From a small northwestern observatory…

We hope all of you had a great Thanksgiving, and any indigestion you felt Friday was from too much turkey rather than too much stock market.

The broader stock market indices had a terrible day Friday — the S&P 500 was down about 2%, although as of this writing it has re-gained about half of its loss. Our in-house REIT fund, ACCRE, was developed in no small part to attenuate such falls. We lost only 0.9% on Friday, and we’ve re-gained all of that and then some today.

More to the point, though, what’s happening? Consumers (and yes, the stock market, too) hears about “the Omicron variant” and “inflation” and not surprisingly reacts defensively to unsettling news. We’re no experts on the Covid virus (although we listen carefully to the folks who are legit experts!) but perhaps we can sort out some of the noise with the aid of some charts from CNN Business and some others.

First, let’s look at inflation. If you’re under, say, 55, for your entire adult life inflation has hovered around a very manageable 2% to 3%. In the 1970’s and early 80’s, of course, inflation was a big deal and double-digit annual price increases weren’t unusual. In the past few years, both pre- and post-COVID, inflation has actually been on a downward trend, getting very close to zero in early 2020. However, the flood of stimulus money in the economy, and the rebound after over a year of semi-lock-down, has triggered prices. On an annualized basis, prices in October were about 6.24% above a year earlier.

So, how big of a danger is this? In other words, is this inflation both real and permanent? A peek at the interest rate market may be insightful. Both the US Treasury long-bonds and the 30-year mortgage market have barely reacted. Both are up from their COVID-recession doldrums, but neither seem to have reacted to consumer prices.

10-year Treasuries and 30-Year Fixed Rate Mortgages

So, bottom line, is the economy healthy? In most respects, yes. As of October 1, the economy was adding about 148,000 jobs per month, which is near the high end of the “healthy” range (100,000 to 150,000). The unemployment rate stood at 4.6%, not quite at the pre-pandemic lows, but about where it was five years ago. Real gross domestic product stood at $19.5 Trillion (annualized) as of the end of the 3rd quarter, which is a new record high and nearly back on the pre-pandemic trend line. Consumer spending — which is driving the inflation fears — is also at a record high of $13.9 Trillion and has been back on its pre-pandemic trend line for most of 2021. All of these are healthy signs of a stable but growing economy.

That said, there are a few clouds on the horizon to be watched carefully. The S&P Case-Shiller home price index sets a new record high each month, but annualized housing starts are actually somewhat lower (1.6 million) than the peak of about 1.7 million set earlier this year. However, housing starts are still well above the 1.2 million level we saw for most of the past four years. It remains to be seen if accelerated housing starts will ameliorate housing prices. Retail inventories as a percentage of sales are lower than we’ve seen any time in the past five years, standing at about 126% (the pre-pandemic average was about 140%). This suggests more consumers chasing fewer goods with commensurate price pressure.

The stock market is a pretty good gauge of economic expectations. Looking at the trends for the past five years, the hic-cup on Friday appears to be nothing more than post-Thanksgiving indigestion. We hope that is the case.

As always, we enjoy hearing from you folks. If you have any questions about economic topics, particularly with a bent toward real estate, please let us know!

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com