Be careful what you wish for

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George Kessarios
Chief Economist & Fund Manager

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A recent key finding from a survey by consulting firm PWC, which polled 700 US executives and board members across of range of industries, was that about 50% of respondents said they are reducing headcount or plan to do so, and have also implemented hiring freezes. About 40% of the respondents said they are rescinding job offers and eliminating sign-on bonuses.

In the meantime, existing home sales fell for the sixth straight month by 6% in July on affordability concerns, and US housing prices are edging down from record highs amid lower demand. Existing home sales are down 20% Y/Y.

Housing starts in the US fell 9.6%, lower than the consensus, but with building permits holding up. But with housing affordability at multi year lows, with savings depleted, a pessimistic jobs outlook, and new mortgage demand at 22 year lows, it’s difficult to be bullish in the sector for the time being.

Fitch Ratings said that “while a severe downturn in US housing has increased”, the firm expects only a modest single digit pullback in 2023 but expects additional housing activity pressure in 2024.

In a statement, NAR chief economist Lawrence Yun said "We're witnessing a housing recession in terms of declining home sales and home building; however, it's not a recession in home prices”. True, however slower building activity will contribute to slower economic activity in the US across the board.

And in the most recent FOMC minutes, the Fed said that the economy was “noticeably weaker” in July than in June. Please note that June was already a weak month, and the fact that July was noticeably weaker is probably something that surprised Fed members and economists.

And we also got this in the minutes:

"Many participants remarked that, in view of the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy's effect on the economy, there was also a risk that the Committee could tighten the stance of policy by more than necessary to restore price stability."

Please note the long-term lag. In other words what the Fed does today does not have an immediate impact. So, the Fed does not really know if policies in place are too tight, and will only realize this several quarters down the road, at which point it might need to unwind a lot of the policies in place today, among other things its insistence on quantitative tightening.

So, in a nutshell, the Fed is getting what it wants, and that is a slower US economy. While a soft landing is still debatable, what is noticeable is that any stone you turn, we will see economic weakness in the US economy. At the end of the day, the Fed better be careful what it wishes, because while many aspects of the US economy still seem strong, things can get ugly very fast, even perhaps sooner than most economists think.

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