There is one thing as bad, sometimes worse, than higher interest rates: rising unemployment. Combine that with a weakening economy which usually results in the FED lowering interest rates, and a weakening labor market that also impacts mortgage rates..... but who can buy a house without a job, no matter how low rates are and if inflation remains sticky?
Today we are living in very unusual times with major structural shifts happening. Here are some facts to ponder:
1. Inflation (rising prices) has been kept higher, mostly because of tariffs and loss of (mostly cheaper) labor via deportations and an aging population retiring. A bigger chunk of the tariff cost to consumers has been absorbed by accelerated imports before the tariffs kicked in and corporations capable of absorbing a bigger chunk of this cost because they had raised prices so much between 2020-2024 and continue to do so. Corporate (and banker profits) are also being fueled by enormous new efficiencies delivered via the adoption of A.I. and robotics.
2. The above is leading to lots more layoffs. Some jobs are becoming replaceable via tech (nothing new). And re-adjusting and re-positioning these people into new jobs will take time.
3. While new government policies aimed at fueling more manufacturing in the US should be good for us in the long term, in the short term they will not register much. Building a productive factory takes years, not months. Manufacturing jobs are actually down, not up. And to manufacture profitably in the US with competitive pricing corporations will automate as much as possible. Amazon already uses 50% robotics.
4. Energy is a huge cost factor in everything. New policies around this should help, but the demands from the tech sector may negate all new energy sources and raise these costs. Fueling inflation too.
5. While we argue about the causes of a changing climate, insurance companies see the rising replacement costs from recent storms and other climate-related events and keep raising premiums. Another source of inflation, especially housing inflation.
6. If the wealthiest consumers slow their spending, the economy could slow down FAST. 50% of all consumer spending is concentrated amongst the top 10% of earners. Most of the equity-wealth-creation has come from a very small group of AI-related stocks. This further highlights the massive (and growing) wealth and income divide that is also fueling more political division and social anger.
We are currently living in two economies. A robust golden age for the top 10%, and another much more challenging environment for the other 90%. In that 90%, job losses can be much more debilitating as they have lower savings, higher debt levels and are much more reliant on income than investments. So while that may be 'someone else's problem', don't forget how unemployed people turn to government (taxpayer) funded social safety nets to survive when unemployed. So while we watch interest rates, equity markets, gold prices, etc, let's keep our eyes on employment data, the FED is!
