OmniDivitia Wealth Management, Inc. - ODWM Blog #demandOmniDivitia Wealth Management, Inc. - ODWM Blog #demandhttps://www.omnidivitia.com/blogs/tag/demandSun, 12 Apr 2026 15:55:07 -0700http://zoho.com/sites/<![CDATA[5 Warning Signs]]>https://www.omnidivitia.com/blogs/post/5-warning-signs

Wall Street Markets vs. Main Street Consumers: Who will Win?

5 Economic Warning Signs You Might Be Missing

Navigating the modern economy feels like deciphering a code, with stock market rallies often masking deeper signs of a slowdown. To understand the true direction of the economy, it's often more revealing to look beyond the daily headlines at a few key underlying indicators. The following five points, drawn from recent economic data, reveal a consistent and cautionary story about where the economy may be heading.


1. Consumer Confidence Has Fallen Off a Cliff

A major survey of consumer sentiment revealed a sharp decline in November 2025, a worrying sign for an economy driven by spending. The Conference Board Consumer Confidence Index® declined by 6.8 points to 88.7, its lowest level since April.  A critical component of that report, the Expectations Index, which measures the short-term outlook for income, business, and labor conditions, has been particularly weak. This index has now tracked below the recession-signaling threshold of 80 for ten consecutive months.


"Consumer confidence tumbled in November to its lowest level since April after moving sideways for several months." - Dana M Peterson, Chief Economist at The Conference Board


This matters because consumer sentiment is a key driver of spending. Such deep pessimism signals that households may be preparing to pull back, posing a significant headwind for economic growth.

2. A Key Recession Predictor Is Flashing Red

The Conference Board Leading Economic Index® (LEI) is a composite index designed to signal turning points in the business cycle before they happen. In August 2025, the LEI for the US declined by 0.5% and fell by a total of 2.8% over the preceding six months.  Crucially, the report notes that this widespread weakness across its components triggered a "recession signal" in August.


“In August, the US LEI registered its largest monthly decline since April 2025, signaling more headwinds ahead.” - Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board


Because this single indicator combines ten different data points—from manufacturing orders to stock prices and unemployment claims—its unified negative signal is particularly impactful.

3. America's Factories Have Room to Spare

Capacity utilization is a key measure of economic health that shows how much of the nation's industrial potential is actually being used. In August 2025, the total capacity utilization rate for the U.S. industrial sector was 77.4 percent. This rate is significant because it is 2.2 percentage points below its long-run average from 1972–2024, indicating that the country's industrial sector—comprising manufacturing, mining, and utilities—is operating with significant slack, suggesting a lack of robust demand in the economy.

4. The Job Market Shows Subtle Signs of Strain

To get a nuanced view of the labor market, it's important to distinguish between the two main types of weekly unemployment claims.

First, "initial claims" represent new applications for unemployment benefits, giving us a real-time look at the pace of recent layoffs. As of November 15, 2025, the 4-week moving average for these new claims was a relatively stable 224,250.

Second, "continued claims" represent the total number of individuals already receiving unemployment benefits. As of November 8, 2025, the 4-week moving average for continued claims was 1,960,250.  While new layoffs are not spiking, the number of people remaining on unemployment is nearly 2 million and has been rising. This divergence signals a cooling hiring environment, where finding a new job is becoming a prolonged struggle for nearly two million Americans.

5. Wall Street's Optimism Isn't Reaching Main Street

There is often a sharp contrast between financial market performance and the economic reality for average households. On November 25, 2025, the S&P 500 Index provided a dose of good news, closing at 6,765.88, up 0.91% for the day.

However, that optimism is not reflected in how most Americans feel about their finances. According to the University of Michigan Surveys of Consumers, the Index of Consumer Sentiment fell to just 51.0 in November, a staggering 29.0% drop from the previous year.


"...consumers remain frustrated about the persistence of high prices and weakening incomes."

Joanne Hsu, Surveys of Consumers Director


This highlights a significant disconnect between the performance of financial markets and the persistent anxieties—driven by high prices and stagnant incomes—that define the economic reality for millions of households.

Conclusion: The Bigger Picture

While no single indicator can predict the future with certainty, the consistent pattern across consumer confidence, leading economic indexes, industrial output, and the job market points toward significant economic headwinds. The data tells a cohesive story of a slowing economy, even when the daily headlines seem contradictory. As these cautionary signals grow louder, the key question becomes not if the economy is slowing, but by how much?


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]]>Wed, 26 Nov 2025 14:38:41 -0600<![CDATA[2025 Federal Reserve Outlook]]>https://www.omnidivitia.com/blogs/post/2025-federal-reserve-outlookThe Federal Open Market Committee (FOMC) consists of 12 members:  the seven members of the Board of Governors of the Federal Reserve System; the ]]>

Walking an Economic Tightrope

The Federal Open Market Committee (FOMC) consists of 12 members:  the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.  A major part of this committee's job is to review economic data & discuss their outlooks in order to establish monetary policy.  The challenge they will have in 2025 is how to balance the fight against stubborn inflation against the desire to maintain low unemployment.  Below are 4 graphs explaining their outlook, taken from the December 2024 Summary of Economic Projections.

GDP Growth

The FOMC projects real GDP growth to average 2.1% in 2025, down from 2.5% in 2024.  The committee expects growth to slow in the first half of 2025, followed by a modest pickup in the second half of the year.

Inflation

The FOMC forecasts the personal consumption expenditures (PCE) price index, their preferred inflation measure, to rise to 2.5% in 2025, up from 2.4% in 2024.  The committee expects inflation to remain above its 2% target through the first half of 2025, before gradually declining.


In addition to the FOMC analysis, we also should consider the potential o=impact of the new administration's fiscal policy regarding tariffs. On one hand, it could be argued that the positions could be used simply to establish a bargaining position.  On the other hand, if they were to be implemented as they have been described so far, they could lead to even higher inflation as either the additional cost due to tariffs would be passed on to US consumers, or because domestic producers might have higher labor costs than overseas producers.

Unemployment

The FOMC projects the median unemployment rate to increase to 4.3% in 2025, up from 4.2% in 2024.  The committee expects the labor market to remain strong, with a relatively low unemployment rate, from a historical perspective.

Interest Rates

The FOMC projects the federal funds target rate to decline to 3.9-4.0% by the end of 2025, down from 4.4-4.5% at the end of 2024.  The committee expects to manage interest rates in a data-dependent manner to combat inflation and maintain a healthy economy.


IMPLICATION FOR MARKETS

In summary, the FOMC data for 2025 projects slowing GDP, slightly higher inflation, rising unemployment, and potential Fed Funds cuts in order to support the economy.  However, several major banks/brokerage firms have placed targets on the S&P 500 reflecting high single-digit to low double-digit percentage growth.  Given the gap in the current fundamental valuations and current levels, coupled with the above FOMC projections, it seems logical that both could occur, but a correction may be needed to provide more attractive entry points in the short term.  Long-term investors should review their goals, timeline, & asset allocation, as well as having a thorough understanding of the risks that yo may be taking on.


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]]>Fri, 24 Jan 2025 13:41:16 -0600<![CDATA[Are We In a "Melt-Up?"]]>https://www.omnidivitia.com/blogs/post/are-we-in-a-melt-upA closer look into a quietly emerging risk in the stock market]]>

Understanding a Melt-Up in the Market and Its Potential Effects in 4Q24

As we enter the final quarter of 2024, investors and analysts are closely watching market movements, particularly the possibility of a "melt-up". This confusing term refers to a sharp, unexpected rise in asset prices driven primarily by investor sentiment, often unrelated to fundamental economic growth. In other words, a melt-up is characterized by euphoria in the market, with stock prices soaring as investors fear missing out (FOMO) on further gains, rather than any significant improvement in company performance or broader economic indicators.  While a melt-up can be exciting in the short term, it often signals heightened risk, and understanding its dynamics and potential consequences is critical for investors as they navigate 4Q24.

What Exactly is A "Melt-Up?"

A melt-up can happen when investors, worried about missing out on future profits, pile into stocks, creating a self-reinforcing cycle of rising prices. Unlike a **bull market**, which is supported by fundamental economic factors such as corporate earnings growth or macroeconomic expansion, a melt-up is often fueled by **speculative behavior** and psychological drivers.  Some common characteristics of a melt-up include:
    • Valuations exceeding fundamentals =  Stock prices surge far beyond what earnings or company fundamentals can justify.
    • FOMO-driven buying =  Investors rush into the market, driving prices higher due to fear of missing out on potential gains.
    • Volatility and market irrationality =  Rapid price movements can create instability and heighten risks of a correction.
In previous instances, such as the dot-com bubble in the late 1990s or the more recent surge in speculative assets during the 2020–2021 pandemic recovery, melt-ups have typically been followed by sharp corrections or even full-blown market crashes.  However, despite some of the above concerns, one positive thing to note is that forward stock market earnings continue to rise.  The question remains: do current estimates justify these prices?

Several factors appear to be creating conditions for a melt-up as we close out 2024, including monetary policy adjustments & global macroeconomic uncertainty.  The Federal Reserve has pivoted to a more dovish stance as its focus turns away from inflation toward the labor market.  This shift may have sparked optimism, pushing investors to assume that lower interest rates will keep supporting asset prices. Additionally, while inflation has cooled in some regions, economic growth remains uneven, especially in Europe and China. Investors, seeking safe havens for their capital, may turn to U.S. equities, driving prices upward.

Potential Effects of a Melt-Up in 4Q24

While the short-term effects of a melt-up might seem positive, with portfolios seeing substantial gains, the long-term risks and economic impacts are more complex.

  1. Market Volatility = As prices rise quickly, the risk of a sharp correction increases. History shows that melt-ups are often followed by downturns. For example, the dot-com bubble of the late 1990s led to a spectacular crash in 2000. If the market becomes overextended, any negative news—be it an earnings miss, geopolitical tension, or macroeconomic disappointment—could trigger a sell-off.
  2. Weakened Investor Confidence = If the market does correct after a melt-up, it could undermine investor confidence for a period of time, potentially leading to a prolonged bear market. Once investors realize that prices have far exceeded the fundamentals, many may exit the market, exacerbating the downturn.
  3. Potential for Sectoral Divergence = During a melt-up, certain sectors may benefit disproportionately. When the correction occurs, the most overinflated sectors may experience the steepest declines.
  4. Impact on Monetary Policy = If a melt-up occurs, central banks, including the Federal Reserve, may face pressure to adjust monetary policy. On one hand, a melt-up could lead to concerns about **asset bubbles**, prompting tighter monetary conditions to curb speculative excesses. On the other hand, a sudden collapse in asset prices could push central banks to ease rates again to stabilize markets. This dynamic adds uncertainty to future monetary policy decisions.
  5. Wealth Effect and Consumer Spending = In the short term, a melt-up can fuel the **wealth effect**, where rising asset prices encourage consumers to spend more. However, this can lead to temporary surges in inflation and demand. When prices correct, the opposite could happen, with consumers pulling back on spending, leading to slower economic growth in early 2025.

How Investors Can Navigate a Potential Melt-Up

Given the uncertainty surrounding a melt-up, it’s important for investors to remain cautious:
1. Diversification: Allocating investments across different asset classes, regions, and sectors can help reduce exposure to an overvalued sector or asset class.
2. Focus on fundamentals: While speculative stocks may be tempting, focusing on companies with strong earnings growth and reasonable valuations can protect against downside risks.
3. Prepare for volatility: It’s crucial to brace for heightened volatility. This might mean adjusting asset allocations or hedging positions to mitigate potential losses in the event of a sharp market correction.

As we enter the final quarter of 2024, the possibility of a market melt-up is real. While the allure of quick profits may drive asset prices higher in the short term, investors should be mindful of the risks that come with euphoric markets. A disciplined, diversified approach, focusing on long-term fundamentals, will be essential for navigating this turbulent period.  To get a better idea of the risk your portfolio may be taking on, schedule a call today by clicking the button below.

Disclaimer:  
The content provided here is at least partially generated by artificial intelligence and is for informational purposes only. While I strive to ensure accuracy, the information may not always reflect the most current developments or data. It's recommended to verify any critical information from reliable sources or consult with a professional expert when making decisions based on this content.
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]]>Thu, 10 Oct 2024 08:00:00 -0500<![CDATA[The Stubborn Soft Landing]]>https://www.omnidivitia.com/blogs/post/the-stubborn-soft-landingAre we actually on track for a "soft landing"?]]>

The Battle Against Inflation is Not Over

The S&P 500 is up just roughly 25% since late October, and the other benchmarks have also continued their momentum. The improvement in forward earnings estimates would appear to justify the growth. Other styles have also performed well. The underlying sentiment seems to be that a soft landing was likely, and the Fed would cut rates numerous times this year to keep the economy from slowing too much.


However, hopes for rates cuts by the Federal Reserve have been premature as the fight against inflation continues. The Consumer Price index not only remains above 3%, but it also ticked upwards slightly in February. Even the Personal Consumption Expenditures Index, the Federal Reserve's preferred measurement of inflation, was up over 2.5% from February 2023 (2.8% excluding food and energy). With inflation being so stubborn, and remaining above their long-term goal, it is likely that "higher for longer" will be the case (i.e., a higher interest rate environment will last for longer than people previously thought).  

This excerpt from a recent Federal Open Market Committee (FOMC) report, known as the "Dot Plot", reflects how views on the economy have changed. While some market analysts have anticipated as many as seven rate cuts in 2024, this shows that the FOMC members anticipate that there will likely only be three cuts in 2024, leading to a Fed Funds rate ranging from 4.50% to 4.75%, from the current range of 5.25%-5.50%.

This would also explain the recent bond market performance, since a lack of anticipated rate cuts would lead to investors searching elsewhere for more attractive return prospects.

A "soft landing" is - unofficially - when monetary policymakers both slow the pace of economic growth and reduce inflation without causing a recession. So far, that appears to be the most likely scenario. I think even a mild recession, or a "soft-ish" landing, could be understandable at this point. One factor I have been monitoring has been the unemployment rate, which is beginning to rise slightly despite being at near historic lows.

Unemployment was measured at 3.9% as of February 2024, the most recent reading as of publication. If actions by policymakers cause consumer demand to slow too much, companies may begin to slow production &/or reduce headcount as an attempt to maintain progress toward their financial goals. This could lead to an increase in unemployment, causing consumers to spend less, and continuing the cycle. 


2023 was all about AI-related stock "FOMO" (fear of missing out), resulting in a few stocks with outsized gains & dragging the market along with it. I believe 2024 will be all about the FOMC's focus on managing inflation. If inflation remains stubbornly above the long-term goal of 2%, interest rates will be "higher for longer" and will dominate the conversation all year (up to & possibly during the election).

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]]>Fri, 05 Apr 2024 13:34:38 -0500<![CDATA[Recession or Soft Landing?]]>https://www.omnidivitia.com/blogs/post/recession-or-soft-landingConsumer spending and low unemployment have helped counter actions by the Federal Reserve.]]>

Jackson Hole could provide some insight.

Last year during his speech at Jackson Hole, WY, Federal Reserve Chairman Jerome Powell stated the following:  


"Restoring price stability will take some time and requires using our tools forcefully to bring supply and demand into better balance.  Reducing inflation is likely to require a sustained period of below-trend growth.  Moreover, there will likely be some softening of labor market conditions.  While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will likely also bring some pain to households and businesses.  These are the unfortunate costs of reducing inflation.  But a failure to restore price stability would mean far greater pain."


What is unclear is not if the Fed feels accomplished; it's likely they do not.  Rather, the question may be how much further do they need to go?  Despite inflation's decline over the last year, it has done so without slower growth or significantly softer labor conditions.


Growth Continues to be Strong

This chart reflects GDPNow, an estimate of the Gross Domestic Product for the United States, managed by the Federal Reserve Bank of Atlanta.  The GDP estimate had slowed to be just above an annualized rate of 1.13% in 1Q23, but the estimate for 3Q23 is now roughly 5.75%, even with the reduction of the money supply (M2) and all of the interest rate increases that have occurred.

The Labor Market is Still Tight

The unemployment rate has been pretty stable over the past year, according to the Bureau of Labor Statistics.  In fact, despite the four-week average of initial jobless claims moving slightly higher this year, the unemployment rate sits lower than a year ago, at 3.50%, much lower than the theoretical rate of "full employment".  Continued claims for unemployment insurance are also lower than before the COVID-19 pandemic began (1,879,000 for the week ending 1/4/2020; 1,716,000 for the week ending 8/5/2023).


Why is this important?  A tighter labor market leads to higher wages, which likely also leads to more consumer spending.  It seems as if the full impact of the interest rate increases over the last 18 months still has to be felt.  We may be toward the end of the Federal Reserve's rate-hiking cycle, but I would not be surprised if the Fed keeps rates higher for longer than what some believe.

Watch Household Credit & Consumer Spending

Consumer spending & household debt could be one measure signaling if the US could have a soft landing or a recession.  The housing market has already slowed over the past 12-18 months, as interest rates have risen and sellers (with mortgages at historically lower rates) are hesitant to upgrade with mortgage rates around multi-decade highs. Affordability is also much lower due to limited housing supply.  In addition, according to the most recent quarterly Household & Credit Report by the New York Federal Reserve Bank, two concerning points  were raised.




  • "Credit card balances saw brisk growth, rising by $45 billion to a new series high of $1.03 trillion."
  • "Credit card balances saw the most pronounced worsening in performance in 2023Q2 after a period of extraordinarily low delinquency rates during the pandemic."

Higher delinquency rates could lead to tighter lending conditions and increased reserve requirements for lenders.  This could accelerate a slowdown in demand, as well as impact lender earnings, which could then result in lower stock prices for financial services companies.  Another point to remember:  the student loan payment moratorium ends August 31, 2023. (What do you think will happen when payments start up again in October?)

Conclusion

Continue to watch reports on household credit & consumer spending closely as we enter 4Q23, especially during the holiday spending season.  In my opinion, if consumers initiate a slowdown in spending (because they feel less confident in the economy), we may have a more moderate slowdown, i.e., a soft landing. Households would likely pay down debt &/or improve their respective balance sheets.  However, if lenders proactively created a somewhat tougher lending environment in order to manage risk & mitigate the increase in delinquency rates, it might induce increased market volatility and lead to a recession.  While painful in the short term, it could also create better long-term opportunities because of the more reasonable valuations.


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]]>Wed, 23 Aug 2023 11:27:41 -0500<![CDATA[All Things A.I.]]>https://www.omnidivitia.com/blogs/post/All-Things-A.I.The first half of 2023 was one with strong market performance, as the S&P 500 returned 16.89%.  However, deeper analysis paints a picture tha ]]>

A.I. related companies seem to be driving this market.

The first half of 2023 was one with strong market performance, as the S&P 500 returned 16.89%.  However, deeper analysis paints a picture that isn't quite as rosy.  The S&P 500 is a market-capitalization weighted index.  When you look at the equal-weighted index, the return is only 5.97%.  The difference is due to the significant influence of some of the largest companies, particularly those related to artificial intelligence.  As of 6/30, seven mega-cap companies accounted for about 26% of the S&P 500 index, had an average return of 93% in 1H23, and a weighted return of 19.77%  This also means that the remaining 493 stocks (with a 74% weighting) actually had a loss of about 3.90%.  There are also some concerns about the sustainability of this market's rally.

Valuations Seem High

As of 6/30, the Wilshire 5000 stock index (intended to represent the entire US stock market), is 1.6 standard deviations above its long term trend.  This is a signal of being overvalued.  Also, even with earnings recovering slightly, markets seem to ignore not only the Fed's current actions, but also the likelihood that they will likely have to continue raising rates because inflation has been so stubborn, and becoming embedded in consumer prices, which has been a stated concern ("...long-term price stability.")

In other words, if the trendline in the previous chart (in red) was translated into a baseline (dotted line in this chart), the current market's deviation is similar to the "dot.com" bubble from 1999-2000, although not quite as large as it was before the Fed started raising interest rates in March 2022.

A Turn in the Business Cycle?


The Conference Board's Leading Economic Indicators have been less than its Coincident Economic Indicators for the last three months.  In other words, based on the chart to the left, not only have survey results indicated more a more pessimistic outlook within 6-12 months from that particular survey date, but for the last three months they also have indicated that the near-future business cycle will be worse than the current situation.  With the first gap being in March 2023, this indicates a potential turn in the business cycle starting in 4Q23 or 1Q24.

Paying a Premium for More Risk?

As of 6/30, the earnings yield on the S&P 500 was about 5.22%.  The yield on the 3-month US Treasury bill was 5.46%.  This means that investors are literally paying 0.24% to take on the risk of the stock market (instead of receiving a benefit of 4.5-5.0%).  At some point, risk management and fundamental valuations will come back into focus, but as long as the market is increasing, many are content to simply ride the wave.  This could lead to some good opportunities when the market corrects, especially if it overshoots the mark trying to correct.


In the short term, "caveat emptor" (let the buyer beware).  To learn more about how our process could benefit your situation, click the button below.

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]]>Tue, 04 Jul 2023 16:07:13 -0500<![CDATA["When Someone Tells You Who they Are, Believe Them the First Time" - Maya Angelou]]>https://www.omnidivitia.com/blogs/post/believe-them-the-first-timeThe Fed, the Treasury bond market, and the VIX are all trying to tell us something...]]>

Maya Angelou Could Have Been Talking about Jerome Powell

Maya Angelou's famous quote is quite apropos with reference to the Federal Reserve.  If you ever had a question on what Jerome Powell is trying to do right now, all you need to do is read his comments from Jackson Hole this past August.


"Restoring price stability will take some time and requires using our tools forcefully to bring supply and demand into better balance.  Reducing inflation is likely to require a sustained period of below-trend growth.  Moreover, there will likely be some softening of labor market conditions.  While higher interest rates, slower growth, and softening labor market conditions will bring down inflation, they will also bring some pain to households and businesses.  These are the unfortunate costs of reducing inflation.  But a failure to restore price stability would mean far greater pain."

The Fed can't be any clearer.  Demand must slow down to meet current supply levels.  Economic growth will likely need to slow for some time in order to bring inflation down from above 8% down to its longer-term target of 2%.  This means making borrowing more difficult & taking money out of circulation, Once demand slows, corporations will likely reduce costs by cutting production and reducing headcount.  Consumers would likely reduce discretionary spending, and focus more on the necessities.  The earnings performance and guidance for 3Q22 & 4Q22 could be an indication of how optimistic or cautions consumers may be, especially given the holiday season that is so important for retail companies.  

The spread between the 10-year Treasury and the 2-year Treasury has also been negative in recent months.  This occurrence is often seen before a recession, which is usually not officially declared until several months after the fact.  


Volatility is also Increasing

Another possible harbinger of a market pullback is the Volatility Index ("VIX"), also known as the "Fear Gauge".  Over the last 20 years, the VIX has been around 30 and associated with the following events:

  • January 2020 = The early stages of the COVID-19 pandemic
  • September 2011 = Double-dip recession fears; European debt crisis; US credit rating downgrade by S&P (from AAA to AA+; the US had a AAA rating since 1941).
  • September 2008 = Global financial crisis

Bull markets are more enjoyable than bear markets such as this, but we know times like this happen occasionally.  If you're uncertain about what all of this means for your family's financial plan or portfolio, click the button below to schedule a call.
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]]>Tue, 18 Oct 2022 14:55:21 -0500<![CDATA[No New Surprises]]>https://www.omnidivitia.com/blogs/post/no-new-surprises

Fed Funds rate now at 3.00%

Today's move by the Federal Reserve is no surprise. In fact, it is largely a stated continuation of its recent moves. The only surprise is a slightly higher target for the "terminal rate", which is the peak rate before they would start cutting (not that cuts would occur immediately). The median terminal rate is 4.60% sometime in mid-2023. It wouldn't surprise me to see that go slightly higher if inflation doesn't slow down further; 4.60% is only essentially 2 more increases of 75 basis points.

Jerome Powell is being extremely clear. There will be some pain; there is no easy solution to this. I believe the likelihood of a "soft landing" is much less than what I think many believe it is. Be patient, manage your risk, and focus on fundamentals. Govern yourself accordingly.

One of my recent commentaries goes a little more in depth on this topic.  Click here for more details.  Registration is required.


#federalreserve #FOMC #economy #jeromepowell

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]]>Wed, 21 Sep 2022 15:15:40 -0500<![CDATA[Jobs and Inflation]]>https://www.omnidivitia.com/blogs/post/Jobs-and-Inflation


Recently, a friend asked me how inflation and jobs are connected. My response is included below. Let me know what your thoughts are.
-------------------------------------------------
"Short answer: More jobs = More Aggregate Wages = Greater Consumer Demand & Lower Unemployment/Tighter Job Market = More demand for qualified talent = wage growth ...which eventually could lead to inflation.

Long answer:  Forgive me for this, but I think it will help to expound a bit.  Also note that these comments are generalities, and are affected by a myriad of factors not mentioned here.

Inflation is essentially having more money for something than there are of that thing to consume at a given time (which leads to a price increase).  In other words, too much money for too few goods.  Companies produce goods or acquire resources for services, in part, based on projected consumer demand.  Consumer demand (in aggregate) is affected by many factors, including the job market and how much those jobs may pay (wage growth).

If unemployment is high, consumers as a whole won't have as much money to spend on goods & services.  The Federal Reserve (Fed), through its Open Market Committee (FOMC), implements monetary policy to manage interest rates & the supply of money in circulation.  Specifically, when the economy slows down & demand is reduced, they'll lower interest rates to make it easier for consumers (& corporations) to borrow money to consume (or produce) goods.  During the current recovery, as the article suggests, while the headline unemployment rate has come down to 6.1%, there are many who are still unemployed, underemployed, or are "discouraged"/have given up looking (roughly 12% as of August 2014).

At the same time, corporations slow the production of new goods in order to work off current inventory.  Because they aren't producing as much, and don't forecast consumer demand improving sufficiently in a given time frame, they seek to be as cost-conscious as possible.  Reducing their headcount is often where that effort leads.  Households, in turn, reduce their spending, and recently have also improved their savings rates & personal balance sheets by paying down debt.  This is good for the household, though it does also take money out of circulation and reduces demand.

At some point, a balance is reached.  Unemployment begins to decline, consumers slowly begin to spend a little more, and companies begin to hire again. This is the proverbial game of "Chicken", because they are somewhat interdependent.  When jobs return at a level where there is increased competition for talent, not only are more people working as a whole, but they are also making more money.  Household disposable income increases, spending likely increases, and inflation slowly becomes more of a threat.  The Fed's challenge is to make sure they don't raise rates too soon - derailing the recovery - but also keep inflation in control.

We are not at the point where inflation is a concern."


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this article may not develop as predicted.

]]>Thu, 18 Sep 2014 13:58:29 -0500