Macro Outlook Apr 2022

Summary:

We close out April on strong negative market sentiment, with the S & P 500 losing 10% over the course of the month. The Nasdaq has had its worst month since 2018. Volatility caused by recession anxiety are headlined by a prolonged Russian war in Ukraine, continued increasing inflation expectations and fears of the FED making a policy mistake, as market participants themselves diverge on the appropriate path forward. Recessions ultimately are dictated by the growth story. While forecasting in uncertain times creates fear of what lies ahead, realized data holds firm that the wounds of the pandemic are healing. Employment remains tight. Housing demand is high. Wage growth continues. Even in equity markets, 80% of earnings have beaten analyst estimates thus far. Some of the volatility we see can be attributed to the outsized influence of tech large caps in a indexing dominated financial system. That is not to say that beyond transitory externalities, that there are not troubling indications. Growth in wages was outpaced by inflation in this round of data release. Combined with a drop in home ownership, this wealth destruction will disproportionately impact middle and lower classes. There are signs that consumers have started feeling the pains of inflation in not just the checking account, but the savings account as well. Finally, the slowdown in labor force growth is a slow blowing headwind, but a direct input in the growth equation.

Individuals and Households

Consumer financing rates are increasing for both short term and longer term loans, however no slowdown in borrowing so far. Mortgages and HELOC borrowing both up. Mortgage debt service payments are starting to put a bigger dent in consumer disposable income.

Investment into increasing housing supply continues to expand, leading to a small tick up in housing inventory. Home sales down, however prices continue to ramp higher, implying that sales may be supply constrained.

Total nonfarm payrolls continue to roll back to pre-pandemic levels, as overall labor market employment metrics show another positive round of release. Average weeks unemployed strongly trending down. Decrease in both job leavers and job losers show that employment turnover trends may be stabilizing. Wage growth up by some metrics, however, on net inflation has decreased the real wages of median American.

Pandemic era savings levels are a thing of the past, leading to the first decrease in cash levels in a while. Consumers are now facing declines in disposable incomes, perhaps a driver in the continuing decline in sentiment. Increasing prices are certainly a big factor in this story. Despite this, personal consumption spending still increases, though we do see declines in bigger purchases like durables goods and air travel.

Businesses

Businesses still tapping into short term financing markets and expanding real estate debt held. Corporate profits show a small dip for the first time in a while, however total sales still expand. Business sentiment on employment up, in line with slightly higher CAPEX spending expectations.

Retail inventories up, however sales remain strong and stock to sales level falls for retailers and manufacturers. Increase in shipment activity, though total transportation down along with truck tonnage.

Looking ahead, job openings jump to new highs as quits back on the ascent. Manufacturer’s orders slowdown this period, though levels well above pre-pandemic levels.

Banks

Bank residual consolidates as cash levels drop and liabilities rise. However, moderated by an increase in loans.

Central Bank

FED assets level growth continues to slow, mostly from a decline in the amount of shorter dated assets held. Policywise, inflation expectations still run higher with money velocity unmoved. Total monetary base increases. Policy uncertainty index spikes.

Government

Interest payment levels rise as government spending gets cuts elsewhere. Deficit slightly less negative. Nominal GDP sees continued growth, though real GDP has slowed into negative territory. Exports up, however not enough to dent the significant trade deficit.

Inputs and Productivity

Current price inflation starkly in frame with latest releases. Energy and food prices increasing at alarming rate.

Labor force level and labor force participation both rise. Longer term labor force participation trend still grim based on underlying demographic data. Capacity utilization and industrial production both up though, continuing trend of improving productivity.

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