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July 1, 2019

The US Economic Fundamentals YTD

Encourage Positive Expectations

Unemployment is 3.6%, initial claims are near historic lows and there are 1.6 million more job openings than unemployed people. A most welcome piece of news is that real average hourly earnings – the cash earnings of all workers, adjusted for inflation are up 1.3% in the past year. Growth in wages is really important and a positive that can be traced to tax cuts and economic levers. Any increase is more than we are used to.

The Fed has a 2% inflation target, so when we see headlines that core inflation readings “Bolster the Case for Fed Rate Cuts”, we can’t help but wonder if we are looking at the same report. A look at the details of this recent report makes the fear of low inflation even more confusing. Headline inflation is at a 3.3% annualized rate in the past three months. We believe these data, as well as strength in trend inflation (which is far more important than single month readings) don’t support the case for rate cuts. 
 


The data, if anything, suggests higher rates would be the more appropriate path based on economic fundamentals alone.   


As the year progresses and worst-case scenarios aren’t realized, possibly catalyzed by resolution of trade tensions, we expect a return of confidence to the financial markets and a shift back towards a more “risk on” environment, putting upward pressure on longer-term interest rates.

Healthy consumer balance sheets, a strong job market, inflation in-line with Fed targets, and the continued tail winds from improved tax and regulatory policy, all reinforce our belief that the economy is on very solid ground.