Drones
On the night of December 12th,
I saw reports from friends that they were personally seeing (and some videoing)
the drones that have been filling the skies of New Jersey and Pennsylvania. Their reports came from Doylestown, Willow
Grove, Perkasie, Phoenixville, and Conshohocken. Countless reports were coming in from the
Lehigh Valley and the Poconos of large drones flying in formation and hovering
in place. Our government has no answers
about the drones that were first reported flying in New Jersey on November 18th. They are dismissing the reports, saying
people are seeing planes (even though they are hovering). and saying there is
no risk. We can bring the drones down
(safely with technology that they use in Europe to bring down drones at soccer
games) and see what they are and what’s on board. Very strange indeed. Because we are not bringing them down, it
makes me think that they are government assets, potentially scanning for
radiation, according to one corporate executive who manufactures drones and
identifies what he thinks is the exact make and model of drone. Are they scanning for radiation, spying for
the Iranians or Chinese, or just crazy operators who like to fly drones at
night? We don’t know because our
government won’t tell us. Stay tuned!
Inflation
The decline in the year-over-year
inflation rates has stalled in the past few months. The biggest declines came during the period
when the Fed was allowing the M2 money supply to outright contract on a y-o-y
basis. That stopped this past April and
M2 has been slowly growing ever since.
Does that mean that the Fed should not lower rates? No, the Fed was overly restrictive when Fed
Funds was at 5.50% and they are still restrictive at 4.50%. Inflation was a critical issue this election
cycle. People are feeling the effects of
cumulative inflation, up 20% since early 2021, and high prices and they need
strong wage growth (on a real basis above inflation) to catch up.
It is still driving me crazy!
People still refer to the CPI and say it is not at the Fed’s target of
2.0%. It will not be! The Fed targets PCE (and headline PCE at
that) and monitors core PCE in setting their targets; the PCE and CPI indices
are constructed differently with different weightings of components. PCE covers urban and rural areas and changes
weightings monthly to account for consumers substituting different goods when
prices change. The CPI covers only urban
areas and weightings are adjusted once a year.
The Fed favors headline PCE and that is their target. We can certainly use CPI but it must be
adjusted to compare to PCE.
In research from November, 2017, Noah
Johnson of the BLS showed analysis of the two indices. He showed that CPI has exceeded PCE by 100
basis points over the past 50 years. I
read a research report by Bloomberg (some time ago) that showed the spread to
be lower at lower rate levels and they adjusted the spread to 50 basis points
for the past 10 to 15 years. So, if the
Fed target for PCE is 2.0%, CPI can be 2.5% and they still meet their target. We are getting so close but frustratingly far
away on some measures: PCE in October was 2.3% (September 2.1%), core PCE in
October was 2.8% (September 2.7%), CPI in November was 2.7% (October 2.6%) and
core CPI in November was 3.3% (October 3.3%).
GDP’s PCE for 3Q24 was 3.7% compared to 2.8% in 2Q24, sharing a 3 handle
with core CPI, so that is worrying people.
The other PCE measures are trending so slowly to 2.0%. People worried that CPI rose in November, but
one of the main causes was a large increase in egg prices due to Avian bird
flu. Should the Fed change rates based
on egg prices?
Based on a Fed Funds rate of
4.50% and inflation measures, is the Fed tight/restrictive? Yes, certainly they are based on a spread to
PCE of 2.2%, core PCE of 1.7%, CPI of 1.8%, and core CPI of 1.2%. Comparing Fed Funds to nominal GDP in 3Q24 of
5.0%, the spread is -.5% and not tight.
Granted, when the Fed eased yesterday, nominal GDP was 4.7% prior to
today’s final revision.
GDP, and Should We Look at GDI
Too?
Anyone who knows me knows that I
am a fan of Dr. Lacy Hunt’s writings on the Fed, rates, and the economy. His continued research has convinced me to
look at the average of two economic production measures: GDP- tracks
expenditures on final goods and services produced, and GDI- sum of the income
received by all those who produce the goods and services, and not just focus on
GDP. Both are contained in the quarterly GDP
reports.
Real GDP in 3Q24 was +3.0%, 2Q24
was+3.0%, and 1Q24 was +1.6%. Real GDI
for 3Q24 was +2.1%, 2Q24 was +2.0%, and 1Q24 was +3.0%. It’s a mixed picture, right? Shouldn’t they equal? The short answer is yes and attempts are made
during annual benchmark revisions. But
the average of GDP and GDI is more consistent: for 3Q24, it was +2.6%, in 2Q24
was +2.5%, and in 1Q24 was +2.3%. It
gives a smoother picture of the growth trend, which is clearly lower than
headlines for GDP would indicate.
I think the lower trend of the
average of GDP and GDI is why the Fed started to ease. The nominal average of GDP and GDI for 3Q24
was +4.5% (equal to FF), for 2Q24 was +5.1% (was .4% under FF) and 1Q24 was
+5.4% (.1% under FF). The Fed generally
eases policy when Fed Funds exceeds nominal GDP, or better yet, the nominal
average of GDP and GDI.
November, 2024
What a month it was! For me personally, I went to Disney World
with family and reconnected with Florida cousins. We toasted my one-year retirement anniversary
at lunch on November 8th. But
the election dominated the news, with Donald Trump regaining the White House
for a second term. He swept all of the
swing states by connecting with everyday people. His promises on immigration, securing the
border and deportations, lower taxes for consumers, seniors on social security,
and businesses, improving trade with tariff strategies, lower inflation by
ramping up production dramatically for oil and natural gas, cutting costs of
government using DOGE, and putting an end to endless wars resonated with
voters. He has surrounded himself with
businessmen and some surprising picks to run the government agencies, with a
promise to cut regulations that are strangling banks and corporations. It’s music to Jamie Dimon’s ears, although I’m
a little sad that he is not part of the new administration. He’ll continue in the role of consultant to
Trump, as has been the case for many months.
Stocks rallied wildly during
November at the promise of lower taxes and an improved business environment. Bitcoin’s price exploded from 66,000 in
October to 106,000 the other day, or +61% due to the Trump effect of supporting
Bitcoin. The DJIA has struggled this
month, with the December 18th selloff the 10th consecutive day of
declines (but up 14% y-t-d), the S&P 500 and Nasdaq achieved new handles of
6,000 on the S&P (up 25% y-t-d), and Nasdaq of 20,000 (up 34% y-t-d). Trump had the honor of ringing the opening
bell on the NYSE on December 12th.
The markets perceive improved GDP
growth with less government cash flooding the economy and crowding out
business, although the Fed’s projections from yesterday show a decline in GDP
from 2.5% this year to 2.1% next year. A
lower budget deficit would be a welcome relief for the bond market roller
coaster, where yields plunged in September upon the first Fed rate cut of .50%,
only to have long-term yields rise by 70 to 80 basis points, while the
short-term rates fell 100 basis points so far.
The yield curve has gone from inverted (10 yr to 2 yr and 10 yr to 3
month), to flat, to steepening very quickly.
The budget deficit for 2024 was -$1.8 trillion, or 6.1% of GDP, and was -$1.7
trillion in 2023. The Trump goals
include reducing the deficit to GDP to 3% or less. Debt is at $36.2 trillion and interest to
service that debt was $950 billion in 2024.
Debt-to-GDP is at 120.7% in 3Q24; long periods above 90% will reduce GDP
potential by one-third.
And speaking of government, on
December 18th, Congressional and Senate leaders tried to jam a 1,547
page “continuing resolution” down the throats of Congress and the American
people. It was loaded with incredible
spending and unrelated “perks,” such as giving a gigantic pay raise to Congress
while many American people can’t make ends meet, sheltering Congress members
from subpoenas (wow!), giving state and local workers an extra social security
payment, allowing Congress members to opt out of Obamacare when all of us
cannot, providing money to upgrade the NFL Washington Commanders’ stadium
(why?), paying for the destroyed bridge in Baltimore that should be paid for by
private insurance, paying $10 billion to keep a government agency in the
business of censorship of conservatives for another year, and a restrictive
debt ceiling. The list goes on and
on. Elon Musk, Donald Trump, and JD
Vance put an end to this outrage and back room dealing. This bill is now thankfully off the
table. The deadline for a spending bill
is December 20th at midnight
or else the government shuts down. Stay
tuned but the American people did not vote for this…
What About Other Indicators?
We can’t forget my other favorite
indicators; watch them and you know what’s fundamentally happening and what
will eventually happen.
-
M2 growth
y-o-y- From the Fed H.6 report, y-o-y growth in M2 money supply for October was
+3.1%, September was +2.6%, August was +2.0%, and July was +1.3%. Y-o-y growth turned positive in April, 2024
after 16 months of y-o-y declines, which hadn’t happened since 1931-1933. Milton Friedman said M2 growth should equate
to nominal GDP growth, so the Fed is still restrictive. Dr. Hunt indicates that the rate cuts by the
Fed are needed to reverse the negative and low trend growth of M2. And don’t forget, they are still doing QT, or
reducing their bond portfolio, which also drains money from the system.
-
The dollar was volatile all year. Standing at 106.84 on December 12th,
with a low of 100.16 on September 27th, but it is now up +5.4% from the
level at December 31, 2023 of 101.33.
This is good news for fighting inflation as import prices will be lower on
a relative basis and this will help to keep inflation down; however, it may not
be the best news for exports. China is
experiencing deflation for the last six quarters and factory prices there have
declined y-o-y for 26 months in a row, according to the WSJ and that is good
news.
-
Leading economic indicators- Surprise! In today’s release, the LEI rose +.3% for
November (the Trump effect), after declining for 30 of 31 months since April,
2022 with only a small increase in February, 2024. The index fell below 100 (100=2016) in
September and November equaled that level at 99.7. Go figure.
- Housing- Y-o-y home prices are still increasing
with Case Shiller at +4.6% in September and FHFA at +4.4%. Average mortgage rates for new 30-year loans
are 6.72% while the average mortgage rate currently on homes in the US is
3.78%. No wonder there is no inventory
on the market. New construction
continues to be slow. Zillow showed how
unaffordable housing really is- today, a salary of $106,500 is needed to buy a
house at the average sale price; in 2020, that same salary was $59,000.
- Employment- The unemployment rate in November
was 4.2%, up from 3.7% one year ago. In
November, payrolls rose by 227,000 after two grim months, but household
employment fell by -355,000. Unemployed
persons now total 7.14 million and the pool of available workers is 12.63
million. Over the past year, full-time
jobs have fallen by -1.34 million to 133.39 million while part-time jobs have
grown by 106,000 to 37 million, with likely few benefits for the latter. This is hardly a robust employment
market. Remember the August announcement
that at least 818,000 “jobs” will be pulled out of totals for 2024 as they
simply did not exist. Perhaps that was
due to the Philadelphia Fed monitoring job growth and showing that there were
job losses that began in 2Q24. This
could explain the Fed rate cuts.
- Productivity- In 3Q24, it ran at +2.2% following
2Q24’s rate of +2.5%. Wages can rise
greater than inflation targets if productivity runs close to its long-term
average of +1.5%. Currently, in
November, the wage growth was +4.0% y-o-y, which is okay if productivity stays
above 2.0%.
- Crude Oil- The latest price is just below $70
per barrel, equal to where we started 2024.
If we can increase production dramatically (the goal may be an increase
of 3 million barrels per day), a decline in oil prices can lead inflation
lower.
Finally. 2024 has been a great
ride. There’s more time to travel, to
write, to be with family and friends.
People ask me if I miss working.
The answer will always be yes, I do.
I especially miss my colleagues. They
probably have missed me saying throughout the year that “Christmas will be here
before you know it.” Christmas is less
than a week away and I pray that all of you find time to relax and enjoy
life. I wish you all a very Merry
Christmas and a Happy 2025!!!
I appreciate all of your
support! Thanks for reading! DLJ 12/19/24
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.
Disclaimer: This publication is provided to you solely for educational and entertainment purposes. The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed. The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice. The author cannot provide investment advice but welcomes all of your comments.
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