BuildersOutlook2022Issue7 - Page 7

ECONOMICOUTLOOK

2022Issue7 BuildersOutlook

ECONOMICOUTLOOK

7
Elliot Eisenberg Economic & Policy Blog
Elliot Eisenberg , Ph . D . is a nationally acclaimed economist and public speaker specializing in making economics fun , relevant and educational .
Mighty Midterms Since at least 1950 , the year following US midterm elections has always seen the S & P 500 rise . During this 70-year period there have been 10 elections with a Republican president , and eight with a Democratic one . The best year for equities was 1955 ( Eisenhower ) when they gained about 30 %, while the weakest year was 1987 ( Reagan ) when equity returns were barely positive . The average gain is about 15 %.
Increasing Inflation The Y-o-Y increase in June CPI is 9.1 %, up from May ’ s 8.6 %, the worst reading since 11 / 81 ’ s 9.6 %. Core CPI is behaving arguably better , it ’ s up 5.9 % Y-o-Y and has been falling since March , but worryingly M-o-M numbers are getting steadily worse ! These lousy readings will keep the Fed aggressively raising rates ; thus , the yield curve continues flirting with inversion , suggesting recession . Ideally inflation peaks ASAP and falls fast .
Opposite Observations GDP in 22Q1 was -1.6 % annualized , 22Q2 looks to come in at -2 % annualized . Yet job growth in 22H1 was superb , averaging 456K / month . How can this be ? Are firms hoarding workers despite falling sales because bosses expect a mild downturn or because hiring is so tough ? Maybe the GDP data will be revised up or employment data downwards . Otherwise , productivity must be sinking at 6 %/ year which is historically unprecedented .
Powell ’ s Peril In early 1972 , with the fed funds rate at 3 %, the Fed began raising rates to quash inflation . By 11 / 73 , the fed funds rate exceeded 10 % and the economy entered a deep recession . The Fed continued raising rates ultimately pushing fed funds to 13 % by 6 / 74 . Then , thinking inflation was licked , they began lowering rates to 5 % by 6 / 75 . The economy recovered but inflation remained . This experience haunts Powell .
Contract Cancellations Last month , new home contract cancellations hit 14.5 %, their highest level in years outside of 4 / 20 ’ s Covid-tainted peak of 16.5 % and are 30 % above their seasonally adjusted pre-Covid rate . Similarly , the percentage of pending-home sales that fell out of contract in June hit 14.9 %, their highest level in years excluding the Covid-19 induced 3 / 20 peak of 17.6 % and are 20 % above the pre- Covid rate of about 12.5 %.
International Inflation At the peak of the Housing Boom , nearly 20 central banks raised rates to cool off their respective economies . In the recovery that followed early in the following decade , the number of central banks that hiked rates again peaked at close to 20 . Right now , the number of central banks raising rates is 40 and rising . Inflation is global , and so is the highly likely concomitant synchronized global slowdown .
Tough Tightening With another 75bp hike this month , a 50bp hike in September and November , plus the continuing effects of QT , and the Fed will have tightened monetary policy by a staggering 350bps in CY2022 . Add deeply contractionary fiscal policy , an inverted yield curve , a steady decline in the monetary base - the only money banks can lend out – and a return to pre-covid growth in M1 and M2 , makes me nervous .