficiently restrictive. You’re not saying today that we’ve reached this level? 

CHAIR POWELL.  No. Clearly what we decided to do is maintain the policy rate and await further data. We want to see convincing evidence, really, that we have reached the appropriate level, and we’re seeing progress, and we welcome that. But we need to see more progress before we’ll be willing to reach that conclusion. 

COLBY SMITH.  And just on the 2024 projections, what’s behind that shallower path for interest rate cuts and the need for real rates to be 50 basis points higher? 

CHAIR POWELL.  Right. So, I would say it this way. First of all, real interest rates are positive now. They’re meaningfully positive. And that’s a good thing. We need policy to be restrictive so that we can get inflation down to target. Okay. And we’re going to need that to remain to be the case for some time. So I think, you know, remember that, of course, the SEP is not a plan that is negotiated or discussed, really, as a plan. It’s accumulation, really, and what you see are the medians. It’s accumulation of individual forecasts from 19 people, and then what you’re seeing are the medians. So I wouldn’t want to bestow upon it the idea that it’s really a plan. But what it reflects, though, is that economic activity has been stronger than we expected, stronger than I think everyone expected. And so what you’re seeing is this is what people believe, as of now, will be appropriate to achieve what we’re looking to achieve, which is progress toward our inflation goal, as you see in the SEP. 

also:

STEVE LIESMAN.  Steve Leisman, CNBC. Mr. Chairman, I want to return to Colby’s question here. What is it saying about the Committee’s view of the inflation dynamic in the economy that you achieve the same forecast inflation rate for next year but need another half a point of the funds rate on it? Does it tell us that the Committee believes inflation to be more persistent, requires more medicine effectively? And I guess a related question is if you’re going to project a funds rate above the longer-run rate for four years in a row, at what point do we start to think, hey, maybe the longer rate or the neutral rate is actually higher? Thank you.

CHAIR POWELL.   So I guess I would point more to — rather than pointing to a sense of inflation having become more persistent, we’ve seen inflation be more persistent over the course of the past year, but I wouldn’t say that’s something that’s appeared in the recent data. It’s more about stronger economic activity, I would say. So if I had to attribute one thing, again, we’re picking medians here and trying to attribute one explanation, but I think broadly stronger economic activity means we have to do more with rates, and that’s what that meaning is telling you. In terms of what the neutral rate can be, you know, we know it by its works. We only know it by its works, really. We can’t – we can’t – the models that we use, ultimately you only know when you get there and by the way the economy reacts, and, again, that’s another reason why we’re moving carefully now because, you know, there are lags here. So it may, of course, be that the neutral rate has risen. You do see people, you don’t see the median moving, but you do see people raising their estimates of the neutral rate, and it’s certainly plausible that the neutral rate is higher than the longer-run rate. Remember, what we write down in the SEP is the longer-run rate. It is certainly possible that, you know, that the neutral rate at this moment is higher than that and that that’s part of the explanation for why the economy has been more resilient than expected. 

also:

CHRIS RUGABER. Hi. Thank you. Chris Rugaber, Associated Press. When you look at the disinflation that has taken place so far, do you see it mostly as a result of what some economists are calling the low-hanging fruit, such as the unwinding of supply chain snarls and other pandemic disruptions, or is it more of a broad disinflationary trend that involves most goods and services across the economy? Thank you. 

CHAIR POWELL. If I understood your question, I would say it this way. I think we knew from the time, from before when we lifted off, but certainly by the time we lifted, we knew that bringing inflation back down was going to take, as I call it, the unwinding of these distortions to both supply and demand that happened because of the pandemic and the response. So that unwinding was going to be important. In addition, monetary policy was going to help. It was going to help supply side heal by cooling demand off and just, in general, better aligning supply with demand. So those two forces were always going to be important. I think it’s very hard to pull them apart. They work together. I do think both of them are at work now, and I think they’re at work in a way that shows you the progress that we are seeing. 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4355.76 as this post is written

Tuesday, September 19, 2023

Trends Of S&P500 Earnings Forecasts

S&P500 earnings trends and estimates are a notably important topic, for a variety of reasons, at this point in time.

FactSet publishes a report titled “Earnings Insight” that contains a variety of information including the trends and expectations of S&P500 earnings.

For reference purposes, here are two charts as seen in the “Earnings Insight” report of September 15, 2023:

from page 28:

(click on charts to enlarge images)

S&P500 EPS 2023-2024

from page 29:

S&P500 EPS 2013-2024

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4431.99 as this post is written

Monday, September 18, 2023

S&P500 EPS Forecasts For 2023-2025 As Of September 15, 2023

As many are aware, Refinitiv publishes earnings estimates for the S&P500.  (My other posts concerning S&P earnings estimates can be found under the S&P500 Earnings label)

The following estimates are from Exhibit 24 of the “S&P500 Earnings Scorecard” (pdf) of September 15, 2023, and represent an aggregation of individual S&P500 component “bottom up” analyst forecasts.  For reference, the Year 2014 value is $118.78/share; the Year 2015 value is $117.46/share; the Year 2016 value is $118.10/share; the Year 2017 value is $132.00/share; the Year 2018 value is $161.93/share; the Year 2019 value is $162.93/share; the Year 2020 value is $139.72/share; the year 2021 value is $208.12/share; and the year 2022 value is $218.09/share:

Year 2023 estimate:

$221.37/share

Year 2024 estimate:

$247.94/share

Year 2025 estimate:

$278.28/share

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4453.26 as this post is written

Standard & Poor’s S&P500 EPS Estimates 2023 – 2024 – September 13, 2023

As many are aware, Standard & Poor’s publishes earnings estimates for the S&P500.  (My posts concerning their estimates can be found under the S&P500 Earnings label)

For reference purposes, the most current estimates are reflected below, and are as of September 13, 2023:

Year 2023 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $220.20/share

-From a “bottom up” perspective, “as reported” earnings of $200.68/share

Year 2024 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $245.90/share

-From a “bottom up” perspective, “as reported” earnings of $224.54/share

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4452.22 as this post is written

Thursday, September 14, 2023

CEO Confidence Surveys 3Q 2023 – Notable Excerpts

On September 12, 2023, the Business Roundtable released its most recent CEO Economic Outlook Survey for the 3rd Quarter of 2023.   Notable excerpts from this September 12, 2023 release, titled “Business Roundtable CEO Economic Outlook Index Continues to Dip Modestly…“:

The overall Index dipped a modest four points from last quarter to 72, remaining below its historic average of 84. Continued moderation in CEO plans and expectations is consistent with a slowing U.S. and global economy.

also:

In their fourth estimate of 2023 U.S. GDP growth, CEOs projected 2.1% growth for the year.

On August 3, 2023, The Conference Board released the Q3 2023 Measure Of CEO Confidence.   The overall measure of CEO Confidence was at 48, up from the previous reading of 42. [note:  a reading of more than 50 points reflects more positive than negative responses]

Notable excerpts from this August 3, 2023 Press Release include:

Despite the brighter outlook, most CEOs still anticipated an economic downturn ahead. In Q3, 84% reported that they are preparing for a US recession over the next 12-18 months, compared to 93% in Q2. That said, the vast majority continued to expect a short and shallow US recession, with just 4% now expecting a deep US with major global spillovers—down from a high of 13% in Q4 2022. Meanwhile, the proportion of CEOs expecting no recession at all climbed steadily from 2% in Q4 2022 to 17% in the latest survey.  

also:

Current Conditions

CEOs’ assessment of general economic conditions were markedly better in Q3:

  • 28% of CEOs said economic conditions were better compared to six months ago, up from 17% in Q2.
  • 31% said conditions were worse or much worse, a notable improvement from 55% in Q2.

CEOs were also less pessimistic about conditions in their own industries inQ3:

  • 29% of CEOs reported that conditions in their industries were better compared to six months ago, up from 19%.
  • 35% said conditions in their own industries were worse, down moderately from 44% in Q2.

Future Conditions

CEOs’ expectations about the short-term economic outlook were slightly less bleak in Q3:

  • 20% of CEOs said they expected economic conditions to improve over the next six months, up from 15%.
  • 39% expected conditions to worsen, down significantly from 56%.

CEOs’ expectations regarding short-term prospects in their own industries also improved slightly:

  • 29% of CEOs expect conditions in their own industry to improve over the next six months—up slightly from 25% in Q2.
  • 30% expect conditions to worsen, down from 40% in Q2.

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Additional details can be seen in the sources mentioned above.

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4496.36 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI4) is one index that is supposed to measure stress in the financial system. Its reading as of the September 14, 2023 update (reflecting data through September 8, 2023) is -.7535:

STLFSI4 -.7535

source: Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index [STLFSI4], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed September 14, 2023: https://fred.stlouisfed.org/series/STLFSI4

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on September 13, 2023 incorporating data from January 8, 1971 through September 8, 2023 on a weekly basis.  The September 8 value is -.38016:

NFCI -.38016

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 14, 2023:  
http://research.stlouisfed.org/fred2/series/NFCI

The ANFCI chart below was last updated on September 13, 2023 incorporating data from January 8, 1971 through September 8, 2023, on a weekly basis.  The September 8, 2023 value is -.32625:

ANFCI -.32625

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 14, 2023:  
http://research.stlouisfed.org/fred2/series/ANFCI

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4491.01 as this post is written

Tuesday, September 12, 2023

Recession Probability Models – September 2023

There are a variety of economic models that are supposed to predict the probabilities of recession.

While I don’t agree with the methodologies employed or probabilities of impending economic weakness as depicted by the following two models, I think the results of these models should be monitored.

Please note that each of these models is updated regularly, and the results of these – as well as other recession models – can fluctuate significantly.

The first is the “Yield Curve as a Leading Indicator” from the New York Federal Reserve.  I wrote a post concerning this measure on March 1, 2010, titled “The Yield Curve as a Leading Indicator.”

Currently (last updated September 10, 2023 using data through August 2023) this “Yield Curve” model shows a 60.8256% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 66.0095% probability through July 2023, and a chart going back to 1960 is seen at the “Probability Of U.S. Recession Predicted by Treasury Spread.” (pdf)

The second model is from Marcelle Chauvet and Jeremy Piger.  This model is described on the St. Louis Federal Reserve site (FRED) as follows:

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)

Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.

This model, last updated on September 1, 2023 currently shows a .8% probability using data through July 2023.

Here is the FRED chart:

Smoothed U.S. Recession Probabilities

Data Source:  Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed September 12, 2023:  
http://research.stlouisfed.org/fred2/series/RECPROUSM156N

The two models featured above can be compared against measures seen in recent posts.  For instance, as seen in the July 16, 2023 post titled “The July 2023 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 54% probability of a U.S. recession within the next 12 months.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4477.26 as this post is written