Guest Post:Financial Markets and Economic Update For Second Quarter 2Q26

I start my newsletter on a sad note this quarter.  On June 22^nd, former Federal Reserve Chairman, Alan Greenspan, died at the age of 100.  He served as Fed Chairman from August, 1987 until his term expired at the end of January, 2006.  He was Fed Chairman during my formative years at Meridian Bank in Reading.  He guided us through the crash of 1987, the S&L crisis of the 1980s and early 1990s, the CRE crisis of 1990, the tech stock bubble of 2000-2001, September 11^th and subsequent recession, and left his position before the housing crisis grew into the Great Recession of 2008.  I’m still mad at him for raising interest rates so much in 1994.  On the positive side, he guided us to ten consecutive years of GDP growth from 1991 to 2001.  I, like most investors and banking industry professionals, had a love-hate relationship with him.  But to many of us, he will always be the Maestro.

Iran

The Iran conflict (or is it a war?) dominated the headlines and caused turmoil in markets- stocks, bonds, crypto, and commodities- during the 2Q26.  WTI crude prices peaked at $111.50 per barrel in early April, but right before the conflict began at the end of February, crude was at $68; the increase was +64%.  WTI crude is now back down to $70 today.  Gas prices spiked from just below $3.00 per gallon to $4.56 on May 21^st, and have fallen back to $3.88 today, for a much slower pace of decline.  Price increases likely would have been much worse had the US not had such high oil capacity.  Earlier episodes of oil price spikes in 1974, 1979, 1991, and 2022 were longer lived and quickly changed from inflation risk to recession risk. 

The primary issue is the danger to shipping in the Strait of Hormuz as Iran fired upon and threatened ships there.  The US set up a blockade so that Iranian oil could not leave the country, pressuring their economy.  While the US does not face oil and gas shortages, many countries do.  Europe imports 95% of its oil, China 75%, and Japan 99%.

The US is trying to negotiate with Iran and has a fragile 60-day ceasefire, but can we trust this global threat?  They use short- and long-range ballistic missiles and drones to threaten their region and the world.  They threaten ships in the Strait, support terrorists like Hezbollah and Hamas, continue to seek nuclear weapons, and kill thousands of their own people as they did earlier this year.  Can we even trust them to not build a nuclear weapon?  I think not.  Stock markets don’t trust them either, judging from recent volatility.

Change Has Come to the Fed- Finally

Kevin Warsh was sworn in as new Federal Reserve Chairman on May 22^nd at the White House (as Greenspan had been in 1987) and a new era began.  Warsh served on the Fed’s Board of Governors previously, from February, 2006 to March, 2011.  Like Greenspan, he believes productivity should be a major factor in monetary policy decisions and that the Fed should not just rely on published data and rules of thumb like the Phillips curve.  Artificial Intelligence right now is expected to lead to another productivity boom, just as the personal computer and the Internet did in the 1990s.  It was no surprise that there was no change in rates at Warsh’s first meeting while he contemplates what to change at the Fed.

Jerome Powell’s term as Chairman expired in May but, like company that doesn’t know when to leave a party, he insisted on staying on the Board of Governors.  It is a highly unusual move and last occurred in 1948, when Fed Chairman, Marriner Eccles, refused to leave the Board when his chairmanship ended despite a request by President Truman to step down.  Why do we give separate Chair and Board terms to these obnoxious people?  On May 31^st, Powell received the Profiles in Courage award from the JFK Presidential Library.  For what exactly?

Chairman Warsh is setting up five working groups to review monetary policy and operations, how to communicate to markets and to the public, data sources and potential new ones, productivity and job growth, and inflation measures and targets.  Hopefully he dumps the SEP, or Summary of Economic Projections, because it is often ridiculous, senseless, and more inaccurate than accurate.  (For this quarter, Warsh did not provide any projections; the other 18 FOMC members did).  Does it bother anyone that they project inflation to fall but it always takes two years to get to target?  Does it bother anyone that they project low GDP growth, but don’t project lower rates?

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- Could we be seeing the bottoming and reversal of the nearly four-year negative cycle in the LEI?  May’s index was +.1%, following April’s rise of +.3%.  March was down -.6% likely due to the shock of the Iran conflict, and February rose +.3%.  The index had declined in 39 of the last 47 months.  We’ve seen three increases- all this year and five months of no change in 2024 to 2026.  LEI had signaled recession many times in those 39 months, but like the inverted yield curves of 2022 to 2024, a sustained downturn in GDP never occurred. 

Inflation- The Iran conflict led to a spike in oil prices from $68 to $111.50 in April and we have seen prices fall back in May and June when hopes of an end to the conflict are at their highest.  However, headline and core (ex. food and energy) prices that were trending down toward targets are now uncomfortably high.  CPI for May y-o-y was +4.2% and core was +2.9%.  PCE in May was +4.1% and core was +3.4%.  PPI for May was +6.5% and core was +4.9%.  It feels like 2022-2023 all over again, but the measures are all expected to decline as oil prices and the slower moving gas prices drop back down to pre-conflict levels.  We are still in the unnatural and unprecedented situation where PCE is too close to or greater than CPI;  May PCE of +4.1% is just .1% under CPI of +4.2%.  May core PCE of +3.4% is .50% greater than May core CPI of +2.9%.  CPI is supposed to be .50% higher than PCE in a normal relationship.  I’m currently reviewing the “Truflation” measure, which is a real-time y-o-y estimate for CPI, started in December, 2021.  For you Bloomberg users, the ticker is TRUFUS44.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.5% for 2Q26.  GDP had improved in 1Q26 to +2.1%, following +.5% in 4Q25.  Nominal GDP was +5.1% in 1Q26, falling from +5.8% in 4Q25. 

Moody’s Beige Book Index- The June, 2026 Beige Book showed a lot of improvement.  Ten districts increased, one was flat, and one declined, which sadly was our own Philadelphia district.  The Moody’s index improved to 36.1 in June, following 25.0 in April, and 16.7 in March.

M2 Money Supply- M2 y-o-y growth was unexpectedly stronger in May at +5.6%, following April +4.7%, March +4.3%, and February +4.3%.  Finally, May’s growth is close to the average nominal GDP growth of +5.5% for 1Q26 and 4Q25.  We saw outright declines from December, 2022 to March, 2024 that were hurtful to growth.  The velocity of money has been flat at 1.41 in 1Q26, 4Q25, and 3Q25.  (Remember GDP=M x V).

Spacex and the Markets

Spacex completed the largest IPO in history on June 12^th, priced at $135 per share.  Trading opened at $152.75, hit a trading high of $225 within days, and slowly faded back to $153 on June 26^th.  Elon Musk became the first trillionaire with that issuance. The market cap stands at $2.0 trillion.

Spacex isn’t the only stock to rise and then fall back this quarter.  After stocks fell in March and April, prices rallied in May into June, before turning down as we see volatility with Iran and quarter-end repositioning.  The S&P 500 forward PE ratio is about 23 (19 to 24 is typical in a bull market).  AI investment and buildout will take an estimated three to five years and should lead to increased productivity, increased corporate profits, and increased GDP growth, albeit with potential increased job losses.  With the pool of available workers growing steadily and now at 14,063,000, this could spell bad news for the labor market.  Inflation will likely decline in this scenario.  (Warsh knows).

Don’t forget bonds.  They’ve been very volatile with a tendency toward rising rates most of the quarter.  During 2Q26, the 2-year Treasury yield rose 30 basis points to 4.09%, the 5-year Treasury rose 20 basis points to 4.13%, and the 10-year Treasury rose 5 basis points to 4.37% (after peaking at 4.50% with worries about the budget deficit, US debt/GDP at 122.8%, and uncertainty over term premiums).  Mortgage rates remain stubbornly high.  Watch out. The curve is flattening.

World Cup

Soccer fans have taken the US by storm, with an estimated 1 million to 5 million fans visiting the US, Canada, and Mexico for the matches.  Among the favorites are USA with Pulisic, France with MBappe (my personal favorite), Argentina with Messi (the greatest), England with Kane, and Norway with Haaland.  My niece got to go to the Ghana match in Philadelphia yesterday to cheer on her home country.  It has been exciting to watch some of the matches, but the 0-0 ties are a little trying.  It’s truly exciting as foreign visitors are praising the great time they are having in America. 

Large Hadron Collider

CERN has scheduled another long shutdown (LS3) for the LHC starting tomorrow to increase its capacity; this shutdown will last until June, 2030.  Other shutdowns included the September, 2008 one right after the LHC was started up on September 10, 2008, due to electrical issues and helium leaks and coincided with the Great Recession.  A temporary shutdown occurred in November, 2009 when a bird dropped a baguette into the electrical substation.  LS1 was from February, 2013 for two years, and LS2 was from December, 2018 for over three years, coinciding with the covid-19 pandemic.  We will wait for what’s next.  In all these years, I only remember one important discovery, that of the Higgs Boson particle in 2012.  Perhaps they don’t tell us everything.  Why would they keep spending extreme amount of money on the LHC?  Maybe they will someday tell us. 

Italy- Here We Come!!

This summer, we will visit Milan, Lake Como, Florence, Pisa, Tuscany towns of Chianti and San Gimignano, Cinque Terre, and Rome.  We are just praying that the 100+ degree heat wave ends before we go.  We have an excellent Italian travel agent who took care of all details- large and small.  I highly recommend her and if you plan a trip to Italia, let me know and I’ll give you contact information.

The Italian economy is producing just +.5% GDP growth despite its strength in manufacturing.  Unemployment is 5.7%.  Government debt is putting a drag on growth, with the debt/GDP ratio of 133.3%; US growth is also slowed by its ratio of 122.8%.  Prime Minister, Giorgia Meloni, has her hands full trying to improve the economy while navigating the EU rules. 

So, for now, arrivederci!

Thanks for reading!  As always, I appreciate your support!  Viva l’Italia!  DLJ 06/28/26

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 your comments.

Guest Post: Financial Markets and Economic Update for First Quarter 2026

 A Wild and Cold Quarter

I can only remember one other winter that was as cold as what we just experienced.  A snowstorm hit the Northeast on January 25^th, followed by a period of ice and freezing rain and days and days of a polar vortex, with brutally cold temperatures and wind chills.  Many days did not make it out of the single digits and roads were icy and winds fierce.  It reminded me of January, 1994, when we had a similar storm of snow and freezing rain.  Temperatures didn’t get above freezing for two weeks then, at which time the ice on the roads finally melted.  Every bone in your body felt frozen.  We escaped to Florida at the end of February and basked in the warmth.  We even got one moment of fame, when the Golf Channel filmed us live as we were getting our picture taken at the infamous Bear Trap at PGA National during the Cognizant Classic on February 27^th.

The quarter will also be remembered for volatile markets and a lot of events that moved markets.  Rallies on stocks, bonds, gold, silver, cryptocurrencies, and energy prices were soon met with selloffs and volatility.  The quarter started with the surprise of the US Military entering Venezuela on January 3^rd, arresting Nicolas Maduro and his wife, and bringing them to the US.  Venezuela surprisingly cooperated with the Trump Administration afterwards in opening their oil markets; the benefits to the people there will hopefully be an economy that grows and a life with freedom.

On January 30^th, President Trump nominated Kevin Warsh for Federal Reserve Chairman to replace Jerome Powell when his term expires on May 15th.  (In my mind, May cannot come soon enough).  The markets fell from their lofty highs, especially gold and silver, when they realized Warsh’s actions might actually support and defend the dollar.  Warsh believes that interest rates can be lower and the economy can grow strongly without inflation, with something called productivity.  Warsh also believes in targeting money supply to control inflation, which would make Milton Friedman proud.  Enough of the Phillips curve.  Enough of the ridiculous economic projections and the even more ridiculous Dot Plots.  Enough of thinking it’s okay to meet your inflation target two years out (i.e. do your job), as nearly every recent projection has shown.  Enough of the bloated Fed with its 3,000 economists and staff.

I’m not alone in my disgust for Powell.  On March 18^th at his press conference (which I heard about later since I avoided watching him), Powell said he would stay on as Chairman Emeritus if Warsh was not confirmed by the Senate by May and would, in any event, stay on the FOMC until the DOJ’s criminal investigation is concluded.  The markets hated to hear this.  Stocks sold off immediately and ended the day with losses.  The man who I once called a hero at the beginning of the Covid pandemic (what is wrong with me?) has overstayed his welcome.  He does not have any answers.  “We just don’t know” is his favorite phrase.  Enough!

A partial government shutdown occurred on January 31^st, with DHS as the only Department not funded.  Democrats did not want ICE funded.  Hello…ICE was already funded into 2029 in the OBBB passed last summer.  But still DHS is unfunded today and TSA is in the headlines, with airport security lines in many cases taking three to four hours due to short staffing and resignations.  Ironically, ICE was sent in to help TSA.  I’m so glad we traveled in late February.  FEMA, the Secret Service, the Coast Guard, cybersecurity analysis, and other operations are also unfunded and held hostage still.

Speaking of late February, on the 28^th, the US and Israel began a bombing campaign on Iran.  The decision was made urgently when the Iranian foreign minister bragged to US negotiators that Iran had 440-460 kilograms of 60% enriched uranium, sufficient, with more refinement, to make eleven nuclear warheads within a short time.  The Iranian people had tried peacefully protesting the regime in January, only to have an estimated 30,000 citizens shot/killed by Iranian “security.”  Trump promised that “Help was on the way” and it arrived.  One of the first bombs killed the Ayatollah and 40 senior leaders.  Since then, the bombing has been non-stop, but Iran has lashed out with drones and missiles fired at its Middle East neighbors, especially Israel, and has been threatening ships in the Strait of Hormuz.  This matters because crude oil is trading at $96 per barrel today and Brent crude is at $108, with an unusually wide spread between the two.  Gas prices have risen from $2.90 per gallon at the end of February to $3.98 today.  Once a tipping point is reached, consumers will cut back on spending on other goods and services.  The conflict with Iran and uncertainty about oil and gas prices took stocks and commodities off their recent highs, set early in the quarter.  (DJIA 50,000; S&P 7,000; Nasdaq 23,000; gold 5,500; and silver 120).  But figure this one out- the dollar index, DXY, is back close to Par at 99.24, up from 96.45, which was the recent low in January.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- The Conference Board indicator was down again in January by -.1%, following December at -.2%, and November at -.3%.  The index has been negative for 40 of the past 44 months (no change in July 2025, May 2025, November 2024, and March 2024), signaling a recession that never came.  It’s not the only once reliable indicator to “fail” as no recession followed.  The inverted yield curves of 2022 to 2024 pointed to recession, too.

Real GDP- The Atlanta Fed’s GDP Now is currently at +2.0% for 1Q26, following a weak 4Q25 reading of +.7%, and full year 2025 of +2.2%.  Major world economies are also weak.  China just lowered its GDP projection to 4%-5% this year, which is the lowest since 1991, due to weak consumer demand, high debt, real estate crisis, tariffs, and an aging population.  It all sounds so familiar.  The economies in Japan, Germany, and the UK are no better.

Moody’s Beige Book Index-  An improvement in the districts occurred in March’s report, with the index at 16.7, following January 5.6, December 11.1, October 13.9, and September 0.

M2 Money Supply- February saw a mini-surge in M2 at +4.9% year-over-year, probably due to the Fed’s cognitive dissonance of not lowering interest rates.  January was +4.3%, December was +4.2%, and November was +3.9%.  The velocity of money ticked up to 1.41 in 4Q25 and 3Q25 from 1.39 in 2Q25 and 1Q25, boding well for GDP growth.  (Remember GDP=M x V).

Inflation- I was very excited by the February CPI report, which was +2.4% y-o-y and the core was +2.5%, both at the implied Fed target.  But the subsequent releases dampened my enthusiasm.  PPI came in very hot and very nasty at +3.4% y-o-y and the core was +3.9%.  PCE (upon which the Fed targets are based) for January was +2.8% and the core was +3.1%.  What gives?  PCE is greater than CPI?

CPI vs PCE- What’s Going On?

When February’s CPI was released, many business writers and talking heads complained that inflation was above target.  Well, for the first time since May, 2025, CPI did hit its implied target versus PCE.  Treasuries celebrated when no one else would, with the 2-year yield down to 3.41% and the 10-year yield down to 4.05%.  As I have written ad nauseum, Fed policy targets are set using PCE, which generally runs 50 basis points less than CPI because of the inclusion in PCE of substitution effects.  Since 2010, CPI has averaged 3.0% per year and PCE averaged 2.48%.  The spread between them showed about 50 basis points, as expected.  CPI hitting target in February probably won’t matter now as energy prices have risen substantially with the Iran conflict.

January’s PCE report came out with the y-o-y changes above 3%, higher than CPI.  The indices are constructed differently, with price effects of goods and services at different proportions.  CPI is down due to housing costs and rents dropping a lot over the past six months.  Rents are now at a 4-year low of $1,353 per month and are down -1.4% y-o-y.  PCE has a lower percentage of housing costs and also a higher percentage of other service costs rather than goods.  It may take some time for CPI and PCE to revert to their average relationship.

Private Credit Crisis Brewing?

Jamie Dimon sounded the alarm months ago when JPM Chase took charge-offs of private credit company (non-bank) loans and restricted new lending to them.  The $1.8 trillion market is comprised of many loans to private credit companies to make their loans; the loans are contained in funds managed by Blackrock, Goldman Sachs, T Rowe Price, Blue Owl Capital, Morgan Stanley, KKR, Apollo, and others.  They have restricted withdrawals from funds to no more than 5% in many cases as investors unsuccessfully scrambled to pull their money.  Liquidity crisis anyone?  It certainly bears watching.

Ending a Wild Quarter

Venezuela, Iran, and Cuba were not anticipated before this year began.  It shows how quickly things can change.  Other notables in the first quarter:

-          Independent journalist, Nick Shirley, exposed massive fraud in Minnesota regarding shell day care and healthcare companies throughout Minneapolis to the tune of $9 billion.  This led to probes expanding from Minnesota to California, Ohio, Maine, and New York.

-          The polar vortex finally ended!  March had some warm days.

-          The Cinderella story of the 16-0 Indiana Hoosiers had a happy ending with their NCAA championship victory over Miami  27-21.  I thought it was more exciting than the Super Bowl.

-          The Supreme Court ruled that the tariffs imposed by President Trump were not legal using the 1977 IEPPA law.  But tariffs can be placed using other existing laws and these laws were detailed in the ruling.  So, the markets really didn’t care.

-          New highs were reached in stocks, gold, and silver but volatility returned with a vengeance and prices all fell back.  Just ask bonds.

-          And congratulations to Giorgia Meloni and the entire Italian team for putting on a great Winter Olympics.  Giorgia, we will see you this summer…

 

Thanks for reading!  As always, I appreciate your support!  DLJ 03/24/26

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 your comments.

Guest Post: Financial Markets and Economic Update Fourth Quarter 2025

I had the best fourth quarter!  I’ve always wanted to visit Europe’s Christmas Markets and finally did in late November to early December on a Viking River Cruise from Budapest to Regensburg.  We loved Budapest, especially with both sides of the Danube River lit up at night.  We loved the Christmas Markets, especially in Budapest, Vienna, and Salzburg.  The best mulled wine was in Salzburg, which is an amazing city close to the Alps with so much culture and history.  The best food was in Regensburg.  It was special to sail from place to place, exploring, learning, shopping at Markets, listening to concerts, and enjoying every day.  For me, it is a dream come true and was actually a retirement gift, booked over two years ago.

Government Shutdown

We all saw it coming.  The government shut down on October 1^st when the Senate could not get 60 votes to get a continuing resolution passed.  Whatever happened to annual budgets, I’ll never know.  We keep pushing the current spending levels ahead by a few months.  Democrats first demanded $1.5 trillion in additional spending, including extension of Obamacare subsidies, which they themselves allowed to expire at the end of this year, but the Republicans held firm.  No.  Finally, in November, eight Democrats crossed the aisle to get to the 60 votes needed to pass the continuing resolution and reopen government, but with a near-term expiration of January 30^th.  It was the longest shutdown in history at 43 days.

So, we get to go through this madness again?  Government employees not getting paid, air traffic controllers not coming to work consistently, SNAP or food stamp benefits delayed, and government economic data suspended were all big negatives.  Republicans are not going to fund insurance companies in the failed Obamacare ACA anymore, they will not extend covid subsidies (covid is over!), and they will no longer pay for illegal immigrants. 

During the shutdown, NASA was busy tracking 3I Atlas, which they call a “comet” streaking across our solar system.  Is it a comet?  Is it an alien spacecraft?  Today, it makes its closest pass to Earth, albeit several hundred million miles away.  We shall see if the ETs send us a message.

Inflation

CPI for November surprised to the downside at +2.7% year-over-year; the core CPI was +2.6%.  CPI typically runs about .50% higher than PCE, upon which the Fed targets are set.  CPI is almost there to its implied target of +2.5%.  However, we only have PCE figures from September, which were +2.8% for the headline and core measures. 

There are plenty of hopeful signs that inflation will be declining in 2026.  Crude oil has fallen from nearly $80 per barrel to $55 this year.  Gas prices broke below $3.00 to $2.90 per gallon now.  Large increases in owners equivalent rent are fading, mainly due to deportations of illegal immigrants.  There is room for improvement in electric and natural gas prices, which rose +4.2% y-o-y, as capacity increases and regulations are reduced.  Food prices are tempering; one example is the cost of a Thanksgiving dinner in 2025 fell -5.2% from 2024 to $55.18.

Affordability is the big political buzzword right now.  The past four years brought us the highest inflation in two generations, from explosive government spending, supply chain issues, and a slow reacting Fed that fueled a spike in the CPI index of +20% between 2021 and 2024.  Expect CPI to continue its decline in annual pace, but it will be difficult to overcome the 20% increase in the level of CPI without deflation.  Focusing on growing real wages will certainly help with affordability.

Housing

Housing inflation is clearly down in this struggling sector.  Recent reports show y-o-y price increases diminishing, including the S&P/Case Shiller at +1.4% in September, FHFA at +1.7%, Moody’s at +2.0%, and existing home median sales prices at +1.2%.  Zillow reports that 53% of homes nationally have lost value in the year ended October, 2025, which is the highest percentage increase since April, 2012.  Prices in the Northeast are stable.  There’s a slowdown in demand, with existing home sales up only +.5% in November.  Inventories remain an issue with scarce supply at 4.2 months’ worth of sales.

Mortgage rates continue their painfully slow decline, with the 30-year rate at 6.21% according to FHLMC.  Monthly mortgage payments are still unaffordable for many potential buyers.  Property taxes in many counties are rising along with prices, and in many cases along with declines in value, adding to the angst of existing and potential homeowners.  Due to the government shutdown, new home sales data is delayed.

Some of my Favorite Economic Indicators

Leading Economic Indicators (LEI)- This Conference Board indicator was released for September and the trend continued to be negative, with September and August each at -.3%, leaving the index at 98.3 (2016=100).  For 36 of the last 40 months, the index has been negative.  Four months registered no change:  July, 2025, May, 2025, November, 2024, and March, 2024.  There was once a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.  So what are we to make of this index falling for over three years, continually signaling a recession that never came?   By the way, the yield curve inversion lasted for years, also signaling a recession.  With Federal Reserve easing, $10 trillion of new investment in manufacturing in the US committed, strong stock markets and earnings prospects, and fiscal stimulus in 2026, I don’t see recession coming soon.

Employment- Job growth has been showing weakness for months.  I can’t help but wonder how much of the decline in payrolls is related to deportations/immigration and cuts in government jobs.  Payrolls rose in November by +64,000, fell in October by -105,000, and rose in September by +108,000.  The unemployment rate rose to 4.6% in November from 4.4% in September.  A bad sign is that the pool of available workers is pushing 14 million, currently at 13.967 million.  Job openings are high in October at 7.67 million.  Quit rates fell below 2.0% to 1.8%, possibly showing workers unease about leaving jobs.  Challenger layoffs averaged 92,820 for the three months ended in November.  Wages rose +3.5% y-o-y in November; real wages have been positive for months.

Real GDP-  We have not received 3Q25 data yet, but the Atlanta Fed GDP Now projection is for +3.5%, following +3.8% in 2Q25, and -.6% in 1Q25.  Imports and inventories distorted both 1Q25 and 2Q25, as companies tried to get ahead of tariffs.  Real final sales strengthened to +2.9% in 2Q25 from +1.9% in 1Q25.  For the first time in a long time, the budget deficit is expected to decline as a percentage of GDP which will be slightly negative to growth.  Final tax changes from the OBBB include accelerated depreciation deductions for business investment and this will improve real GDP.  We are still held back by $38 trillion of US government debt, which is 126% of GDP; if greater than 90% for an extended time (since 2009), real GDP is impaired by about one-third.

Productivity- The talk is all AI, all the time.  Yes, AI will increase productivity and efficiency.  GDP can grow strongly without creating inflation if productivity is also strong.  (We witnessed this in the 1990s).  2Q25 productivity was +3.3% after a decline of -1.8% in 1Q25.  Capacity utilization is recently low at 77.4%, so we can afford to increase productive capacity without inflation.  And remember, if productivity meets its long-term average of +3.5%, employers are amenable to passing on 1.5% of it plus an inflation target of 2.0% for total raise of +3.5% without inflationary impacts.

Moody’s Beige Book Index- The index remained positive again in November at 11.1, following October of 13.9 and September at 0.  There were negative readings of -16.7 in July and -5.6 in June.  The latest Beige Book showed four districts increasing modestly, three with no change, and five in decline, including Philadelphia.

M2 Money Supply- M2 continues its upward growth trend at a steady clip on a y-o-y basis, with October at +4.6%, September at +4.5%, August at 4.4%, and year-to-date through October at +4.1%.  Milton Friedman would be pleased that M2 is increasing nearer to the growth rate of nominal GDP, after the Fed allowed M2 to outright decline for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.  The velocity of M2 remains at 1.39 for both 1Q25 and 2Q25.  Expect M2 to continue to rise as QT has now ended.

Fed Actions

Another meeting, another rate cut.  That’s three in a row since September for a total easing of .75%, bringing Fed Funds to 3.50% to 3.75%.  The FOMC must have heard my criticism of their anemic GDP projections in September.  They now have raised their GDP projection to +2.3% in 2026.  But, true to form, they project taking two years to reach their inflation targets.  It’s always two years away!  It’s ridiculous!  Thankfully, Powell’s departure is not two years away.  I held to my pledge not to watch his press conferences in October or December and not to watch his BS, doublespeak, and “fog” worries ever again.  This is the same man I called a hero during the covid pandemic but his handling of inflation, QE and QT, and money supply turned me off for good.

The Fed finally ended QT on December 1^st.  They caused trouble in the money markets again by stubbornly refusing to ease enough.  Bank reserves are falling and there was great pressure on short-term funding rates.  SOFR was consistently above the IOR rate.  At the December meeting, they announced they will buy T-Bills as needed to help liquidity in the money markets; first up $40 billion of purchases.

The real Fed Funds rate is now about 1.00% (3.75% less PCE 2.8%).  There’s room to cut more.  Many economists estimate that the neutral rate for Fed Funds is 2.50% to 3.00%.

Year-End

We are almost there!  It will be Christmas before you know it!  We made it through a quarter where we saw:

•            On October 19^th, thieves stole $100 million in jewels from the Louvre
•            Jamie Dimon talking about cockroaches and loan losses
•            On November 12^th, the Philadelphia Mint produced the last penny.  It cost 4 cents to produce 1 cent.
•            A record government shutdown from October 1^st to November 13^th
•            Winter starting early with a snowstorm on December 14^th
•            The navigation of 3I Atlas throughout our solar system
•            Dorothy’s navigation of the Danube River

I wish you and your friends and families a Merry Christmas and a Happy New Year 2026!

I appreciate your support!  Thanks for reading!  DLJ 12/19/25

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 your comments. 

Guest Post: Financial Markets and Economic Update Third Quarter 2025

My third quarter started off with ten wonderful days in France- Paris, Noveant-Corny, and Mont Saint Michel.  I always said I didn’t want to go up into the Eiffel Tower, but this time I went to the second level, which was high enough for me.  The view is astounding.  The Notre Dame Cathedral is glorious once again, so clean, so beautiful!  We went to Mont Saint Michel off the coast of Normandy and to see the GIs Association, who welcomed our eighth visit since 2013 to spend time with them as they honor my Uncle Stephen and the men of the 5^th Infantry Division who fought there for their freedom in 1944.

We went to Atlantic City for two days but were chased by the hurricane at sea with rip tide risks, rough seas, and rain coming inland.  I’ll end the quarter with a trip to Rhode Island.

Stocks continue their upward climb.  Bonds are rallying despite the bond vigilantes’ best efforts.  The Phillies clinched the National League East for a second consecutive year last week and our hopes are alive again.  And on Sunday, the Eagles pulled off another comeback miracle to beat the Rams as, with two seconds left, Jordan Davis blocked a field goal, picked up the ball, and ran down the field to score a touchdown.  OMG!  As Merrill screamed, “Game Over!”

The Fed Lowers Rates- Finally!

Well, they finally did it!  We got a measly 25 basis point cut in the Fed Funds rate to 4.25% and no relief from QT liquidating of bonds, especially MBSs.  We are not much closer to neutral today than we were yesterday.  Some economists estimate the neutral rate to be 2.50% to 3.00%.  Adding to my frustration is the fact that the Bureau of Labor Statistics announced their annual payrolls revision for April, 2024 to March, 2025 of -911,000; 2024’s number was equally surprising and disappointing at -818,000.  They blame the small business birth-death ratio adjustment, yet they never seem to make any changes.  I’ve been writing about this for years!  Instead of average payroll growth of 146,000 per month during the revision period, we now have 71,000 per month.  Payrolls have gotten worse since then, with August adding only 22,000.  June’s number was revised to a negative number, or loss of jobs.  And the Fed gives us 25 basis points?  Last September, they cut 50 basis points when employment was not as dire.

Chairman Powell gave his obligatory press conference after the FOMC decision on September 17^th.  The statement he read was seemingly out of a textbook, with: dual mandates…we work for the American people…the rate cut was for “risk management” purposes…we are data dependent (backward looking)…we are well positioned, we were right to wait and see how tariffs, inflation, and the labor market evolved.  No, I’m sorry.  You were not right.  Are you and your FOMC members not embarrassed by your GDP projections of less than 2% for years?  Are you not embarrassed that you have not reached your PCE inflation target of 2% for the past five years and won’t achieve it, according to your own projections, for the next two years+?

And now I have a new goal- to avoid watching Powell’s press conferences for the remainder of his term.  I will not listen to his double speak, textbook excerpts, and refusal to acknowledge that reporters’ questions raise good points and deserve answers.  So, avoiding these press conferences will make my life simpler.  I can read about it later.    

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- This Conference Board indicator continues to slip, with August at -.5%, July revised +.1%, June -.3%, and May unchanged.  The Board’s recession signal was triggered in May and again in August.  For 35 of the last 39 months, the index has declined.  (Exceptions were a tiny rise in July, 2025, and unchanged readings in March, 2024, November, 2024, and May, 2025).  There used to be a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.

Real GDP bounced back to +3.3% in 2Q25, following -.5% in 1Q25 with the tariffs/imports/inventories unusual activity, and +2.4% in 4Q24.  The latest Atlanta Fed GDPNow estimate for 3Q25 is +3.3%.  Tariffs can help create a diversified industrial economy which brings back manufacturing production that left the US over the years.  Increased investment in our country will lead to more domestic production, a stronger dollar, and lower inflation/lower rates.  Artificial intelligence has the potential to increase productivity, improving GDP while keeping inflation in check.   One note about headline GDP: it is masking the fact that real final sales have slipped to +1.9% in 1Q25 and 2Q25, following +2.9% in 4Q24.

Productivity improved in 2Q25 to +3.3% from a dismal -1.8% in 1Q25.  Higher productivity affords companies the chance to increase production and keep costs in check, i.e. lower inflation.

Moody’s Beige Book Index- In a follow up to last quarter’s newsletter, the September index returned to zero from its negative readings of -16.7 in July and -5.6 in June.  The latest Beige Book showed six districts increasing modestly, including Philadelphia, two with no change, and four in decline.  Half the country is begging for lower rate relief…

Unemployment continues to get worse and the rate rose to 4.3% in August from 4.2% in July.  Payroll growth was anemic at +22,000.  Household growth was +288,000, showing a real dichotomy in the two surveys.  The pool of available workers (a Maestro favorite) is currently at 13.738 million.  The augmented rate derived from this pool rose to 7.8% in August from 7.6% in July.  Employer demand for hiring has definitely slowed; with the previously mentioned benchmark revisions, markets are uncertain and skeptical about having accurate employment measures.  Some mention the Quarterly Census of Employment and Wages, or “QCEW,” as a better source, but its release would not be timely enough.

The M2 money supply continues its upward growth trend, with August and July y-o-y at 4.8%, June +4.5%, and May and April +4.2%.  Milton Friedman would be pleased that M2 is increasing nearer to the growth rate of nominal GDP, after the Fed allowed M2 to outright decline for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.

Housing- August was a dreary month for housing starts -8.5% and permits -2.3%.  Builders have not yet cut back on rate buydowns and price discounts/incentives as new home sales rose +20.5%, paring inventory to 7.4 months’ worth of sales from 9.0 months in July.  Mortgage rates have provided some relief recently, with the 30-year at 6.35%, which is clearly better than earlier this year.  But affordability is still holding back buyers.  Inventories for existing homes are still tight at 4.6 months’ worth of sales.  Mortgage rates above 6% are still not low enough to encourage widespread sales of existing homes with mortgages below 4%.

Inflation

The headline CPI for August was +2.9% y-o-y; the core rate was +3.1%.  Goods prices y-o-y were +1.5%, showing little effect from tariffs, while services were +3.6%.  PPI for August was +2.6% and the core was +2.8%.  PCE for July was 2.6% and the core was +2.9%.  PCE is the Fed’s preferred measure and their 2.0% targets are based on PCE.  Their targets are not based on CPI, which generally has run about .40% to .50% above PCE.  So consider 2.5% a target for CPI.  One of Powell’s few revelations from the recent press conference was that the Fed thinks that tariffs have added .30% to .40% to the inflation level so far.

When Will the Yield Curve be Normal, i.e. Positive?

The Fed’s restrictive stance has distorted the yield curve for several years now.  The curve was inverted for 26 months for the 10-year Treasury to the 2-year Treasury from July, 2022 to September, 2024;  the 10-year Treasury to the 3-month T-Bill was also inverted for 26 months from October, 2022 to December, 2024.  The usually historical prediction from both of these inversions for a recession never came true.  Since 2024, we’ve seen flat curves, parts of the curve steeper such as 10-year to 2-year Treasuries, and an inverted curve for 10-year to 3-month Treasuries before it became positive again with the September 25 basis point rate cut.  Bond vigilantes attacked again, right after the Fed announcement on September 17^th.  The 10-year Treasury was close to breaking 4% to the downside, but traders quickly sent it up 10 basis points.  In protest of something, I guess…

If the Fed continues to ease toward neutral, which could be 2.50% to 3.00%, long-term rates could decline, not in tandem , but about 50% of the move in short-term rates.  That would be “normal” and would help the cause of lower mortgage rates.  Slowing of QT in MBSs would help lower mortgage rates, too.  By the way, the historical average of the10-year Treasury to 3-month T-Bill spread is about 1.10%; for the past 10 years, it has been about .80%, pulled lower by years of low inflation prior to 2021.  Today, the spread is .19%

Happy Events

I mentioned our trip to Paris in July.  It is very special exploring that city.  And Mont Saint Michel!  I must admit, I really needed to catch my breath after climbing 300+ steps up to the Abbey.  What a glorious feeling it was to be at the top of this mountain.  Views are spectacular.  The feeling is very spiritual when thinking about the millions of people who have made this journey before us to the island and climbed this mountain.  Saint Michael, protect us!

I appreciate your support!  Thanks for reading!  DLJ 09/24/25

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 your comments.

Guest Post: Financial Markets and Economic Update-First Quarter 2025

- By Dorothy Jaworski

We made it through the long, cold winter.  There were days it was so cold I did not want to leave my house.  Even President Trump’s inauguration on January 20^th was moved indoors to the Capitol Rotunda because of wintry temperatures.  We suffered through the cold but had very few snowstorms as they seemed plentiful south of Philadelphia and basically missed us.

The first quarter of 2025 was one of a lot of excitement- a glorious run to a Super Bowl win by the Eagles, a new President and his whirlwind actions, an AI surprise from China, on and off again tariffs, a boring Fed, DOGE and government spending cuts, imaginary inflation fears, and stock market drama.  On the horrible side, Los Angeles experienced its worst wildfires ever in January, which destroyed 16,300 buildings, including 13,000 homes, killed 29 people, and displaced 80,000 in the Pacific Palisades and Eaton fires.

Undoubtedly, the Eagles 40-22 win over the Chiefs in the Super Bowl was the highlight of the quarter.  The excitement built with every playoff game and the Eagles performed at a high level.  Acquiring Saquon Barkley changed this team.  Jalen Hurts, the O-line, and receivers AJ, Devonta, and Dallas outperformed, and we owe much respect to the defense!  An estimated 1.5 million fans turned out for the parade.  As Nick Sirianni said, “You can’t be great without the greatness of others.”  Now, all eyes turn to the Phillies.  A long, hot summer will determine if they can challenge the World Series LA Dodgers for MLB’s crown this fall.

Stocks and Bonds

It feels like we’ve been on a roller coaster when it comes to the markets this quarter.  We rallied for much of January until the 27^th, when we received the DeepSeek AI announcement that a Chinese firm developed their own AI model for $6 million.  What?  Not billion?  It was chaos in the tech sector.  Nvidia and Broadcom, known for their AI chips, each fell -17% for the day, with market cap losses of -$587 billion and -$195 billion, respectively.  It’s estimated the whole AI market lost $1 trillion that day.  If China could develop technology so cheaply, why would our companies spend billions of dollars?  In a wild frenzy, millions of people downloaded DeepSeek AI.  They didn’t learn from TikTok?    Well, it wasn’t long before we discovered the truth; Microsoft reported that DeepSeek was copied from Open AI’s ChatGPT through improper use of an Open AI distillation tool.  The intellectual theft by China continues.  The markets soon recovered a lot of the losses.

Prices at the end of January seemed to hold up pretty well, but volatility and sell-offs took over in February and especially March.  In those two months, the DJIA fell -6.6%, the S&P 500 fell – 7.6%, and the Nasdaq fell -11.7%.  Gone are the new handles I wrote about last quarter: DJIA 45,000, S&P 6,000, and Nasdaq 20,000.  The media narrative turned to trashing tariffs and daily claims of recession and inflation that have rocked the markets.  I will discuss tariffs shortly.

Bonds rallied overall during the quarter with yields on the 2-year to 10-year Treasuries falling by -28 to -33 basis points.  Yields spiked in January, with the 10-year reaching 4.81%, before falling to around 4.25% now.  The yield curve briefly inverted again at the end of February (10-year minus 2-year) at – 8 bps but since has returned to positive at +34 bps.  The 10-year to 3-month spread is generally flat.  By the way, gold has rallied to new highs at $3,085 per ounce, up an astounding +42.6% in the past year, oil prices are at $69 per barrel, down -16.5% from last year, while AAA gas prices are at $3.16 per gallon, down -10.7% from last year.  Let the energy price declines begin.

 

Trump and Policies

Rarely have we seen a Presidency start off with so much action.  President Trump and his Cabinet have worked quickly to enact his policies and campaign promises on stopping illegal immigration, securing the border, and deportations, lowering income taxes for individuals and businesses, reducing prices, examining and cutting government spending and staff in every agency, with DOGE doing the analyses for the departments.  (To date, DOGE has identified $130 billion of savings and cuts, with a goal of many times this amount),  Other policies include enacting tariffs- both as a negotiating tool and to increase revenue to equalize the trading with other countries, using our massive oil and gas reserves to increase energy production, improving economic growth, and working to end the endless wars in Ukraine and Gaza.

So far, he has had success on the border and on the business side- securing almost $2.8 trillion of commitments from large US and foreign corporations to build and manufacture products here in the US over the next few years.  Oil and gas drilling is back and new leases are being sold once again.  Trump feels that lowering energy prices can have a cascading effect to lower prices of almost all goods.  Growing the economy, increasing private sector jobs, not government ones, and increasing real wages are top goals.

Tariffs and Taxes

The media also developed a recession narrative during the first quarter, even though few, if any, corporations mentioned recession during their first quarter earnings calls.  But suddenly it’s a big narrative.  The Fed played into this with their quarterly projections in March and lowered their GDP projections to +1.7% to +1.8% in 2025 and 2026, respectively, from above +2.0% in the prior projections in December.  Yet they are only lowering rates twice this year- the same as their last projection?  The Atlanta Fed GDP Now estimate for the first quarter was -2.8% as of March 28^th, even though they admit the estimate is not incorporating foreign trades of gold properly.  Be careful what you wish for; recessions are often self-fulfilling prophecies.  It’s ridiculous. 

The tariff situation has been very volatile since Trump first started announcing them in February.  He used some as negotiating leverage, some to protect US industry (autos), and some to level the playing field with reciprocal tariffs to just make trade fair.  The media narrative is that tariffs are inflationary.  I disagree.  If spending occurs on products with higher tariffs with higher prices, then less spending will occur on other goods with lower or no tariffs and those other goods’ prices will fall.  Prices tend to adjust throughout the economy.  If high tariffs depress demand, those manufacturers likely will lower prices.  Of consumers’ purchases currently, about 15% is on imported goods.  The Fed and NBER both studied the effect of Trump’s first term tariffs and found no effect on inflation, which continued to run below the Fed’s target of 2.0% then.  Tariffs do not cause inflation; as Milton Friedman taught us, “inflation is always and everywhere a monetary phenomenon.”  Even Chairman Powell knows this and called the effects of tariffs “transitory.”  (oh, no, not that word again!).  Despite knowing the results of studies on tariffs, he said he was “uncertain” of their impact.  Guests on Bloomberg guests on the day of the Powell press conference said “Why are we hanging on every word Powell says, when he keeps saying he doesn’t know?” 

Bur mark my words, once Congress passes the large tax bill making the Trump tax cuts of 2017 permanent, increasing the SALT deduction cap, lowering the corporate tax rate from 21% to 15%, putting in business deductions for accelerated depreciation, lowering individuals’ tax brackets, and including no tax on social security, tips, and overtime, the narrative about recession will quickly disappear. 

What About Other Indicators?

Here are some of my favorite indicators; watch them and you will know what’s happening:

-      Leading economic indicators, or LEI, continue to be weak.  February was -.3%, January was -.2%, and December was -.1%.  Of the past 33 months, only two were positive:  March, 2024 and November, 2024.  The Conference Board restated the index with benchmark revisions and it’s back above 100 (2016 levels) at 101.1 in February.  No surprise here.

-         Real GDP was +2.4% in 4Q24 with nominal GDP at +4.8%.  Real GDI was +4.5%; the average of GDP and GDI was +3.5%.  As mentioned earlier, the Atlanta Fed GDP Now 1Q projection number is -2.8%.  They publish it even though they state they are not including foreign trade in gold correctly.

-   M2 year-over-year growth in both February and January was +3.9% and December was +3.8%.  Friedman taught us that growth in the money supply should approximate nominal GDP growth, which is currently at +4.8%.  They are catching up and this is probably why they are cutting back on QT, their bond selling program.  After a period of decline in y-o-y M2 from December, 2022 to February, 2024, M2 growth has steadily ramped up.

-     Inflation.  Here’s the rundown.  It’s not so terrible.  PCE 4Q24 +2.4%, core PCE 4Q24 +2.6%, PCE February +2.5%. core PCE February +2.8%, CPI February +2.8%, PPI February +3.2%.  The Fed target of +2.0% is on headline PCE; CPI is +.5% higher with +2.5% as an implied target.  The 5-year Treasury Tips spread is 2.67%; the 10-year TIPS spread is 2.38%.  The final March survey of the University of Michigan showed the 5-year inflation expectation was +5.0%, but sorry, they are wrong.

-     Unemployment.  The BLS benchmark revision reduced -589,000 from reported jobs in 2024, not the original -818,000 projected last August.  The unemployment rate was 4.1% in February compared to 4.0% in January.  Unemployed persons are 7,052,000 and the pool of available workers is 12,945,000; both have been on the rise in recent months.

-        The Fed has been boring lately.  We know they are afraid to change rates, even though Powell says they are “meaningfully restrictive.”  The Fed is uncertain what tariffs will do, uncertain what inflation will be (their projections from March are outrageous- they do not hit the 2.0% PCE target until 2027!  What?!), uncertain what GDP will do (of course, they lowered it below +2.0%).  Powell kept saying they are “uncertain.” “it’s hard to tell,” “they just don’t know,” and “we’ll see what happens.”  Wow…where does that leave the rest of us?

I feel like I’ve gone on longer than usual this quarter, so I’ll wrap it up here.  I just got back from a wonderful week with great friends in Palm Beach County, Florida.  Sorry, we had no Trump sightings.  I’m looking forward to more traveling in the second half of this year.  Isn’t that what retirement is all about?  Stay tuned!

I appreciate your support!  Thanks for reading!  DLJ 03/28/25

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.

Guest Post: Financial Markets and Economic Update-Fourth Quarter 2024

 Drones

On the night of December 12^th, 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 18^th.  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!

Instead of speculating, I decided to wait and see what the Federal Reserve did with rates December 18th.  They lowered the Fed Funds rate by .25% to a range of 4.25% to 4.50%. as expected, and I believe they made up their minds long ago.  By the Chairman’s admission, they are still restrictive in policy.  I think they don’t want to weaken employment or the economy before our new President takes control in January.  By the way, the Trump team is concerned that inflation is not falling and are not calling for rate cuts.  The team’s arrival cannot come soon enough.  The Fed also released their quarterly projections, showing they think GDP will decline from 2.5% in 2024 to 2.1% in 2025 and they show an unemployment rate that rises to 4.3% and stays there.  The surprise is that they show PCE inflation not dropping fully to the 2.00% target until 2026.  We are so close, but why are we waiting two years?  Why?  Stock markets reacted very badly after the news of the rate cut and Powell’s press conference.  The Dow was down over 1,000 points to close in negative territory for the tenth consecutive day.  Ugh, another overreaction.

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 8^th.  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 18^th  selloff the 10^th 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 12^th.

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 18^th, 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 20^th  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 12^th, with a low of 100.16 on September 27^th, 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.