Focused Investing
Inflation, Jobs, and Recession
Inflation has not been an issue in the economy for more than 40 years but today it is the first topic we hear and read about daily. June inflation increased to 9.1% year-over-year, but much of that number is energy, which has climbed nearly 42% over the last 12 months. The Fed is on record that they can avoid a recession in the current rate-rising regime. The recent evidence is not favorable.
The Fed holds its meeting this week and is widely expected to raise rates by 0.75%, putting the target rate between 2.25% and 2.5%. Higher inflation and higher rates have combined to slow the economy with GDP falling 1.6% in the first quarter and expectations for the second quarter anywhere between -1.6% and up 0.9%. Real Retail Sales have declined for two consecutive months and first-time unemployment claims have risen steadily this year. The Fed clearly has a growth problem developing.
On the jobs front, many market pundits have said the labor markets remain strong, but if we look just below the surface of the headline numbers, we see a picture that is not at all rosy. First, the economy added 372,000 jobs in June, but we must keep in mind that this number frequently includes a worker more than once. To see this, note the monthly jobs report has two sections, the establishment survey, and the household survey. The establishment survey is the source of the jobs created each month, but it counts the number of jobs whereas the household survey counts the number of people with a job. To see how this is different if I get two part-time jobs in a month, I am counted twice in the establishment survey, but the household survey will count me once. Thus, you need to use both surveys to get a complete picture of the labor markets. In the household survey for June, the number employed declined, and looking at the age categories, the only age group with an increase was from 16-19 years old, the age group that frequently is employed in part-time positions. All other age and gender groups declined. This strongly suggests that the quality of the jobs created in June was poor and not indicative of a strong labor market.
The headline retail sales number showed strong growth in June, rising 1.0%, but as with the jobs report, this number is weaker than reported. Retail sales are adjusted for things like holidays and seasonal variations, but not for prices, so the 1.0% excludes the effect of inflation. In June, inflation was up 1.3% from May, inflation-adjusted retail sales declined 0.3% following a 1.1% decline in May. Telecom company AT&T spooked the market late last week with a warning that the company’s cash flow would be $2 billion less than previously expected due to customers paying their bills late. This all paints a picture of a stressed consumer, and where the consumer goes, so goes business.
Conclusion
Thus, Allen Trust Company sees tough economic times for the rest of the year and equity markets will struggle as well. As one TV pundit states, there is always a bull market and now is no different. The tough economic times mean interest rates are unlikely to rise as high as many believe, creating opportunities in fixed income overall, and within equities, we think healthcare companies offer good value near-and long-term. We are focused on adding quality to client accounts and believe that every market environment creates opportunities for long-term value to be added and today is no exception.
If you would like to learn more or have any questions, contact us at Allen Trust Company by phone: 503-292-1041 or email: info@allentrust.com.