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Post-covid Disruptions Produce Both Greater Economic Uncertainties And New Investment Opportunities—excess Savings Supports Consumer Spending Through The Holiday Season——fed Should Stabilize Inflation By Setting A Range Rather Than A Single Point Inflation Goal—investors Should Expand Ther Focus Into 2024 To Take Advantage Of Narrow Breadth Market Rally

Date Posted: June 8, 2023

Post-covid Disruptions Produce Greater Economic Uncertainties

The May Jobs Report Surprised Everyone By Substantially Exceeding All Forecasts. This Example Highlights The Frustrations Economists Face Attempting To Forecast The Current Economic
Outlook. The Most Forecasted Recession In History Remains Just That, With Its Likelihood Pushed Further Out. The Greater Than Normal Economic Uncertainty Likely Reflects Disruptive Changes Either Caused Or Accelerated By Covid. It May Be Too Early, But Covid May Ultimately Necessitate A Re-examination Of Broad Structural Changes That It Brought About. Covid Certainly Altered How The World Will Deal With Globalization And Geopolitical Forces. To What Extent Will We See A Material Shift Of Global Supply Chains To More Regional Sourcing? The Current Tight Labor Markets May Represent An Initial Influence From The Long-term Demographic Changes Slowing U.s. Work Force Growth. The List Of Changes Goes On And Will Be Extensive. The Post-covid Period Will Likely Bring About More Dramatic Changes Than Those Experienced In Past Decades. Investors Will Need To Rethink Where The Opportunities Will Arise.

Service Employment Still Below Pre-covid Levels—leads To Wage Pressures

The Government’s Response To The Pandemic Represented A Multiple Of Prior Federal Fiscal Spending Responses To Earlier Recessions (See Figure 1.) Restrictions Put In Effect During The
Pandemic Sharply Reduced The Availability Of Most Discretionary Services. When Those Restrictions Ended, Inflationary Demand Pressures Shifted From Goods To Services. Service
Suppliers Then Attempted To Rebuild Their Staffs. Despite Those Efforts, Service Employment Remains Below Pre-covid Levels Despite Creating Over Two-thirds Of New Jobs During The Last
Three Months (See Figure 2.) To Attract And Retain Employees, The Service Industry Increased Wages Six Percent Annually According To The Atlanta Fed’s Wage Growth Tracker. To Bring
Inflation Down To The Fed’s Two Percent Goal Would Require Wage Increases To Average Between

Figure 1
Fiscal Spending Growth Following Onset of Recessions

Source: Congressional Budget Office, Federal Reserve Bank of San Francisco

Figure 2
Selected Services Employment (Thousands seasonally adjusted)


Source: BofA Global Research, Haver Analytics, Bureau of Labor Statistics


Excess Savings Will Likely Support Consumer Spending Through The Year-end Holiday Season

Excess Savings Leftover From The Record Federal Government Fiscal Stimulus Programs Actively Bolster The Current Economic Momentum. According To An Estimate From The San Francisco Fed, Leftover Excess Savings Total About $500 Billion (See Figure 3.) The San Francisco Fed Expects That The Present Level Of Excess Savings Will Fuel Consumer Spending Until The End Of 2023. If This Projection Holds True, Then Retailers Will Likely See A Positive Holiday Spending Season. The Evidence Of Recent Consumer Spending Momentum Shows Up In The Increasingly Optimistic Blue Chip Consensus Economic Forecasts Published In The Atlanta Fed’s Gdpnow Report (See Figure 4.)

Figure 3
Aggregate Excess Savings Following Onset of Recessions

Source: Federal Reserve Bank of San Francisco, Bureau of Economic Analysis

Figure 4
Atlanta Fed GDPNow Second Quarter Real GDP Estimates (Quarterly Percent Change)

Source: Federal Reserve Bank of Atlanta, Blue Chip Financial Forecasts

Ratio Of Job Openings To Unemployment Numbers More Reliable Indicator Of Labor Market Conditions Than Unemployment Rate

Despite The Fed’s Rate Hikes, Labor Market Strength Shows Few Signs Of Slacking. The Recent Jolts Report (5/31/2023) Showed Little Reduction In The Imbalance Between Job Vacancies And The Number Of Unemployed. A Recent Draft Study Titled, What Caused The U.s. Pandemic-era Inflation?, Authored By Ben Bernanke, Olivier Blanchard, And C. Fred Bergsten, Concluded That
“the Ratio Of Vacancies To Unemployment Is A More Reliable Indicator Of Labor Market Conditions In Times, Such As During This Pandemic And Its Aftermath.” According To Their Study, Simply Basing The Unemployment Rate On The Status Of Households Does Not Consider The Hiring Plans Of Employers. Currently, The Ratio Of Job Vacancies To Those Unemployed Stands At 1.8 Times.This Ratio Compares To Less Than One Times For Most Of The Period Prior To 2017 (See Figure 5.) How Easily The Labor Market Rebalances Will Prove A Key Test. If An Economic Slowdown Forces Employers To End Husbanding Their Workers, Labor Imbalances Could Disappear Quite Quickly.

Figure 5
Job Openings to Unemployed Workers Ratio

Source: Bureau of Labor Statistics

Short-term Inflation Measures Trending Lower

The Fed Closely Monitors The Personal Consumptions Expenditures Price Index (Pce) To Gauge Progress Towards Reaching Its Two Percent Inflation Target. The Median Inflation For The Core
Personal Consumption Expenditures (Pce) Price Index Remains Elevated And Little Changed Since Last August At Nearly Six Percent (See Figure 6.) In Contrast, Figure 7 Provides A Broad Series Of Short-term Inflation Measures. While These Measures Show Inflation Still Elevated, In Most Cases, Their Direction Shows Downward Trends. If These Tends Continue, The Fed May Be Able To Avoid An Additional Funds Rate Increase In July.

Figure 6
Median Personal Consumption Expenditures Inflation

Figure 7
Short-Term Measures of Underlying Inflation

Source: Bureau of Labor Statistics, Various Federal Reserve Banks

Fed Should Follow The Greenspan Fed’s Inflation Strategies—stabilize Inflation By Setting A Range Rather Than A Point Target

Perhaps When It Comes To Bringing Down Inflation, The Fed Should Take Some Lessons From The Federal Open Market Committee Meeting Of Nearly Thirty Years Ago (July 2-3, 1996.) The
Minutes From That Meeting Quote Chair Greenspan Who Said, “price Stability Is That State In Which Expected Changes In The General Price Level Do Not Effectively Alter Business Or Household Decisions.” Current Treasury Secretary Yellen At That Same Meeting Said, “i Believe That Heading Toward Two Percent Inflation Would Be A Good Idea, And That We Should Do So In A Slow Fashion, Looking At What Happens Along The Way.” With The Difficulty It Currently Faces In Controlling Inflation, Today’s Fed Could Look First To Stabilizing Inflation In Steps And Reset Its Inflation Goals To A Range That Works Down To Its Current Inflation Target. That Might Produce A Favorable Reaction From Business, Consumers, And The Financial Markets. At The Same Time, It May Prove Less Impactful On Near-term Economic Growth.

The Fed “skipping”

Since March 2022, The Fed Increased The Funds Rate 10 Consecutive Times To 5-5.25%. To Take Some Time To Evaluate The Economic Impact From These Increases, The Fed Will Likely Decide To Pause At Its June Meeting. The Three Most Powerful Members Of The Fomc, The Chair, Nominated Vice-chair, And President Of The New York Fed All Publicly Support A Pause.Additionally, Fed Governor Phillip Jefferson, Nominated To Be Fed Vice-chair, Introduced A New Word To The Fed’s Policy Lexicon By Indicating A Pause Might Not Mean A Peak Rate But Just “skipping” A Rate Increase. Many Economists Now Expect An Additional Rate Hike At Its July Meeting, The Last Until After Labor Day. That Shift Caused The Futures Markets To Sharply Change Their Rate Expectations From A 50-75 Bps Rate Cut Before Year-end To No Reduction This Year

Investment Conclusions

Equities: As We Step Into The Second Half Of 2023, Long-term Investors Should Actively Expand Their Focus Beyond The Current Year To Capitalize On Current Investment Opportunities. Those Opportunities Emerge From The Narrow Participation Of A Wide Range Of Stocks In The Current Market Rally. Specifically, Several Sectors Should Benefit From The Disruptions Created By The Pandemic As Well As From Significant New Federal Government Spending And Investment Tax Credit Programs. To Uncover Such Growth Prospects, Investors Will Need To Venture Beyond The Established Growth Names. Many Of These Will Deviate From Those That Thrived In The Previous Decade. To Accomplish This, Prioritize High-quality Companies That Will Likely Achieve Sustained Future Free Cash Flow And Dividend Growth Driven By Above Average Returns On Capital.
Fixed Income: “Income” In Fixed Income Now Carries Real Meaning. As 2023 Progresses, Lengthening Bond Duration, To Some Extent, Will Likely Prove Increasingly Attractive If And When
The Economy Slows, And Inflation Declines From Its Current Elevated Levels. Alternative Investments Can Also Be Used For That Portion Of The Portfolio Historically Committed To Fixed
Income; Alternatives Tend To Be Less Correlated With Stocks And Bonds. That Diversification Will Also Prove Particularly Valuable In The Face Of Current Investment Uncertainties.