Canoes, Airplanes and the Consumer
Our obsession with watching the Fed to figure out if they will be able to engineer a “soft landing” may soon be ending. The airplane analogy was always kind of a head scratcher anyway. Technically, a soft landing would be determined by the Fed a) stopping an interest rate hiking cycle, b) not putting the economy into recession, and c) reducing the fed funds rate to neutral.
Well, the Fed has managed to end its interest rate hikes and we have, so far, avoided a recession unless you want to count the ’22-’23 manufacturing and earnings recession. And some would say we have achieved a neutral rate of interest, for now. Or maybe not, more rate cuts may be needed and the market is expecting at least another two or three cuts in the next year.
But set aside these troublesome details. How do we know when the plane takes off again? Is it when the economy starts booming? Or does it have to go into “overheated” state? Or is it when the Fed decides to start raising rates again? It’s a problematic analogy.
I heard a better one this week from an analyst who compared investing and tracking the economy like paddling a canoe. If you think of your investment journey like an unexplored river, you are always in the game as long as you are on top of the water and your paddle is in control. Your may need to switch the paddle from one side to the other, or speed or slow it up. There may even be a time or two you need to portage and carry the canoe around a waterfall or other obstacle. But the journey continues, as long as you react in a timely manner to the conditions. No takeoffs. No landings.
As we take a read on current conditions, we note fairly positive signs. Inflation has come down from its recent highs. Employment has stayed fairly solid and unemployment is close to historic lows. Wages have even started to turn up for many, although they have a way to go make headway against the high price of just about everything since the pandemic. And we expect things could be bumpy with an election here or an unexpected geopolitical event there. But these things have been normal in the long history of our river run experience.
And it helps a great deal to take a longer-term perspective. Bloomberg put out an interesting article today that asks the question, how much of a typical family’s income does it take to purchase certain key components of the American middle class dream? And they studied the 8-year period between August 2016 and August 2024, which is at least a medium, if not long-term, period. https://www.bloomberg.com/news/features/2024-10-17/costlier-housing-cars-college-deepen-us-voter-fears-over-economy
The findings speak to why, even with our relatively positive read on the economy currently, the longer term has been a real challenge for many Americans. The median price of a single-family home is up 75%. That’s a double-edged sword. Current homeowners are certainly pleased about it but those trying to buy a home, especially a first home, not so much.
The average monthly car payment? Up almost 54% from $478 to $737. At the same time, the average number of years we keep our cars on the road has risen to 14. Wonder why?
And childcare? Which is a big and important expense for many young families. The average weekly cost has risen from $211 to $321.
These are the things consumers are focused on and both political parties in this election season have talked endlessly about them, often blaming the other side. But these problems didn’t develop over a single administration and, in some cases, they were decades in the making. They are longer term problems that need to be addressed with comprehensive solutions.
We will be keen to see any new policies arising after the election, once a new Congress and White House are in place, that are designed to address these issues and we will be sure to keep our canoes heading down the river.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.