Speaker 1: Somebody pasta stoff TAA stars.
Speaker 2: When it comes to the economy, it seems like everybody
Speaker 2: has an opinion about what's going to happen next. Are
Speaker 2: 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 3: 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 know,
Speaker 3: it's quarterly, it gets heavily revised. The unemployment rate is monthly,
Speaker 3: and so you know when the unemployment rates at three
Speaker 3: to nine that the economy is in pretty good shape.
Speaker 3: 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. But
Speaker 3: I think those there is some predicted value in housing starts.
Speaker 2: I like the concept of GDP unemployment and 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: flip side 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. 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: the 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, 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 to bat, but I understand
Speaker 3: what you're saying. 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. But the
Speaker 3: measure of rents that go into CPI and PCEE, they
Speaker 3: include renewals, which they should. You know, the people that
Speaker 3: are getting in renewals are still catching up to the
Speaker 3: fact that the rent surged a year or two years ago.
Speaker 3: But this is a key point is monetary policy cannot
Speaker 3: impact what happened to rents two years ago. It can
Speaker 3: only impact what's happening today. And today rents are basically
Speaker 3: flat asking rents, so you know, there's a different people
Speaker 3: Sometimes renders say to me, well, wait, my rent still
Speaker 3: going up. Yeah, but 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,
Speaker 3: the Governments reporting, one of the sentences in there has
Speaker 3: been a fifty percent is related to rents or something
Speaker 3: close to that of the of the CPI increase. So
Speaker 3: what I've been doing is I've and taking rents out
Speaker 3: of the inflation measures to see where we're at, and
Speaker 3: we're much closer, and for several months we were at
Speaker 3: the Fed's target. So this is this is a little
Speaker 3: balancing act for the Fed is how much should they
Speaker 3: look at rents and how much should they exclude it
Speaker 3: from what they're what they're doing now. Very recently, in
Speaker 3: the last two or three months, we've seen services pick
Speaker 3: up a little again, and so that is concerning. But
Speaker 3: still if you look at the like the Cleveland Fed
Speaker 3: immediate CPI, I think it was close to four percent
Speaker 3: last month or annualized, but if you take out rents,
Speaker 3: it was under two percent, so to the to the
Speaker 3: Fed's target. So this is this is really one of
Speaker 3: the key areas on inflation that I'm looking at.
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: there is supply and demand. We still have pretty good demographics.
Speaker 3: We have a large cohort in the home buying age
Speaker 3: group in their thirties. On the flip side, the inventory,
Speaker 3: of course has been very low, but it's starting to increase.
Speaker 3: It's still pretty thirty percent below kind of a normal level.
Speaker 3: But since sales are down so much, I've been looking
Speaker 3: more at months of supply and that is probably going
Speaker 3: to get back to twenty nineteen levels later this year,
Speaker 3: and that says that house prices will basically be flat
Speaker 3: to only up slightly by the end of the year.
Speaker 3: 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 recession was not imminent when everybody
Speaker 2: else seemed to be stuck on the inverted yield curve?
Speaker 3: Yeah? Well, you know, there were several economic analysts who
Speaker 3: didn't think there would be a recession. Claudia sam and
Speaker 3: who you've interviewed recently, Yan Hotsuits, Goldman Sachs chief economists
Speaker 3: who everybody should read if they get a chance. In
Speaker 3: twenty twenty two, I didn't see there was no reason
Speaker 3: to expect a recession at all. In twenty twenty three
Speaker 3: that you started seeing some signs of a possibility. The
Speaker 3: Federal Reserve staff was even predicting a recession in twenty
Speaker 3: twenty three. So but I mean, the key things that
Speaker 3: people were looking at was the inverted YO curve, which
Speaker 3: is still inverted, and the fact that housing starts dropped
Speaker 3: off pretty sharply. But what they weren't looking at was
Speaker 3: other parts of pandemic economics, if you will. Auto sales
Speaker 3: had been really depressed because of supply issues, and so
Speaker 3: that meant auto sales were going to pick up in
Speaker 3: twenty twenty three, which they did, and there were other
Speaker 3: parts of the economy that had similar things were the
Speaker 3: supply issues were going to start easing up from the pandemic.
Speaker 3: So if you factored in pandemic economics, I was saying, hey,
Speaker 3: we need to watch, but I don't think we're going
Speaker 3: to have a recession, And 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 the
Speaker 3: unemployment claims is very important. That's not now. That's important
Speaker 3: when you really do think that there's a possibility of
Speaker 3: a recession, if that really starts climbing sharply, that's probably
Speaker 3: your key indicator. But that only matters in that particular situation.
Speaker 3: Right now, probably the most important thing is the inflation
Speaker 3: reports and being able to look at him look at
Speaker 3: them with taking the rents out to kind of get
Speaker 3: a feel for what's happening because of this unusual thing
Speaker 3: that just happened with rents. So you know, I would
Speaker 3: definitely be following both of the inflation reports CPI and
Speaker 3: the PCEE report.
Speaker 2: So to wrap up, investors should realize they don't need
Speaker 2: to follow every data release, every news report, every economic
Speaker 2: announcement that comes out, but you should be aware of
Speaker 2: where we are in the cycle. When we're closer to
Speaker 2: a recession when things are in danger of slowing down.
Speaker 2: The weekly new unemployment claims are worth tracking, but in
Speaker 2: the meantime you should be watching unemployment rates, you should
Speaker 2: be watching housing starts, and lastly, you should be paying
Speaker 2: attention to both CPI and PCE reports to give you
Speaker 2: a sense of when the FED or if the FED
Speaker 2: is going to cut or stay Pat. I'm Barry Retolts
Speaker 2: and this is Bloomberg's at the Money Star