Our Economy Has Plenty of Changes Underway

What is coming for our economy? 

There is a lot going on. 

But many are interested in what can be expected in the short term or long term.

Many are refraining from buying a home or investing in the stock market. 

Uncertainty is at an all time high, as this is not a time where we can look back in history and identify this ever happening before. 

Therefore, we don’t have results to compare with to better predict outcomes.

• We have high inflation, but plenty of jobs available.
• We have excess money saved, but have difficulty finding places to investment.
• We have soaring rents, but not comparable increases in pay.
• We have real estate markets dipping, but uncertainty where dips will occur.
• We have recession talk everywhere, but also indications that we aren’t in a recession.

It’s a lot!! We know… 

Today, we will go over a few indicators and where we think the market is going.

Inflation

Inflation is going to be a difficult component to tame. 

Being that prices are primarily inflated from supply issues, our resolution will take time.

We need to slow demand so we have time to correct the issues. This is where the Fed has focused on raising rates. 

Raising rates forces people and companies to focus on their highest priorities. By having less cash available each expense will be evaluated if truly necessary. Overall, raising rates (or the cost of borrowing) decreases demand by reducing spending.

• But why are prices inflated? They are inflated because of an initial lack of labor, due primarily from COVID-19, and lastly supply issue. 
• Demand is high because of the easy access to money while supply dwindled.

Cheap money (or the low cost of borrowing) for over a decade, affected the housing market supply the most.

In our article Real Estate Trends: Data and Economic Impacts we covered many causes to the housing inventory issue. 

Next up, COVID, which affected housing as well. But now, added general inventory issues across several industries to the equation.

Housing has seen rapid cost increases in value due to both, consumers having the money, but being very short on supply. Eventually, short supply occurred across several industries. 

Regardless of the product type within the CPI, supply is the issue across the board.

Being that we will need much more time to correct current issues, the tightening is no where near done. Don’t be surprised if the next rate hike in September is as high as July’s was or close.

We are nowhere near our target of 2-3%.

This brings us to our next topic.

Fed Rates

Although many are speaking on the next rate hike not needing to be as high. It could be justified that it should stay high…

The fed has bought back many mortgage backed securities which has worked in favor of consumer rates not growing as rapidly in sequence of actual rate hike increases. 

Perhaps they have bought back too many securities…

It’s possible the Fed could be aggressive once more and then take a medium standpoint throughout the rest of the year. It also doesn’t mean that rate hikes won’t happen in 2023.

Until supply is showing signs of being caught up, we are not in the clear.

Supply chain, on a world scale, are all involved in the system of trade.

Supply Chain

Many are not paying attention to company profits and their ability (or inability) to secure profits. Afterall, the companies employ us. 

• According to a study by the BLS (Bureau of Labor Statistics) in 2016, the U.S. has 10.1% of people who are self employed. See the article here. 
• It would be interesting to see this data now post-COVID.

There are heavy backlogs of freight, that will undergo massive discounts due to supply chain bottlenecks. 

These discounts do not secure profits. After several weeks of freight not being in a sellable position, mark downs begin. Profits decrease with each mark down and are usually within 1-2 weeks of each other.

We also have several companies that have taken on loans that were bailed out by the government when COVID first began. 

• More debt, less sales, high attrition, higher pay, and higher costs for supplies and materials…
• Will these companies earn enough profit to stay in business?

Only time will tell. But the presence of zombie companies are present. 

In the next two years, we will see who wins against these stress tests and who fails.

This brings us to our next topic.

Investing

While stocks are beginning to show bottoms, we are no where near seeing who will sustain through these tough times and who will not. 

This is only the beginning. 

• Will companies secure enough profits to stay out of bankruptcy? 
• See the companies who were bailout recipients here.
• Again, more debt, less sales, high attrition, higher pay, and the higher costs of supplies, will cause for high-level stress tests.

Some companies will survive and some will not. We have at least two years to determine who will come out of this above water.

Let’s not forget that Russia is using the oil as a bartering tool now as a power play to gain positioning. That won’t stop. 

To add to the many countries that are facing much higher levels of turmoil within inflation, recessions, and the lack of survival essentials, there will be effects abroad that will play a role in the U.S..

Also keep in mind, the U.S. companies that have a high presence internationally. Hardships differ in each country and they will affect sales. The proportion of international sales to each company’s bottom dollar matters.

• These factors will bring about new leaders in world trade. While others may face short-term hardships before they rebound.
• So while, much is at stake, it is yet, still a great time to invest provided you don’t overlook vital factors.

Identifying market bottoms, emergence of transitioning power players, the shortage of real estate supply, coupled with a keen eye for investment potential, and you have the components of what could make up great investment opportunities.

Stay keen and in the know and you can make some vital decisions that will help facilitate potential long-term growth.

We hope this article has been helpful for you today. 

Thanks for joining us faithful readers  – future leaders.

Love ya and continue to strive for growth.

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Please comment your thoughts on today’s economy and the factors mentioned in today’s article.