Speaker 1: Somebody stuff.
Speaker 2: Tail stalls. When it comes to the economy, it seems
Speaker 2: like everybody has an opinion about what's going to happen next.
Speaker 2: Are we getting a recession? Can we execute a soft landing?
Speaker 2: Is the FED about to cut rates or are they
Speaker 2: standing pat And what about inflation? Has it stabilized in
Speaker 2: bottom or is it about to pick up again. The
Speaker 2: answer to these questions are mostly just opinions guesses from
Speaker 2: folks with rather questionable track records. As it turns out,
Speaker 2: you can cut through all of this confusing noise and
Speaker 2: let the economic data tell you its own story. I'm
Speaker 2: Barry Riddelts and on today's edition of At the Money,
Speaker 2: we are going to discuss how to allow economic data
Speaker 2: to reveal itself to you without the guestwork, opinions or
Speaker 2: the usual pundit pontifications. To help us unpack all of
Speaker 2: this and what it means for your portfolio, let's bring
Speaker 2: in Bill McBride. He runs Calculated Risk. Bill has used
Speaker 2: economic data to create opinion free analysis of the economy
Speaker 2: over the past two decades, and he has accurately identified booms, busts, bubbles,
Speaker 2: and recoveries in real time and at major turning points,
Speaker 2: including the Great Financial Crisis and its subsequent housing bottom
Speaker 2: and recovery. So Bill, let's just start with economic data.
Speaker 2: Typically it's noisy most of the time, not especially meaningful.
Speaker 2: How do you identify what data series to follow and
Speaker 2: which releases are important?
Speaker 3: Well, there's several major releases on the Employment Report, the
Speaker 3: GDP report, and since my major focus is on the
Speaker 3: housing market, is also housing starts and new home sales.
Speaker 3: But I follow quite a few other data releases, mostly
Speaker 3: just to see if something's not tracking what you kind
Speaker 3: of expect. And it's really kind of the surprises that
Speaker 3: change your views or brings you, you know, insights into
Speaker 3: what's actually changing in the economy.
Speaker 2: So it sounds like you're paying the most attention nonfarm payrolls,
Speaker 2: which comes out every month, GDP which comes out quarterly,
Speaker 2: and then housing sales and new home starts, both of
Speaker 2: which are monthly. Do I have that right?
Speaker 1: That's correct? I think those are the major releases to follow.
Speaker 2: Do you think those have the most predictive value as
Speaker 2: to what happens next?
Speaker 3: Well, I think the Employment Report actually tells you the
Speaker 3: best what's happening now. The GDP report tends to you
Speaker 3: know it's quarterly's it gets heavily revised. The unemployment rate
Speaker 3: is monthly, and so you know when the unemployment rates
Speaker 3: at three to nine that the economy is in pretty
Speaker 3: good shape.
Speaker 1: New home sales and housing starts do have some predictive value.
Speaker 3: Not always, but generally, if new home sales and housing
Speaker 3: starts are increasing, the economy is going to be fine
Speaker 3: for the next few years. If they decrease sharply, there's
Speaker 3: a potential for a recession. But it's not you know,
Speaker 3: no model is perfect. We saw a number of major
Speaker 3: economists get fooled by the inverted yield curve and the
Speaker 3: sharp drop in housing starts and new home sales that
Speaker 3: were related to the pandemic and that so you always
Speaker 3: have to take everything with a grain of salt.
Speaker 1: But I think those there is some predicted value in
Speaker 1: housing starts.
Speaker 2: I like the concept of GDP unemployment in housing starts
Speaker 2: as past, present and future really gives you the broad
Speaker 2: range of what's going on. But let's talk about the
Speaker 2: flips out of that. What do you think people in
Speaker 2: both investors and economists pay too much attention to and
Speaker 2: what data series perhaps should they be spending less time with.
Speaker 3: I think probably the one people should ignore the most
Speaker 3: is anything doing with sentiment.
Speaker 1: M it's more of an opinion.
Speaker 3: Especially in the last decade or two, we've we've we've
Speaker 3: seen a real a political tinge to it, so, especially
Speaker 3: especially on the conservative side, when there's a Democratic president
Speaker 3: that the economy is terrible to many Republicans, uh and
Speaker 3: their Democrats. Is a little bit the same way that
Speaker 3: there are some surveys that that's all it does is
Speaker 3: really tell you who's president?
Speaker 1: Right?
Speaker 2: Right? Is That's that's fascinating. I always find it amusing
Speaker 2: when you look at certain models that have a survey component.
Speaker 2: Owner's equivalent rent What do you think you can rent
Speaker 2: your house for? Always kind of cracks me up. And
Speaker 2: the one that really I couldn't agree with you more
Speaker 2: about ignoring sentiment is the Federal Reserve asking ordinary people
Speaker 2: where do you think inflation is going to be in
Speaker 2: five years? I can't imagine a more useless question than that.
Speaker 3: There's probably a little value tobout, but I understand what
Speaker 3: you're saying.
Speaker 1: Sentiment in general is hard to measure.
Speaker 2: So let's talk a little bit about inflation. Are there
Speaker 2: things that you pay close attention to rent, food, fuel,
Speaker 2: mortgage rates. What are you looking at when you want
Speaker 2: to figure out what's happening in the world of inflation.
Speaker 3: You know, inflation is especially interesting topic right now, obviously
Speaker 3: because it impacts what the Fed's going to do, which
Speaker 3: impacts interest rates. Part of the problem is we had
Speaker 3: a huge surge in rent related to household firmation, really
Speaker 3: mostly in twenty twenty one, but going into twenty twenty
Speaker 3: two and now asking rents are basically flat year over
Speaker 3: year and have been for some time now.
Speaker 1: But the measure of rents.
Speaker 3: That go into CPI and PCEE, they include renewals, which
Speaker 3: they should. You know, the people that are getting in
Speaker 3: renewals are still catching up to the fact that the
Speaker 3: rent surged a year or two years ago. But this
Speaker 3: is a key point is monetary policy cannot impact what
Speaker 3: happened to rents two years ago. It can only impact
Speaker 3: what's happening today. So you know, there's a different people
Speaker 3: that sometimes renders say to me, well, wait, my rent
Speaker 3: still going up. Yeah, that's because it's a renewal and
Speaker 3: monetary policy doesn't impact that at all. So when you
Speaker 3: look at the CPI reports for the last few months, the.
Speaker 1: Government's reporting.
Speaker 3: One of the sentences in there has been a fifty
Speaker 3: is related to rents or something close to that of
Speaker 3: the of the CPI increase. So what I've been doing
Speaker 3: is I've been taking rents out of the inflation to
Speaker 3: see where we're at, and we're much closer, and for
Speaker 3: several months we were at the Fed's target. So this
Speaker 3: is this is a little balancing act for the Fed
Speaker 3: is how much should they look at rents and how
Speaker 3: much should they exclude it from what they're what they're doing.
Speaker 2: Let's talk real estate. There's so many different elements that
Speaker 2: go into residential housing. It's people's incomes, what mortgage rates
Speaker 2: are at local housing supply, and the aforementioned rentals. What
Speaker 2: do you watch most closely in this area? What do
Speaker 2: you think people should be watching that perhaps they're not.
Speaker 3: I think the key to watch is inventory. That's you know,
Speaker 3: it's a there is supply and demand. We still have
Speaker 3: pretty good demographics. We have a large cohort in the
Speaker 3: home buying age group in their thirties. On the flip side,
Speaker 3: the inventory, of course has been very low, but it's
Speaker 3: starting to increase. It's still pretty thirty percent below kind
Speaker 3: of a normal level. Since sales are down so much,
Speaker 3: I've been looking more at months of supply, and that
Speaker 3: is probably going to get back to twenty nineteen levels
Speaker 3: later this year, and that says that house prices will
Speaker 3: basically be flat to only up slightly by the end
Speaker 3: of the year.
Speaker 1: I think so.
Speaker 2: In twenty twenty two and twenty twenty three, just about
Speaker 2: every economist out there was looking for a recession. You
Speaker 2: were not, And you got it right. What were you
Speaker 2: seeing that told you we recession was not imminent when
Speaker 2: everybody else seemed to be stuck on the inverted yield curve?
Speaker 1: Yeah?
Speaker 3: Well, you know, there were several economic analysts who didn't
Speaker 3: think there would be a recession. Claudia Sami, who you've
Speaker 3: interviewed recently, Yon Hotsuits, Goldman Sachs chief economists who everybody
Speaker 3: should read if they get a chance. In twenty twenty two,
Speaker 3: I didn't see there was no reason.
Speaker 1: To expect a recession at all.
Speaker 3: In twenty twenty three that you started seeing some signs
Speaker 3: of a possibility. The Federal Reserve staff was even predicting
Speaker 3: a recession in twenty twenty three. So, but I mean,
Speaker 3: the key things that people were looking at was the
Speaker 3: inverted YO curve, which is still inverted, and the fact
Speaker 3: that housing starts dropped off pretty sharply. But what they
Speaker 3: weren't looking at was other parts of pandemic economics.
Speaker 1: If you will.
Speaker 3: Auto sales had been really depressed because of supply issues,
Speaker 3: and so that meant auto sales were going to pick
Speaker 3: up in twenty twenty three, which they did, and there
Speaker 3: were other parts of the economy that had similar things
Speaker 3: were the supply issues were going to start easing up
Speaker 3: from the pandemic. So if you factored in pandemic economics,
Speaker 3: I thought was saying, hey, we need to watch, but
Speaker 3: I don't think we're going to have a recession, and
Speaker 3: we didn't.
Speaker 2: So given all of the above, if investors want to
Speaker 2: focus on one or two data series to give them
Speaker 2: some idea of where we are and where we're going,
Speaker 2: what two data series should they be paying attention to
Speaker 2: over the next few years.
Speaker 3: Unemployment rate and the payroll report is critical. What's important
Speaker 3: over time changes. Yes, there's times when the weekly unemployment
Speaker 3: claims is very important. That's important when you really do
Speaker 3: think that there's a possibility of a recession, But that
Speaker 3: only matters in that particular situation. Probably the most important
Speaker 3: thing is the inflation reports and being able to look
Speaker 3: at them, look at them with taking the rents out
Speaker 3: to kind of get a feel for what's happening, So
Speaker 3: you know, I would definitely be following both of the
Speaker 3: inflation reports CPI and the PCE report wrap up.
Speaker 2: Investors should realize they don't need to follow every data release,
Speaker 2: every news report, every economic announcement that comes out, but
Speaker 2: you should be aware of where we are in the cycle,
Speaker 2: when we're closer to a recession, when things are in
Speaker 2: danger of slowing down. The weekly new unemployment claims are
Speaker 2: worth tracking, but in the meantime, you should be watching
Speaker 2: unemployment rates, you should be watching housing starts, and lastly,
Speaker 2: you should be paying attention to both CPI and PCE
Speaker 2: reports to give you a sense of when the FED
Speaker 2: or if the FED is going to cut or stay
Speaker 2: pat I'm Barry Retolts and this is Bloomberg's at the
Speaker 2: Money to Tail Store to Tail Ustall