Fed’s Inflation Calculations Explained

Three on Thursday First Trust Economics

Brian S. Wesbury - Chief Economist

April 18, 2024

In this week’s “Three on Thursday,” we explore the Personal Consumption Expenditures (PCE) Price Index, which became the Federal Reserve’s preferred inflation gauge starting in 2000. This shift occurred after Federal Reserve Chairman Alan Greenspan highlighted its advantages in The Monetary Policy Report to Congress. The Fed favors the PCE Price Index over the Consumer Price Index (CPI) for several reasons. Firstly, the PCE Price Index uses a formula that adapts to changes in spending habits, reducing the upward bias inherent in the CPI’s fixed-weight approach. It also employs weights based on a broader expenditure measure. Additionally, the PCE Price Index’s historical data can be revised to incorporate new information and improvements in measurement techniques, which include refinements to the source data used in the CPI, leading to a more consistent time series. While the Federal Open Market Committee (FOMC) has adopted the PCE as its preferred measure, it continues to use a range of price metrics and other cost information to assess inflation trends. For further clarity, we’ve included a table and two detailed charts in this edition.

The PCE Price Index can be divided into two main categories: Goods and Services. Goods represent 33.1% of the index, with Durable Goods (items intended to last three years or more such as appliances and furniture), and Nondurable Goods (items with a shorter lifespan, like food and clothing) contributing 11.6% and 21.4% to the overall index, respectively (off 0.1% due to rounding). Services account for 66.9% of the index, dominated by Household Consumption Expenditures, which hold a substantial 64.0% weighting. Nonprofits contribute a smaller portion at 2.9%. Within Household Consumption Expenditures, Housing and Utilities form the largest group, influencing the overall index with a 17.7% weighting, followed closely by Health Care at 16.3%.

Since 2000, the annualized gain in the PCE Price Index has typically been about 0.4 percentage points lower than the CPI due to several key differences. First, the CPI uses a fixed basket of goods and services with quantities based on past consumption, rarely updating. In contrast, the PCE Price Index adapts more dynamically, reflecting changes in consumer behavior and substitutions in response to price changes by frequently adjusting item weights based on current spending data. Second, consumption categories in the CPI and PCE are weighted differently; for instance, housing accounts for about 45% of the CPI but only 15.4% of the PCE. Third, the CPI measures direct out-of-pocket expenses by consumers, while the PCE includes all goods and services consumed by households, even those paid by employers and the government, like medical premium payments made by employers, providing a broader view of consumption. Lastly, variations in seasonal adjustments and price calculations for identical products also contribute to discrepancies. For example, the PCE’s airline fare index is based on passenger revenue and miles traveled, whereas the CPI measures ticket prices for specific routes, leading to different pricing insights.

For decades, economists have excluded food and energy prices from inflation measures – commonly referred to as “core prices” – because they can be both seasonal and volatile. Starting in November 2022, the Federal Reserve said it will focus on a narrower measure known as “Supercore” inflation, which refines this perspective even further. Fed economists categorize core inflation into three segments: core goods, housing services, and core services minus housing. The latter category, often referred to as Supercore, gained traction after the COVID lockdowns. This focus stems from the Fed’s belief that service sector prices, unlike goods prices, are predominantly influenced by labor costs—a factor the Fed thinks it can influence. Raising interest rates typically cools economic activity, and jobs growth, which should limit wage hikes. In contrast, they believe goods prices are more susceptible to global dynamics like supply chain variations. Interestingly, in spite of major interest rates hikes, Supercore has remained stubbornly elevated, up 3.3% from a year ago. This is likely a significant argument for fewer rate cuts this year than the market has been expecting.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Continued Growth in Q1

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

April 22, 2024

The economy continued to grow in the first quarter at what we estimate is a 2.6% annual rate. That’s a slowdown from the 3.1% rate in 2023, but still good compared to the past couple of decades when the average growth rate has been 2.0%.

However, we think a chunk of recent growth is artificial, and temporary, the by-product of too much government. Directly, this includes “real” (inflation-adjusted) government purchases that grew 4.6% in 2023 and we estimate grew at a 2.3% annual rate in the first quarter.

It also includes the indirect effects of the expansion in the budget deficit in FY 2023. The official deficit didn’t expand much, but that’s because President Biden announced a plan to forgive student loans in 2022 and then the Supreme Court struck it down in 2023. Neither of these affected the government’s cash flow but they did change official government accounting. Taking them out means the deficit expanded to 7.5% of GDP in FY 2023 from 3.9% in FY 2022.

In addition, and as we explained recently (MMO, April 8), if monetary policy were really tight, inflation would be persistently declining. But CPI prices were up 3.0% in the year ending in June 2023 and are now up 3.5% in the past year. This suggests residual effects of past monetary looseness are still boosting the economy.

We estimate that Real GDP expanded at a 2.6% annual rate in the first quarter, mostly accounted for by an increase in consumer spending.

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector declined at a 3.0% annual rate in Q1 while auto sales declined at an 8.7% rate. However, it looks like real services, which makes up most of consumer spending, soared at a 4.7% pace. That’s the fastest pace for service growth since the re-opening from COVID in 2020-21. Excluding that re-opening, when all the data were whacky, it's the fastest pace for service growth since the peak of the Internet Bubble in 2000. Putting it all together, we estimate that real consumer spending on goods and services, combined, increased at a 3.1% rate, adding 2.1 points to the real GDP growth rate (3.1 times the consumption share of GDP, which is 68%, equals 2.1).

Business Investment: We estimate a 2.4% growth rate for business investment, with gains in intellectual property leading the way, while commercial construction declined. A 2.4% growth rate would add 0.3 points to real GDP growth. (2.4 times the 14% business investment share of GDP equals 0.3).

Home Building: Residential construction is showing some resilience in spite of some lingering pain from higher mortgage rates. Home building looks like it grew at a 5.0% rate, which would add 0.2 points to real GDP growth. (5.0 times the 4% residential construction share of GDP equals 0.2).

Government: Only direct government purchases of goods and services (not transfer payments) count when calculating GDP. We estimate these purchases were up at a 2.3% rate in Q1, which would add 0.4 points to the GDP growth rate (2.3 times the 17% government purchase share of GDP equals 0.4).

Trade: Looks like the trade deficit expanded in Q1, as exports grew but imports grew even faster. In government accounting, a larger trade deficit means slower growth, even if exports and imports both grew. We’re projecting net exports will subtract 0.5 points from real GDP growth.

Inventories: Inventory accumulation looks like it picked up in Q1, but only slightly versus Q4, translating into what we estimate will be a 0.1 point addition to the growth rate of real GDP.

Add it all up, and we get a 2.6% annual real GDP growth rate for the first quarter. Solid for now, but we expect slower growth later this year as the temporary effects of government deficit spending wear off.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Elections Matter

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

April 15, 2024

Many, us included, see parallels between today’s big issues and those of the 1960s and 1970s. Mistakes in both geopolitical and fiscal policies compound overtime, often leading to more mistakes. After Vietnam ended badly, US weakness likely encouraged terrorism. The 1972 Munich Massacre of Israel Olympic Athletes, Entebbe in 1976, and finally US hostages held in Iran from 1979 to 1981.

At the same time both fiscal and monetary policy became unhinged. The result was stagflation, with inflation hitting and unemployment approaching double digits. We don’t have room for a complete historical explanation, but Presidents Johnson, Nixon, Ford, and Carter each made mistakes in either foreign or fiscal policy that led to these problems.

Then, Ronald Reagan was elected, and while his opponents claimed he would cause nuclear war, the exact opposite happened. Stagflation was ended, the Berlin wall fell, and the world entered a mostly peaceful era. Elections matter.

With Iran attacking Israel over the weekend, and unsustainable budget deficits eroding the US fiscal situation, we are reminded of the 1970s. In fact, there were two decisions made under President Carter almost fifty years ago that have helped create both of these issues.

We focus on policy, not personality. We are not attacking President Carter himself. He appears to be a very good and decent man. His great charitable work after leaving the presidency speaks for itself and sets a great standard for other former officeholders. In addition, President Carter bucked his party and deregulated both the trucking and airline industries.

However, Carter also made some serious blunders. On the geopolitical front, it was Carter who decided (1) not to back the Shah of Iran in 1978 and after that (2) not to pursue regime change in Iran after the seizure of American hostages and a coup d’état against the duly-elected Iranian President Banisadr (who had to flee for his life back to France).

Now the Islamic Republic of Iran effectively controls Syria, much of Iraq, Lebanon, Gaza, some of Yemen, and in the meantime is aligning with rivals of the US, such as China and Russia. With every passing decade it has become more difficult to dislodge the regime in Iran and now, in the absence of a change in the near future, it may only be a matter of time before Iran is able to acquire a nuclear weapon.

On the fiscal side, President Carter also championed an arcane but incredibly important change to Social Security enacted in 1977. This change virtually guaranteed the long-term insolvency of the old-age pension portion of the Social Security system unless future policymakers agree to some combination of tax hikes or benefit cuts.

Before these changes were made, Social Security payments were adjusted by inflation, what we call the cost-of-living adjustment (COLA). Until the mid-1970s, Congress had to vote to make this adjustment and politicians took credit every time they did. But, as inflation became more of a problem, the annual COLA was tied directly to the Consumer Price Index.

The COLA adjustment automatically increased both current and future benefits. But Carter added a wrinkle. Current recipients would receive the COLA adjustment, but future benefits would rise by both the COLA plus an estimate of real wage gains. At first this made little difference, but through the magic of compounding, this adjustment for real wages adds up and the current trajectory of payments is unsustainable.

Carter and other policymakers were warned about this problem at the time, but didn’t pay it heed. No wonder people see similarities between today and the 1970s. Current policies and past policies are colliding to create the very same problems. As November approaches, voters would do well to remember this history. Their decisions are not just about the next few years, but will resonate for decades to come. Solid US leadership can change the entire world.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

CPI Inflation and Federal Reserve Rates Decision: Back to the Drawing Board?

Raymond James

Economy & Policy

April 12, 2024

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Before we start discussing the Consumer Price Index (CPI) again, we want to remind readers that CPI inflation is not what Federal Reserve (Fed) officials use to determine monetary policy. It is true that markets put a lot of emphasis on this measure, but we would like to caution giving too much importance to it. Please take a look at past Weekly Economics where we discuss the differences between the CPI and the PCE price indices, and the reasons why the latter is the one the Fed uses to conduct monetary policy.

With this caveat, the release of the March Consumer Price Index (CPI) was another reminder that the last stretch of the fight against inflation is not going to be easy. The fundamental reason for this is that U.S. economic growth has remained strong and job growth has kept real disposable personal income supportive of consumption and thus of continuous upward pressure on prices.

For the Fed, the biggest question is “what to do in this environment?” If it waits and keeps interest rates at 5.5%, there is a risk that economic growth continues to remain robust and inflation will probably not slow down much more, giving credence to those who have been arguing that inflation will remain above the Fed’s 2% target forever. If this is the case, and Fed officials believe that strong economic growth is the reason inflation is not coming down enough to reach the 2% target, then it has to start thinking of the possibility of increasing interest rates further. However, we believe that the Fed already knows that the fight to bring down inflation to the 2% target will be a long one and that is the reason it has the PCE price index achieving the 2% inflation target rate in 2026, not today or next year. Thus, it can sit tight and not increase interest rates and wait for the rate of inflation to, slowly, go down to 2%, which seems to be the current base case.

If this is the case, then the question is, when is the Fed prepared to start decreasing interest rates. Before this last CPI release, we had already indicated that the March dot plot release was in ‘flux,’ with Fed officials showing no conviction on the start date for lowering interest rates. So, markets have been warned and have started to act upon this new stance. And this higher than expected CPI print has the potential to cement the belief that it may have to wait longer before starting to cut interest rates. In that vein, markets have already moved to expecting fewer than three rate cuts this year while concluding that June is probably not going to be the start date for rate cuts.

Although we are still not convinced and would like to wait for more data to make any changes to our rate cut expectations, we understand that the first quarter of the year CPI reports have not been good for Fed officials and for the potential start date for a rate cut.

Our hesitation today has to do with three fundamental issues. First, as we said at the beginning of this weekly, the CPI is not the inflation index used by the Fed to conduct monetary policy as it tends to overstate the rate of inflation in the economy. Second, the Fed doesn’t need to see inflation at 2% to start cutting rates, it just needs to be convinced that inflation will continue to come down. This is still possible because we expect the economy to slow considerably during the second and third quarters of the year, so there is still a possibility that the Fed may cut rates to prevent further weakness. And third, the strength in the CPI during the first quarter of the year may be related to changing seasonal factors and Fed officials would not want to make a policy decision that has the potential to be a mistake. This is because if there are revisions to seasonal factors for 2024, these adjustments may show weaker inflation during the first quarter of the year, suggesting that the decision to not alter Fed policy was correct.

Thus, we would like to wait for the release of the PCE price index at the end of this month and then wait for more information on how inflation, and the U.S. economy, is evolving, before making a change to our rate projection. We understand that markets, and many economists, have already changed their forecast for the first rate hike to September but, as we said before, we would like to wait for more information on economic activity to make a more informed decision.

To read the whole article click here!

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023

After the Fed Pivot: Where Are the Opportunities?

Raymond James

Markets & Investing

April 10, 2024

Senior Investment Strategist Tracey Manzi notes that with a Federal Reserve easing cycle on the horizon, the fixed income markets are relatively attractive.

To read the full article, see the Investment Strategy Quarterly publication linked below. 

The Federal Reserve’s (Fed) pivot late last year sparked an enormous rally in the bond market. In fact, U.S. Treasurys and nearly all fixed income sectors enjoyed some of their best quarterly returns on record. The sharp decline in yields over the final quarter of 2023 was a textbook reaction as market participants are well versed in what typically comes after the Fed pivots – softer growth, lower inflation and the commencement of an easing cycle. While the timing of the Fed’s easing cycle after the final rate hike varies, historically the Fed’s first rate cut has come an average of seven months after the last rate hike, based on the last six cycles.

With the Fed delivering its final rate hike in July 2023, we are now approaching the window – which has ranged from one to 14 months – where policymakers have typically kicked off their easing cycle. While notable, this cycle has been anything but average. Case in point: after 550 basis points of tightening (one of the most aggressive cycles in history), the economy continues to show surprising resilience – strong job growth, slowing, but still above-trend growth and record low unemployment. Why? The government’s ongoing fiscal expansion, where the budget deficit is now running at ~6% of GDP. While the fiscal stimulus may have lengthened the economy’s runway, our economist expects growth and inflation to slow over a six-to-12-month horizon. This expected cyclical slowdown should keep the bond market focused on the timing and pace of the Fed’s eventual rate cuts.

Starting yields are the strongest predictor of future returns

Given the ongoing strength in the labor market and still solid economic growth, the Fed can afford to exercise patience. In fact, the resilient economy has been a major factor behind why excessive rate cuts this year have been largely unwound and a key reason why Treasury yields have moved modestly higher since the start of the year. With the market now pricing in three rate cuts by year end, Treasury yields will be swayed (up or down) by the incoming data. But with the Fed telling us that interest rates have peaked for the cycle and that rate cuts are on the horizon as long as the disinflationary trend remains intact, Treasury yields will eventually be headed lower – albeit likely at a slower pace than we originally anticipated.

While our call for moderately lower yields in 2024 may be delayed as long as economic growth remains solid, we still believe the current high level of yields remains an attractive opportunity for investors. That's because the starting level of yields is the single best predictor of a bond’s total return over longer periods of time.

Where we see opportunities

Treasury yields are likely to trade in a wide range again this year given the economy is at an inflection point. In the near term, we see scope for Treasury yields to move in either direction. For example, any weaker than expected economic news (whether on the growth, jobs or inflation front) could drive yields significantly lower as the market reprices to a more aggressive Fed easing cycle—with a move to 3.5% not out of the question. Conversely, any signs of waning demand at the upcoming Treasury auctions (2024 will be another year of heavy Treasury issuance to fund the deficit) could easily push yields higher to 4.5% again. These trading ranges should create some opportunities for investors along the way. But by year end, we believe yields should be within the ballpark of where they started the year. However, with the economy still on solid footing, we are modestly raising our 10-year Treasury yield forecast to 3.75%. 

Conclusion

With a Fed easing cycle on the horizon, the fixed income markets are relatively attractive. Today’s yields remain near their highest levels in well over a decade, providing investors with an opportunity to lock in the current levels of yield. Capital appreciation opportunities may come, particularly if economic growth turns out to be weaker than expected. But even without the bonus of capital appreciation, the more normal level of yields suggests investors can now earn a reasonable return on their bond investment. And that return should be much higher going forward than what an investor could earn in the prior decade. Relative value opportunities exist within the fixed income sectors for those looking to augment their core fixed income exposure.

Read the full
Investment Strategy Quarterly

All expressions of opinion reflect the judgment of the Chief Investment Office, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Help Safeguard Your Assets From a Beneficiary's Divorce

Raymond James

Estate & Giving

How a careful and intentional trust will help ensure your intentions are upheld.

Smart estate planning doesn’t just take into account what you’ll pass down to your heirs, but how you’ll do it. There are numerous ways to make the transfer, and some offer more protection than others. If one of your heirs gets divorced down the line, you don’t want to risk your wealth ending up in unintended hands. 

One of the simplest ways to transfer your wealth to your family is by naming beneficiaries on your accounts. But even assets solely in your child or grandchild’s name might be up for debate in a divorce proceeding. At the very least, the asset can be used in consideration when determining alimony or child support.

Here are some ways you can help protect your estate from an heir’s divorce.

Wording is everything

First, enlist an estate planning attorney to advise you on the correct wording when it comes to trust documents. Be sure to express your concern about assets becoming vulnerable in the case of an heir’s divorce. The attorney should include language that helps protect your beneficiaries from an ex-spouse claiming entitlement to any of the inheritance.

Be painfully clear in trust documents by explicitly stating that nonbeneficiaries are not entitled to receive any assets from the trust even if they’re married to a beneficiary. Make your intentions specific to reduce the possibility they come into question during a divorce proceeding.

While trusts often use language that specifies absolute requirements for payments – in other words, conditions for the distribution of assets – they can become a conflict point in a divorce. If a court determines the distribution of assets was guaranteed, the court may consider dividing assets between the couple.

You may also want to think about indirect distribution of assets. You can allow the trust to make payments to third parties instead of distributing them directly to your beneficiary. Examples include declaring the trust will pay college tuition or fees, or for repaying your beneficiaries’ loans.

Think about structure

Some states are better for protecting assets in a divorce than others. Alaska, Nevada, South Dakota and Tennessee currently allow courts to shield assets in a trust from divorce claims, including alimony and child support. You should know the laws that govern your trust, which will depend on where it originated.

As the trust grantor, you have the power to decide what a trustee can do. It’s possible to expand the trustee’s powers to allow for specific changes to the trust if it becomes compromised by an heir’s divorce. This might include authorizing your trustee or successor trustees to remove a beneficiary completely if there’s an impending divorce, or move assets into a completely new trust for the divorcing beneficiary.

If you know exactly what you want to pass on to an heir who you’re concerned may get divorced, you can create an irrevocable trust for that express purpose. Unlike revocable trusts, the terms of an irrevocable trust cannot be changed. Once the trust is funded and the assets are transferred to the control of the trustee, it’s permanent. You could create a second trust that’s revocable for the purpose of transferring your other assets to other family members.

Most importantly, speak to your advisor about your heirs’ inheritance in the case of divorce. Consulting an estate attorney and even a divorce attorney in some instances may be helpful when creating or revisiting your estate planning documents. There are provisions that can be put in place to help ensure your wealth, family and intentions are protected.

Sources: blg.com; smartasset.com; schwab.com

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Raymond James Trust, N.A. is a subsidiary of Raymond James Financial, Inc. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Trust.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.

Is the Fed Tight, or Not?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

April 8, 2024

In the waning seconds of one of the most watched women’s college basketball games ever, a foul was called. The University of Connecticut was playing the University of Iowa in the semifinals of the women’s NCAA championship tournament. Officials called a UConn player for an “illegal screen” on an Iowa defender, which helped Iowa win the game. This happened Friday night, and on X (formerly Twitter) the debate about this call still rages.

In spite of the debate, that game is over. On Sunday, Iowa lost to South Carolina in the finals and the world moves on. Meanwhile, in the realm of economics, a different debate rages. Is Federal Reserve policy tight, or not?

Ultimately, there is an ironclad two-part test to determine if monetary policy is tight. First, has the economy weakened to below trend growth? More clearly, is GDP falling, or unemployment rising? And second, has inflation persistently declined. If those things haven’t happened, it's hard to argue monetary policy has been tight.

At present, we are tracking Real GDP growth at about a 2.0% annual rate in the first quarter, which is close to the long-term average. This follows all of 2023, and the last two quarters of 2022, where quarterly real economic growth was faster than 2.0% each and every quarter. At the same time, unemployment remains below 4.0%. In other words, we haven’t yet had an economic slump consistent with tight money.

For inflation – after dropping from what appears to be a supply-chain induced spike of about 9.0% in mid-2022 – CPI inflation fell to 3.1% in mid-2023. But lately, CPI inflation has stopped its decline. We estimate that consumer prices rose 0.3% in March and the Cleveland Fed’s CPI Nowcast currently projects 0.3% for April, as well. If so, the overall CPI will be up 3.3% in April versus the year prior.

So, both real growth and inflation show little impact from Fed tightening, in spite of many of the traditional measures of monetary policy signaling tightness. For example, the M2 measure of the money supply peaked in April 2022 and is down 4.3% since. We haven’t had a drop like that since the early 1930s during the Great Depression. Yes, the monetary base is up 10.7% in the past year, but unless that base money is converted into M2, it likely has little impact. Following the 2008-09 financial crisis, quantitative easing didn’t turn into M2 and inflation remained tame…but during COVID, QE did cause M2 to spike, and inflation jumped.

Meanwhile the slope of the yield curve between the target federal funds rate and the 10-year Treasury yield has been inverted since late 2022, a typical sign of tight money. And while not as clear cut, the federal funds rate has been 2.0 percentage points, or more, above inflation in the past six months. While we would say these rates are roughly neutral, not really helping or hurting growth, this is a huge change from the 2009-2021 period, when rates were held well below inflation.

Think of it this way: imagine you’re trying to freeze water, at sea level. A thermometer shows the temperature is 25⁰F and the water isn’t freezing. Does this mean the laws of chemistry and physics have been repealed? Of course not! Any sensible person would think that the thermometer must be broken, or maybe the liquid you’re trying to freeze isn’t water after all.

Which brings us to one signal of monetary tightness that hasn’t been triggered yet. History suggests that interest rates should be roughly equal to “nominal” GDP growth (real GDP growth plus inflation) – a cousin to what is called the “Taylor Rule.” Nominal GDP is up 5.9% in the past year and a 6.5% annual rate in the past two years. Yet, the federal funds rate is just 5.4%. That’s not tight money! Maybe that’s the measure of tightness we should have been following all along.

In other words, maybe one of the reasons we haven’t yet experienced economic turbulence is that monetary policy hasn’t been as tight as most investors thought. If so, it could take much longer to bring inflation down to 2.0% than the Fed expects, which means short-term rates could stay much higher for much longer.

In turn, that would mean more economic pain ahead than most investors currently expect. Some calls are hard to make no matter how much time is left in the game.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

March Highlighted by Markets Rising to Record Highs

Raymond James

Markets & Investing

April 01, 2024

Market rally driven by a broadening of the market and optimism that the Federal Reserve will deliver rate cuts later this year.

March was a month of new records. All three major equity indices — the S&P 500, Dow Jones Industrial Average and Nasdaq — hit all-time highs and equity markets were positive for the fifth month in a row. The equity market rally was driven by mega-cap tech stocks, the broadening of the market and optimism that the Federal Reserve (Fed) would deliver rate cuts later this year.

“Equity markets rose to record highs as the Fed is still expected to cut interest rates three times and deliver a soft, non-recessionary landing, which is supportive for corporate earnings,” said Raymond James Chief Investment Officer Larry Adam. “That growing optimism appears to have been priced into the equity market with valuations now at stretched levels — the highest over the last 20 years outside of COVID.”

Bond yields were largely unchanged this month, sitting close to the upper end of their year-to-date range as the March rate cut didn’t materialize and the first rate cut now seems likely to happen in June or July. A record amount of issuance in investment grade corporate bonds was met with strong demand by investors as yields remain attractive even as credit spreads narrow.

The U.S. economy remains on solid footing, supported by strong job gains, improving housing activity metrics and growing consumer spending.

We’ll dive into the details below, but first, let’s review the year-to-date results:

*Performance reflects index values as of market close on March 28, 2024. Bloomberg Aggregate Bond and MSCI EAFE figures reflect March 29, 2024, closing values. 

Equity market optimism

Hotter than expected inflation data coupled with optimism regarding economic growth propelled commodity-related sectors, such as Energy and Materials, to outperform the index in March. Despite the upside inflation surprise, Fed Chairman Jerome Powell instilled confidence in the market during the Federal Open Market Committee (FOMC) press conference, reiterating the Fed’s commitment to remaining patient as inflation moves gradually toward its 2% target over time.

Although one 2025 rate cut was removed from the dot plot, the S&P 500 notched six new record highs in March as economic growth and employment were also revised favorably in the Fed’s Summary of Economic Projections.

Not much changed in fixed income

Despite some volatility, March offered little net change in Treasury yields. The exciting story remains in obtainable high-income levels for individual bonds as yields remain elevated in diverse products across the curve. Though the high-quality corporate curve is fairly flat, it boasts higher yields than have been available for nearly two decades. Longer-term municipal yields benefit from an upward-sloping curve from 15-30 years in maturity, providing attractive taxable-equivalent yields for high earners.

U.S. economy keeps chugging along

The February Leading Economic Index, a general indicator of where the U.S. economy is heading, was positive for the first time since February of 2022. The U.S. service sector continued to expand in February, industrial production was slightly positive and higher than expected, with construction as well as business equipment production driving the Index higher. Housing market indices were mixed, with existing home sales surging among higher available inventory and new home sales decreasing during the month. Nonfarm employment increased by 275,000 in February, but the strong January number was revised considerably lower, netting 167,000 fewer jobs than originally reported.

D.C. to weigh defense and tax packages

Following the passage of all 12 government funding bills in March, attention in D.C. has turned to the potential passage of the $95 billion defense supplemental and the $78 billion tax package.  House Speaker Mike Johnson (R-LA) has indicated he will bring the defense package to the floor for a vote after the Easter Congressional recess. While the passage of the tax bill would represent a market positive for capital- and R&D-intensive businesses and discretionary income for low-income families, ongoing Senate disagreements around the Child Tax Credit and an increasing desire to defer tax negotiations to 2025 continue to weigh on its prospects.

Ukraine becomes adept at targeting Russian oil refineries

While the Kremlin has not tried to weaponize its oil industry the way it tried (and failed) to weaponize natural gas, the last month provided a reminder that the war in Ukraine can still affect the oil market. Though Ukraine lacks the ability to strike Russian oilfields, which are typically located in Siberia – too far for drone strikes – it has successfully damaged at least seven refineries around Russia, hundreds of miles from the front line. It’s worth noting that Russia started the practice of targeting energy infrastructure during the winter of 2022-23, damaging numerous Ukrainian power plants.

Has the global economy turned a corner?

International equity markets have continued to drive higher as the dollar has strengthened against most major currency pairs. The latest round of developed markets’ “risk-on” price action follows updates from significant central banks that policy loosening is now imminent and the growing belief that the global economy has turned an important corner.

The most significant monetary policy development proved to be the Bank of Japan’s exit from negative interest rates for the first time in eight years. Japanese investors are among the biggest exporters of capital in the world, borrowing in cheap yen to invest in higher rate destinations elsewhere, including the United States. 

Of greater surprise is the Swiss National Bank’s cut to that country’s key interest rate by 0.25% to 1.50%, a signal to others in the euro zone of easier monetary policy to come. The Bank of England has sent a strong signal that rates are very likely to start falling in the UK as well in response to an anticipated easing in inflationary pressures – probably in June.

The bottom line

The equity market’s strong start likely increases the likelihood of near-term volatility. It typically experiences three to four pullbacks of 5% or more each year and hasn’t had one since September 2023.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting  intermediate-term (2 -10 years) obligations of the U.S. government. Companies engaged in business related to the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Material created by Raymond James for use by its advisors.

The Fed Audit

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

April 1, 2024

Several years ago some politicians started demanding that the Federal Reserve get audited. We think the idea has some merits but also some drawbacks, as well.

One problem with the Fed is that it doesn’t have a hard limit on its own spending. For example, let’s say the Fed wanted to hire a bunch of extra staff to write papers on climate change, income inequality, gun control, or other “political hot button” issues of the day that don’t really have a direct relationship with monetary policy or the Fed’s mission. Our understanding is that there’s nothing to stop the Fed from doing so, as long as it claims some relationship to monetary policy, no matter how tenuous.

And even if the appointed leaders at the Federal Reserve Board object, there are still twelve regional reserve banks around the country that could do so, and their leaders are not appointed by the president or confirmed by the Senate. In fact, the Chicago Federal Reserve Bank already has staff dedicated to researching topics that impact the “greater good” and “community development.”

Depending on the party in power, auditing the Fed could lead Congress to mandate more or less of these endeavors, and at the same time put more political pressure on the Fed to tilt monetary policy in a way that politicians see as favorable toward themselves, which would mean less Fed independence. History shows clearly that less central bank independence correlates closely with higher inflation and less currency stability.

What we would suggest is a law that limits the Fed to activities that directly, not indirectly, impact monetary policy. Those areas can be measured with an accounting audit by an outside firm, which the Fed already does. Last week the Fed released its audited financial statements for 2023 and they were…. interesting.

Most prominently, the Fed lost $114 billion last year. This is the first time the Fed has ever run an annual loss and the loss is a direct consequence of the Financial Panic of 2008 when the Fed started paying banks to hold reserves.

Prior to that change, the Fed did not pay banks to hold reserves, meanwhile earning interest on the securities in its portfolio (mostly Treasury bills). But after the change, when the Fed was holding rates close to zero, it still ran surpluses. When the Fed held rates low, it contributed an average of more than $75 billion annually to government revenue.

But holding rates too low creates distortions in financial markets and rates had to go higher. In order to “normalize” rates, the Fed now pays banks 5.4% on their excess reserves. The result is that the Fed paid private banks $281 billion in 2023.

But the Fed earns less than that on its bond portfolio. To repeat, it lost $114 billion in 2023 and has a total accumulated deficit of $133.3 billion since 2022. The Fed calls these accumulated losses a “deferred asset” because it expects to return to profitability in the future.

These kinds of losses should invite political oversight. Does the Fed just borrow more from the Treasury (the taxpayer) to meet payroll? If so, there is already a reason to doubt its independence from the political side of government. Rather than audit the Fed, which is already done, laws which require more transparency and a more focused mission, would be productive. The Fed has become too political. That should change.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Unexpected tax bill? Avoid compromising your long-term plan

Raymond James

Tax Planning

Surprised in spring by a tax bill you didn’t anticipate? Consider strategies for settling up without disrupting your longer-term financial progress.

Filing season is underway, and many working Americans are already receiving their refunds – but what happens if you were expecting to break even or receive a refund and are facing a bill instead?

First, stay calm and investigate by discussing with your accountant. Have you included every deduction? Has anything changed since filing last year? Second, start to think strategically about how to pay what you owe, particularly if your money is invested, earmarked for retirement or stashed away in an emergency fund. Lastly, put plans in place now to include tax-mitigating strategies into your financial plan for next year.

Actions to take

Explore a securities-based line of credit. With a securities-based line of credit1 (SBL), you can pay the taxes you owe without touching the investments you own. With an SBL, you won’t have to sell any of your holdings and will avoid disruption to your investment strategies as well as capital gains. An SBL can also help you leverage non-retirement assets by pledging your portfolio as collateral. SBL balances are paid at your discretion, with only a minimum monthly interest payment required – making it a flexible way to access liquidity without liquidating assets.

Consider tapping into your home equity. A home equity loan2 may be a more cost-effective way to pay instead of selling securities that are part of your long-term investment plan. These types of loans can offer quick liquidity and flexibility to help you meet your tax obligation, at competitive interest rates. And you may be able to avoid capital gains taxes that could result from selling appreciated investments.

Carefully select investments that could be sold for additional liquidity.In some cases, selling securities to capture capital losses or rebalance a portfolio is a good idea. Talk to your advisor about securities that could be harvested for capital losses or ones that you can sell to help bring your portfolio back into alignment with your long-term goals. Another possible benefit? Unused realized capital losses may be available to offset future tax bills. Remember, rebalancing may result in tax consequences.

If possible, avoid…

An unfavorable offer in compromise.The IRS may negotiate an offer in compromise (OIC) to help you settle your bill for less than you owe. However, be aware that there are associated costs, including a filing fee.

Paying with a high-interest-rate credit card.This kind of debt can negatively impact your credit score and quickly rack up fees, making it harder to pay down the principal. Even though the IRS also charges interest, it’s far lower than most credit card companies.

Taking money from your retirement accounts.It’s not a great idea to undermine a long-term plan by withdrawing funds early. You’ll be faced with penalties, as well as additional taxes on the amount you take out, which could mean you won’t have as much to pay your tax bill as you thought. And you’ll have even less for retirement.

Plan ahead

If you do end up owing taxes, talk to your tax and financial advisors about other ways you can pay the bill without disrupting your investment plan or depleting savings. If you anticipate owing taxes again, you may also want to discuss your withholding amount as well as investment and tax-saving strategies to reduce your liability next year and beyond.

Raymond James does not provide tax services. Please discuss these matters with the appropriate professional.

1 A Securities-Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards an SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect SOFR rates (or any successor rate thereto) that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s non-pledged Capital Access account. Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, Member FDIC.

2 Raymond James Associates, Inc., and Raymond James financial advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs. The proceeds from a home equity loan cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate or Raymond James. The line of credit can be suspended, reduced or terminated in the event of fraud, failure to repay, adverse collateral conditions, or other violation of credit terms. Property insurance is required. Flood insurance is required if property is in a designated flood zone of ‘A’ or ‘V.’ Products, terms and conditions subject to change. Subject to standard credit criteria.

Spring 2024 WorthWhile Magazine

Did you know that your sensory experience is crucial to health and happiness? The latest issue of WorthWhile explores sense loss and its correlation to physical and mental well-being. It provides an overview of how you can practice mindfulness with each of your senses and how to recognize signs of deterioration.

WorthWhile magazine, published quarterly by Raymond James, offers articles on a range of topics – from serious to fun, and everything in between. We thought you would enjoy reading it.

Other articles in this edition:

·         This year’s housing market outlook

·         Pet tech trends that are gaining popularity

·         What to expect traveling to Machu Picchu

·         Estate tax exemptions that are set to expire

·         Examining the so-called de-dollarization movement

 You can read the latest digital version by clicking here. Let us know if there are any articles you want to discuss.  

 We’d love to hear your thoughts on this issue, and if you found anything worth sharing.

CPI Explained: Breaking Down the Basics

First Trust Three on Thursday

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

March 21, 2024

In this week’s edition of “Three on Thursday,” we take a deeper look at the Consumer Price Index (CPI). The CPI is a key measure of inflation, measuring the average change in price over time of a market basket of consumer goods and services. Its broadest and most widely used index, the Consumer Price Index for All Urban Consumers (CPI-U), represents over 90% of the U.S. urban population. The CPI-U reflects the cost of essential items such as food, apparel, housing, fuel, transportation, medical services, pharmaceuticals, and other products and services purchased for everyday living by nearly all urban residents, excluding those in rural areas, the military, and those in institutions, such as mental hospitals and prisons. Prices are collected monthly from 75 urban areas across the country from about 6,000 housing units and around 22,000 retail establishments. The CPI-U uses these prices, weighted by their importance in consumer spending, to calculate average price changes, which are then used to gauge inflation. To offer deeper insights, we’ve included three informative charts below.

The CPI-U consists of over 200 categories that are arranged into eight major groups, with weightings based on consumer spending patterns. The Bureau of Labor Statistics (BLS) calculates each category’s share of total expenditures by totaling the expenditures reported by households for each item and then determines the proportion of total expenditures that each item represents. In essence, items or categories where consumers spend a larger portion of their income will have higher weights in the CPI, indicating their greater importance in the overall index. The BLS now updates these weightings annually, using recent Consumer Expenditure Survey data to keep the CPI relevant and accurately reflect shifts in consumer spending on various goods and services. The largest group weighting by far in the CPI-U is housing which makes up 45% of the overall index weighting.

Housing, with a substantial 45% weighting, constitutes the largest share of the Consumer Price Index (CPI), with the Owner’s Equivalent Rent (OER) being its most significant component at a 26% overall weighting in the CPI. In essence, OER measures the change in the amount a homeowner would pay in rent or earn from renting his or her home in a competitive market. The investment portion that comes with purchasing a home is excluded in OER, so home prices are not factored into the estimate. This estimation is achieved through the CPI Housing Survey, which follows the rents of a large sample of renter-occupied housing units. Each month, one-sixth of a pricing area (called a panel) is measured, with all six panels priced twice a year. This methodology causes the CPI’s rent measures to lag behind market indices like Zillow and CoreLogic, particularly because the CPI captures rents for ongoing tenancies rather than just new listings, and only measures an area every six months. There is a very high correlation between home prices lagged 18 months and OER. If this relationship holds moving forward, the growth rate of OER should continue slow, putting downward pressure on the overall CPI.

Since November 2022, the Federal Reserve has honed its focus on a narrower inflation measure known as “supercore” inflation. Powell has highlighted its significance, stating that supercore inflation “may be the most important category for understanding the future evolution of core inflation.” Traditionally, core CPI excludes food and energy prices to provide a clearer view of inflation trends. The Fed’s approach to supercore inflation refines this perspective even further. Powell, along with other senior Fed officials, categorize core inflation into three segments: core goods, housing services, and core services minus housing. The latter category, often referred to as supercore, has garnered considerable attention. This focus stems from the Fed’s belief that service sector inflation, unlike goods prices, is predominantly influenced by labor costs—a factor the Fed can influence through interest rate adjustments. Raising interest rates typically cools economic activity, leading to slower hiring rates or even layoffs, thereby affecting inflation. In contrast, they believe goods prices are more susceptible to global dynamics like supply chain variations. Relative to the overall CPI, supercore has remained much more stubbornly elevated.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Welcome to State-Run Capitalism

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

March 25, 2024

We’ve mentioned this before, but it bears repeating. It seems that investors pay as close attention to what the government is doing, as they do to actual business news. We don’t think investors are wrong to do this, but it’s only because government has become so big.

The US has moved from a simple Keynesian-type model to what we call “State-Run Capitalism.” When the economy turns soft, a typical “Keynesian” (demand-side) response would be to boost the budget deficit or print more money.

Now, the government is running permanent, and very large, deficits and using its budget to fund semiconductors, EVs, solar and wind energy generation, as well as redistributing more money to immigrants and students who are in debt. This all smells and looks like central planning…or State-Run Capitalism.

At the same time, because the Fed is now using an abundant reserve monetary policy, it has taken the financial system out of the process of determining short-term interest rates. Banks no longer need to trade excess reserves, so the federal funds rate has no real market. The Fed just makes that rate up.

So, here we sit in 2024, and a Wall Street Journal economics reporter, Greg Ip, just wrote a piece titled “The Economy is Great…”. We don’t think that’s really true, but real GDP did grow more than 3% last year and job growth has been robust.

A typical Keynesian response to this, the one most people were taught in economics class, would be for the government to run a surplus, or at least substantially shrink the deficit, and the Fed to be at least slightly worried about over-heating the economy.

Instead, Congress just pushed through a $1.2 trillion spending bill with a deficit that will approach $1.6 trillion, and the Fed announced that it was likely to cut rates three times in 2024.

What the heck? Why? Especially with inflation reports so far in 2024 coming in hot. The Cleveland Fed median price index is up 4.6% from 12 months ago, “supercore” CPI is up 4.3% over 12 months, and nearly 7% annualized over the past three months. With inflation this high, and the economy “great,” no traditional Keynesian would support these policies.

We don’t blame investors for reading the tea leaves and realizing that all this stimulus is probably good for the markets in the short run. Lower rates mean more growth and higher price earnings ratios. The market seemingly (and perhaps correctly) has decided that the Fed, and the Federal Government, can manage the economy to keep stocks up.

But all of this will come with a price. No centrally managed economy has been permanently made to go only one way. It can look good for a time, but eventually the sheer size of the government and the mishandling of monetary policy catches up. On a smaller scale, the US tried this in the 1970s, and the result was stagflation. Russia, Venezuela, and a host of other countries have all failed.

But it doesn’t happen overnight. More importantly, because the Fed has separated the growth of the money supply and the level of interest rates, rate cuts may not mean what many people think they do. Yes, rates may come down this year, but the money supply has contracted in the past year. A contraction in the money supply is never a good sign.

We still expect a recession this year. The US will have an irresponsible deficit, but it will be slightly less irresponsible than it was last year. Add in a decline of M2, and the morphine pumped into the system over the past few years has worn off.

If the Fed is cutting rates because it is an election year, and if the government is spending money in an effort to entice some voters to see it as personally beneficial to vote for big government, it’s a recipe for lousy economic outcomes.

When the government pushes money in directions that are politically beneficial, they are often not efficient in a true economic sense. This means less growth and more inflation. We are very worried about stagflation in the years ahead.

Between now, and whenever that is, the market may completely ignore it. And, investors will think the government has found a recipe for permanent prosperity. But after thousands of years of trying, and never making it happen, we bet against even this new version of State-Run Capitalism.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Rate Expectations

First Trust Economic Research Report

Robert Stein, CFA - Dep. Chief Economist

Brian S. Wesbury - Chief Economist

March 20, 2024

There was zero chance the Fed was going to cut rates today; instead it was all about what today’s meeting, the dot plot, and the press conference meant for the timing and pace of rate cuts in the months ahead.

Starting with today's statement, there was only one change from January, and it was a minor one. While prior language stated that job gains “have moderated since early last year but remain strong” today’s statement removed language concerning moderation and simply stated that “job gains have remained strong.” That – along with a slight adjustment lower to the unemployment rate forecast for 2024 –suggest that a stronger than anticipated job market has weakened Fed confidence that inflation will trend sustainably towards 2.0%.

The survey of economic projections provided more clarity. Forecasts for real (inflation-adjusted) GDP growth in 2024 rose to 2.1% from 1.4% in December. And with that outlook for stronger growth, their unemployment rate expectation shifted down to 4.0% from 4.1% while core inflation expectations rose to 2.6% from 2.4%. It's worth noting that with unemployment at 3.9% and core inflation at 2.8%, this suggests the FOMC members see very little movement in either category over the remaining nine months of the year.

While the combination of faster growth, higher inflation, and a stronger job market didn’t shift the Fed’s expectation for the equivalent of three 25 basis point cuts between now and year end, the distribution of forecasts shows that only one FOMC participant now expects more than three rate cuts will be appropriate this year, down from five members at the December meeting. And rate cut expectations for 2025 shifted to three cuts from four.

Beyond rate cuts, markets have been wondering when the Fed will start to taper back the pace of quantitative tightening (QT). During today’s press conference, Powell wouldn’t confirm or deny that the process could begin as soon as the next Fed statement on May 1st, but he did say that it would be appropriate to start “fairly soon” with plans to gradually cut the pace of roll-offs. In other words, May looks to be on the table.

We expect the Fed will start cutting rates in June. That said, the Fed should take a cautious approach once the process begins, with a primary focus on not cutting rates too aggressively or prematurely, which could re-ignite the inflation problem like the Fed did on multiple occasions under Chairman Arthur Burns in the 1970s. The economy is still growing, but we think it falls into recession before the year is out and that real GDP growth significantly lags the predictions of the FOMC members. This, in turn, heightens the risk that the Fed takes a more aggressive path on rate cuts in response to economic weakness, bringing the threat of reaccelerating inflation to the forefront in the years ahead.

Text of the Federal Reserve's Statement:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Focused on the Fed

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

March 18, 2024

The Fed meets this week, which means investors and analysts will be sifting through Wednesday’s FOMC statement, updated economic projections, the “dot plots,” and Powell’s press conference searching for any signal – real or imagined – about what our central bank will do next. In particular, the market is on tenterhooks about when rate cuts will start, how fast those rate cuts will come, or if the Fed will simply hit the “pause” button on the prospect of rate cuts until deep into 2024.

We think this obsession with the Federal Reserve is unhealthy. Instead of an obsession with slight policy shifts out of Washington, DC, we think investors need to be focused on more important matters, like the process of innovation, entrepreneurial risk-taking, and corporate profits. In the end, it’s these factors that will drive stock market valuations the most, not the vagaries of the short-term interest rate target by the mandarins of money.

Things have changed a great deal since the last Fed meeting on January 31. Back then, the futures market expected about six rate cuts of 25 basis points each this year, with the first cut coming in March. As of Friday’s close, the market was expecting only three rate cuts this year, with the first one coming in either June or July.

No wonder the shift in rate expectations given recent reports on inflation. The two CPI reports since then show consumer prices up at a 4.6% annual rate in the first two months this year. And no, this was not food and energy; “core” prices, which exclude those two volatile categories were also up at a 4.6% annual rate so far this year.

Even worse for the Fed is that the newly made-up slice of the CPI that the Fed and others call the “Super Core” measure of inflation, which includes services only (no goods) but also excludes food, energy, and housing rents, rose 0.8% in January and 0.5% in February. That’s a growth rate of 8.2% annualized so far this year. Notice how you used to hear a lot about this measure a year or so ago when it was indicating lower inflation and now few dare speak its name when it shows inflation re-accelerating! Meanwhile, overall producer prices are up 5.4% so far this year and “core” producer prices are up at a 4.5% annual rate.

None of these figures are remotely close to the 2.0% inflation goal the Fed claims it’s still targeting.

The problem for the Fed is that there are signs that the economy may be slowing. Although retail sales rose 0.6% in February, after factoring in downward revisions to prior months, retail sales rose a tepid 0.1%. “Core” sales, which exclude volatile categories such as autos, building materials, and gas stations — and is a crucial measure for estimating GDP — increased by 0.1% in February, but was revised significantly lower for previous months, down 0.5%. If unchanged in March these sales will be down at a 0.7% annual rate in Q1 versus Q4, which would be the first quarterly decline since the COVID lockdowns.

Industrial production rose a tepid 0.1% in February but that follows declines of 0.3% and 0.5% in December and January, respectively. We like to follow manufacturing output excluding the auto sector (which is volatile) and that is down 0.9% from a year ago. Not a good sign.

As always, we will be watching the press conference following Wednesday’s meeting for any mention of the Fed looking more closely at the money supply, but we won’t get our hopes up. The M2 measure of money is down 2.0% in the past year, which would not be good for the economy if these figures are accurate and if they continue.

Another key issue is whether the Fed will publicly abandon it’s 2.0% target to make it easier on themselves to achieve their goal. We think that will happen eventually, but that’s several years from now, not soon. The Fed likely thinks it would lose credibility if it announced a higher target for inflation, and could send long-term interest rates spiraling upward; that’s not a risk the Fed would take, particularly in an election year.

Our advice to investors: listen to and watch the Fed but don’t obsess about it. The changes in monetary policy from meeting to meeting don’t matter nearly as much as the productive capacity of the American people.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Opportunity Blooms in Tax Season

Raymond James

Tax Planning

Whether you get a refund or end up owing, you have options.

Tax season can be a period of new possibilities – especially when it comes down to what to do with your refund or, on the flip side, how to settle your bill.

If you receive a refund

So you worked diligently with your tax preparer to complete your return, only to discover some of the fruits of last year’s labor will be coming back to you as a refund. So, what can you do with your bounty? Here are some possibilities:

• Start fresh. Strengthen your finances by paying down credit card or any other non-tax-advantaged debt.

• Cultivate. Make some improvements to make your home more valuable, comfortable or energy efficient – or get ahead on the kids’ tuition.

• Nourish. Invest in yourself (a new gym membership or art classes) or someone else (donate to a charity or sponsor a family or individual in need).

• Replant. Use that money to get a head start on this year’s contributions to your retirement account, or bolster your emergency fund.

• Plan. Some say a refund is just a loan you give the government interest-free. Should you reconsider your withholdings so that you come out even next year?

If you end up owing

If you end up owing taxes, you’ll need to decide how to pay. However, before you write that check or cash in some of your invested assets, consider how those actions may impact you immediately and over the long run.

For instance, liquidating assets in your investment portfolio to pay your taxes may generate new tax consequences and could impact your long-term investment strategy. And emptying your savings account may leave you vulnerable should another unplanned need for cash arise.

Instead of using the assets working toward your long-term goals, consider liquidity and borrowing options based on the value of your assets, or that offer rewards like cash back or redeemable points. That way, you can access the cash you need to pay your tax bill while keeping your assets where they belong – invested.

Looking to mitigate your tax bill next year? Consider these tips:

• Maximize contributions. Take advantage of tax breaks in your retirement accounts and make catch-up contributions once you turn 50.

• Harvest losses. Consider balancing your realized capital gains by selling securities for a loss and mitigating your tax liability.

• Seek advice. Contact your financial advisor and tax professional to discuss tax planning.

Spring forward thoughtfully

The year’s early months are a time of renewal, so use your tax refund wisely, or if you owe taxes, consider your long-term investment plan and borrowing options before uprooting your hardworking, invested assets.

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.

Is the Job Market Really That Strong?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

March 11, 2024

If you only look at the headlines about the monthly payroll report, the job market has looked surprisingly strong in recent months. Nonfarm payrolls rose 275,000 in February, beating the consensus expected 200,000 as well as the average of 229,000 per month in the past year.

But a deeper look at the data makes it look about as fishy as week-old sushi. Now, we’re not alleging some sort of “Deep State” conspiracy, we’ll leave that to others. But reviewing the report in its entirety show the job market is not nearly as strong as the top line payroll readings suggest.

For example, look at the revisions. Payrolls in December and January were revised down by a total of 167,000 (the largest monthly downgrade for any non-shutdown months since late 2008), meaning February was just 108,000 above the original January level. And it was even worse in the private sector, where payroll gains were a paltry 19,000 for the month after netting out revisions for prior months.

What’s odd about these downward revisions is that they seem to happen pretty darn often of late. In 2023, for example, the regular two-month revision process reduced the initial monthly report by 30,000, on average. That ain’t chump change. In the past few decades, negative revisions like this have normally been associated with recessions or the immediate aftermath of recessions.

It's also important to follow civilian employment, an alternative measure of jobs that includes small-business start-ups. On a monthly basis, these figures are volatile, and are affected by estimates of the size of the total population, so take them with a grain of salt. But the trend is important and isn’t anywhere as strong as payrolls. While payrolls are up 2.7 million in the past year, civilian employment is up 0.7 million and the unemployment rate has risen to 3.9%. Moreover, the gain in civilian employment in the past year has all come in part-time work, with a slight loss for full-time jobs.

There may be solid technical reasons for this large gap. The figures are generated by two different surveys (one for employers, the other for households), and maybe the massive influx in immigrants, even if largely illegal, is finding its way into payroll expansion (perhaps with illegal hiring or false documents) in a way not being picked up by the civilian survey. We’re guessing many recent immigrants are not eager to answer surveys sent by the Labor Department.

Notably, among those who do answer the survey, civilian employment among the native-born population is down around 900,000 from a year ago – the first drop since the onset of COVID – versus an increase of about 1.5 million among the foreign-born.

Only time will tell the true underlying health of the labor market. There is no clear signal we’re in a recession, but the patient isn’t looking well. What is clear, is that economic risks abound, and a soft landing is far from guaranteed.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Employment Up (Non-Farm Payrolls), Unemployment Up (Household Survey)

Raymond James

Economy & Policy

March 08, 2024

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Sometimes, and February was one of those times, the information on the U.S. labor market doesn’t make sense. Many argue that government agencies are cooking the books. However, the counter argument is: Why wouldn’t they cook the books ‘consistently,’ that is, if they cook the non-farm payrolls survey up to show strength in the labor market they should also cook the books for the household survey. The problem is that to keep the ‘consistency’ over time, especially if you have a particular agenda, it means that statisticians would have to ‘change’ the ‘recipe’ every month (i.e., that is, they will have to change their lie every month), which would mean that they will be easily caught. Thus, there is no conspiracy behind these numbers. These are just two different surveys with different characteristics.

In February, the non-farm payroll survey showed 275,000 new jobs added while the household survey showed a loss of 184,000 jobs. How could that be? Easy, as we said above, these are two very different surveys, and they have very different characteristics. Thus, they give, sometimes, very different views of the labor market. While in the non-farm payroll survey an individual can have more than one payroll job during a specific month, in the household survey, that is not possible. In the household survey you are asked if you worked over the last several weeks or months. If you say no but you have been looking for a job, then you are unemployed. If you say no and you have not been looking for a job, you are out of the labor force and not considered to be unemployed.

In the payroll survey, as long as you are in the payroll of one or more than one firm, then you are employed, and you are counted.

What the February non-farm payroll report showed with the downward revisions to December 2023 and January 2024, down a net of 167,000 jobs, is that the surveys are probably still having issues with seasonal factors, which made them adjust the numbers considerably. Thus, we should also expect some revisions to the February non-farm payroll number.

Why are prices not going back to pre-COVID-19 recession levels?

We have heard that consumers are longing for prices to go back to pre-COVID-19 pandemic recession levels. That made one of us remember the 1970s. At that time, one of us was a high schooler with great ‘future’ income expectations. I remember that on my way to school I would drive (using one of my parents’ car!) by a car dealership and would say “I want to start saving money so I can buy a brand-new Volkswagen Beetle,” which at the time, cost about $3,000. At the time, my income source came from newspaper deliveries. It would have probably taken me about 20 years to save that money if I depended on that source of income while living with my parents and having no other expenses. It wasn’t that I liked the Volkswagen Beetle, but it was the cheapest new car on the market at the time. Of course, I was never able to buy the car, not only because of what it would have meant, but also because the 1970’s stagflation worsened, and car prices surged and never came back down.

As I abandoned the idea of buying a new car and settled back into asking my mom for hers (or taking public transportation), my older brother and I started our stamp and coin collections. By 1979, when I graduated from high school and my brother had finished his first year of college, we sold our stamp and coin collection to fund our backpack travel through Europe for three months. All our pre-backpacking travel plans went smoothly. We bought a book called “Europe on

$5 dollars a day, Scandinavia on $15 dollars a day.” Then, on the first day of our arrival to Europe, reality struck. As we were walking toward our U.S. hostel in Madrid, we passed a newspaper/magazine kiosk where we saw the new edition of our European backpacking travel book. The new edition was called “Europe $15 on dollars a day, Scandinavia on $25 dollars a day.” That is, we started our three-month trip with a daily deficit of $10 dollars per day, per person! And since the airline trip from the U.S. was a chartered flight that had a fixed schedule…we were stuck, we could not come back earlier and cut our losses.

Thus, we adapted, reengineered our trip, ate less (lost about 20 pounds!), slept less and/or less comfortably, and skipped Nice, France overnight, only staying during the day after a small pizza cost us $20 dollars while sleeping on a train, four hours in one direction and then four hours in the opposite direction, for a ‘nominal’ total of eight hours of ‘sleep.’ Good thing we bought the Eurail pass in advance of our trip, so we could hop on a train as many times and directions as we wanted during a two-month period. We also learned fast from students that were doing the same thing as us, and validated the Eurail pass almost a month later so we could extend our travel, i.e., we cheated a bit…and thank God, were not caught! Of course, electronic ticketing would make this almost impossible today so don’t try it, I hear the fines are severe today!

Why do we come up with these anecdotes? Because prices are not coming back to pre-COVID-19 pandemic levels, as we learned when dreaming of buying a Volkswagen Beetle for $3,000 or visiting European countries on $5 dollars per day and Scandinavia on $15 dollars per day. But not because prices cannot come down, they could, but for that we would need something close to a Great Depression, with wages coming down also to pre-COVID-19 pandemic levels. And that is even more difficult because economic theory shows that wages are highly sticky downward. That is, a typical economic adjustment implies adjusting the number of workers rather than bringing down salaries to clear the labor market. Furthermore, wages and salaries, more or less and typically with a lag, have accompanied the recent increase in prices and thus, have been helping Americans catch up with the increase in prices, i.e., inflation.

The graph below shows one measure of real wages and salaries adjusted for inflation (in this case median usual weekly real earnings) and it shows that real wages and salaries have started to increase as firms have adjusted nominal wages to reflect higher prices and inflation has continued to come down.

Our guess is that we want prices to go back to pre-COVID-19 pandemic levels because that would mean that our incomes would have a higher purchasing power if we had those prices compared to today’s prices. However, as we said before, because wages and salaries are probably not going back down unless there is a serious economic contraction that lasts for many years, we will have to continue to adapt to these new prices and worry less about trying to buy that $3,000 dollar Volkswagen Beetle or visit Europe on $5 dollars a day and Scandinavia on $15 dollars a day!

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The Conference Board Coincident Economic Index: An index published by the Conference Board that provides a broad-based measurement of current economic conditions.

The Conference Board lagging Economic Index: an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM New Orders Index: ISM New Order Index shows the number of new orders from customers of manufacturing firms reported by survey respondents compared to the previous month. ISM Employment Index: The ISM Manufacturing Employment Index is a component of the Manufacturing Purchasing Managers Index and reflects employment changes from industrial companies.

ISM Inventories Index: The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories.

ISM Production Index: The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month.

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.

Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes.

The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan.

Source: FactSet, data as of 7/7/2023

Up and Adam Market Insight

Disclosures
LHS/RHS: Left-hand side/Right-hand side axes. The DJIA is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The NASDAQ 100 Index  is a stock market index that includes 100 of the largest, most actively traded, non-financial companies listed on the Nasdaq Stock Market. US government bonds and Treasurys are guaranteed by the US government and, if held to maturity, generally offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Sector investments are companies engaged in business related to a specific economic sector and are presented herein for illustrative purposes only and should not be considered as the sole basis for an investment decision. Sectors are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The US Dollar Index is a measure of the value of the U.S. dollar against six other foreign currencies. The currency pair EUR/USD indicates how many U.S. dollars (the quote currency) are needed to purchase one euro (the base currency).  WTI crude oil is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai Crude. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The Conference Board Leading Economic Index (LEI) is an economic leading indicator intended to forecast future economic activity Indexes are available for the U.S. and various geographic areas. The Redbook Index is a sales-weighted of year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores. The Trade Balance is the net sum of a country's exports and imports of goods without taking into account all financial transfers, investments and other financial components. The Manheim Used Vehicle Value Index (MUVVI), a measure of the US used vehicle market, is published by Manheim, a company that offers vehicle remarketing services to dealerships and other automotive businesses. The Nikkei 225 is a price-weighted index of the 225 largest companies in Japan. Retail sales are the sale of consumer goods or services to consumers for personal use. Retail sales can include in-store sales, online sales, direct sales, or sales via mail. Jobless Claims are the number of people who file weekly for unemployment insurance benefits. The Chicago Fed National Activity Index (CFNAI) is a monthly index of U.S. economic activity constructed to summarize variation in 85 data series used to gauge overall economic activity and inflationary pressure. The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors (providers: ISM, Markit, etc.). The Existing Home Sales Index is a monthly report that measures the prices and sales volume of existing single-family homes, condos, and co-ops. The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options. The New Home Sales Index is an economic indicator that measures sales of newly built homes. The Dallas Fed Manufacturing Index is a monthly index that measures the performance of the Texas manufacturing sector and is based on a survey of over 100 large manufacturing companies in the region. Gross domestic product (GDP) is the monetary value of all final goods and services produced within a country over a specific period of time. Investing in Small-Cap Stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Consumer Confidence Index (CCI) is a survey that measures how optimistic consumers are about their financial situation and the economy. The Bloomberg Commodity Index (BCOM) is a financial benchmark that tracks the price movements of commodity futures contracts. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index measures the change in the value of the U.S. residential housing market by tracking the purchase prices of single-family homes. The Russell 2000 index is a market index that tracks the performance of around 2,000 small-cap companies in the US. The Federal Housing Finance Agency's (FHFA) House Price Index (HPI) is a quarterly index that measures changes in the average price of single-family homes. The Richmond Manufacturing Index rates the relative level of business conditions including shipments, new orders, and employment. The New Tenant Rent Index is a research index series that uses data sourced from the CPI Housing Survey. The Russell 1000 Index is a stock market index that measures the performance of the largest US companies by market capitalization. The JOLTS report or Job Openings and Labor Turnover Survey is a report from the Bureau of Labor Statistics measuring employment, layoffs, job openings, and quits in the United States economy. The ADP National Employment Report is a measure of the monthly change in non-farm, private employment, based on the payroll data of approximately 400,000 U.S. business clients.

All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee and are subject to change. This information should not be construed as a recommendation. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Data Source | FactSet as of 3/6/2024

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Is a Debt Spiral Already Here?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

March 4, 2024

Washington DC continues to spend much more than it gets in revenue. In the Calendar Year of 2023, the federal government spent $6.3 trillion, but only collected $4.5 trillion in taxes. This $1.8 trillion gap drove the national debt to $34 trillion in December 2023. And it is only going higher.

One problem with these budget numbers is that government accountants, rightly or wrongly, lowered spending in 2023 by about $300 billion after the Supreme Court struck down a large part of President Biden’s proposal to forgive student loans. That legal decision didn’t change the government’s cash flow last year in any significant way, but it did let the Department of Education “write up” the value of its loan portfolio by about $300 billion. This, they counted as “negative spending,” which then reduced the official budget deficit. So, while the reported deficit in 2023 was $1.8 trillion, the Treasury needed to borrow more than $2 trillion to make ends meet.

The high levels of borrowing are causing some investors to fear some sort of imminent and unprecedented snowballing of federal debt. Continual borrowing will lead to skyrocketing interest rates (and higher interest payments), which will lead to severe problems in the financial system.

In particular, they note that since June 2023, when the debt ceiling was suspended, total Treasury debt outstanding has gone up by nearly $3 trillion. That includes a total of $874 billion in the second quarter of 2023, $835 billion in the third quarter, and $834 billion in the fourth quarter. Other than 2020-21, during COVID lockdowns, the debt has never gone up this rapidly, not even in 2008-2009.

But it’s important to remember that the debt does not go up at a steady rate during the course of the year. In 2023, during March and April, the federal government received a surge in tax receipts, which temporarily reduced the amount of debt outstanding. We think this will happen again this year, particularly because the S&P 500 went up 24% last year and the federal government is therefore likely to reap lots of non-withheld revenue.

As a result, the Congressional Budget Office estimates that individual income tax payments will be up 13.4% this year and the budget deficit will come in at roughly $1.5 trillion versus $1.7 trillion in Fiscal Year 2023. On that score, we are not as optimistic. Even as we write this, Congress is debating foreign aid measures that, whether you like the underlying policy or not, will, by themselves, boost the deficit.

And while the cost of servicing the debt is going up, the interest measure that matters is the net interest on the debt relative to GDP. In other words, what matters is how much of our national income is needed to service the debt. That measure, while climbing and a problem, is still below the average of roughly 3% of GDP it was back in the 1980s-90s.

However, because we think interest rates will remain higher than government accountants think, the carrying cost of our debt will move higher.

The bottom line is that federal government spending is way too high and most politicians do not seem to care. There are those who look at these numbers and assume some kind of imminent crisis, when what we see is a slow, but unavoidable decay in our underlying potential to grow. New technologies are raising productivity, but a huge government acts like a ball and chain on those benefits.

For now, the markets are ignoring this, and assume a soft landing with lower interest rates. But the more economic growth is undermined, the less likely this outcome.

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