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New data shows weakening in the US economy – Friday’s jobs report showed that unemployment ticked up to 4.1% in June. Credit card delinquencies and debt are also on the rise. Consumers, who represent about two-thirds of the economy, are shopping less.
But investors don’t seem to mind it.
Both the S&P 500 and Nasdaq hit new record highs on Friday following the release of the employment report. All major indexes closed out the shortened trading week higher, and the S&P 500 is up a staggering 17% thus far year-to-date.
So what gives? One simple explanation lies within the hallowed halls of the Federal Reserve’s HQ in DC. Inflation is easing, and so is economic growth – that combination means interest rate cuts could be on their way.
Some analysts think there’s more to it. These numbers represent a return to a more normalized pre-pandemic economy. Traders love normal.
But there could be some surprises coming as the election landscape in the US heats up and President Joe Biden faces tough questions in recent days about the viability of his reelection campaign.
Before the Bell spoke with Michael Reynolds, vice president of investment strategy at Glenmede, about investors, the economy and political landscape.
Before the Bell: Markets barely reacted to Friday’s jobs report. Were you expecting that?
Michael Reynolds: It seemed like a non-event for markets because it’s a status quo continuation of trends that have been ongoing and a normalization of the labor market.
The Fed has an estimate of what it calls the natural rate of unemployment. What that means is that in a steady-state economy where things are well-functioning without a lot of disruptions, you should expect about a 4.2% rate of unemployment if you’re at full employment. We started the year at 3.7%, and we’ve been drifting higher to that natural rate. Some people are pointing to that as a deterioration in the labor market, but we think that’s a little misguided given that we had such an abnormal labor market for a long period of time, throughout the pandemic, and post-pandemic. You should expect to see this drift upwards if the economy is normalizing.
How did the jobs number play into expectations for Federal Reserve interest rate cuts later this year?
We like to look at average hourly earnings, which are important given that the service sector is still seeing elevated inflation rates and wages are a big component of that. We saw a 0.3% increase there month-over-month, which is a little softer than it was last month. Things are moving in the right direction.
Are we ready to declare mission accomplished on getting inflation under control? Certainly not. But we’ve started to see some really encouraging results, especially out of last month’s consumer price index report, which was basically flat.
This week we’ll get another CPI report, and that’s going to be really front and center. The Fed is going to be watching it very closely to see if last month was an outlier or the start of a new trend. Our expectation is two rate cuts this year is base case. September is probably going to be the first “live meeting” where rate cuts are a real possibility. But there’s still a lot to be seen until then – a few more inflation reports, a few more jobs reports that the Fed will have to react to.
How sure are you about September?
When I circle September I’m using a pencil instead of a pen, because I might need that eraser. Inflation has shown a couple of false starts in getting back to that 2% target. What’s giving us a little bit more comfort this time is that the services side is really coming down, and we didn’t see that in the false start in 2023.
How are you feeling about the health of the consumer? How is that impacting markets?
If you look at some of the underlying components of this jobs report, the number of employed persons actually increased, even though the unemployment rate increased. What happened is your denominator increased, more people joined the labor force this month. So I don’t see this report as a headwind at all to the consumer, there are more people working and more people looking for work. That’s a good sign in an economy like this.
But there is some risk to the consumer in this period. We’ve been looking at things like excess savings built up over the pandemic. That’s largely been spent through, that cushion is largely gone. That means that consumers have just a normal level of saving in aggregate.
The other thing we’re looking at is delinquency rates on credit cards, especially the interest rates being charged on those credit cards, as a potential warning sign. It seems a nascent warning sign, that it’s something to be watching. We don’t see that as an imminent risk to the consumer right now.
We recognize that to have a thesis on the economy is to have a thesis on the consumer. The consumer makes up two thirds of all economic activity, but, as it stands now, we think the consumer, in aggregate, is still at a pretty healthy point right now.
It seems like you’re feeling pretty optimistic, but there’s always room for an October surprise. How do you think the market would react to big election news? There are reports circulating that President Joe Biden is weighing dropping out of the presidential race.
Markets have a discounting mechanism, and over the past year and a half, the markets have had opportunities to hear from the two major candidates about their policy initiatives and start to price that in over time. In a hypothetical scenario where we’re looking for a new nominee for a major party, the market’s going to have to do that on an accelerated timeline, not just game out all the different possible candidates that could take the mantle but also try to figure out what those candidates stand for.
There’s going to be an accelerated process of vetting candidates, not just for political purposes, but the market is going to want to vet their ideas as well and start to game out the probabilities. We’ve got tax cuts expiring next year. What do these candidates want to do in that case, what is their take on tariffs? We almost always see higher volatility going into elections. That could especially be the case this year.
Diaper change: Japan’s aging society is transforming the baby care business
The world’s population is getting older in what the United Nations calls an “irreversible global trend,” driven by longer lives and smaller families.
The number of people aged 65 and older is expected to more than double to 1.6 billion globally by 2050, according to a UN report published last year.
In Japan, this change is threatening one of the world’s largest economies as the percentage of older people grows and fewer couples have children.
In early June, the country said the number of babies born fell for the eighth straight year, hitting a record low of 727,277 births in 2023 since Japan started compiling data more than 120 years ago.
A few months earlier, Japan said that one in 10 people were aged 80 or older, making it the oldest country in the world. Last year, almost 30% of the Japanese population was 65 or older.
In June 2023, Japanese Prime Minister Fumio Kishida unveiled a multi-billion dollar package of measures to encourage families to have more children. Japan is trying to tackle a demographic crisis that could impact pension funding and health care as the workforce shrinks and demand from the aging population surges.
The growth of the older population is also changing the consumer product market.
Demand for adult diapers in Japan has been rising, while the need for baby diapers has fallen.
The global market value for adult diapers was pegged at $12.8 billion in 2023, according to market research provider Euromonitor International. It is expected to reach almost $15.5 billion by 2026. In Japan, the adult diaper market stood at $1.7 billion in 2023, and is expected to grow to $1.9 billion in 2026, accounting for more than 12% of the global total.
One example of a company adjusting to this shift is Japanese manufacturer Oji Holdings, which announced in March it would stop producing baby diapers for the Japanese market later this year to focus on incontinence products for adults.
The company will continue to run its overseas baby diaper business, it said. Their combined baby diaper sales in China, Indonesia and Malaysia have grown despite a slowdown in the domestic market, where the company sold 7.3% more diapers for adults than babies in 2023.
These two amusement park giants just merged. Roller coaster fans are nervous
Six Flags this week completed an $8 billion merger with rival Cedar Fair to create the largest amusement park operator in the United States. Together, they operate 42 amusement and water parks across 17 states, reports my colleague Nathaniel Meyersohn.
The success of the deal will determine the future of these amusement parks, and diehard roller coaster fans are watching carefully. Some are optimistic that the condition of Six Flags’ parks will improve. Others worry it will become more expensive to get into their favorite parks.
Many amusement park fans are passionate about the parks’ design and history and notice the smallest of changes. For now, each park in the new company will keep its old branding and name. But fans fear the parks could lose their nostalgic elements and become a sea of corporate sameness.
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