Broker Check

A Tale of Two Economies

June 05, 2023

U.S. Markets posted solid gains on the big news of a budget deal that averted a potential financial catastrophe. Wait, no that wasn’t it. The markets posted solid gains on news of a continuing strong labor market showing how strong the economy is. Actually, both stories played a role in all three major indexes rising about 2% for the week.

Congress was able to reach an agreement on raising the debt ceiling last week. That was good news for the stock market, but not as good as the solid jobs report that came out on Friday. U.S. employers not only added a surprising 339,000 jobs in May, blowing past estimates, but April’s figure was increased by an additional 93,000. This is the first tale of the U.S. economy.

The second tale of the U.S. economy shows a different side to what is occurring in the business sector. The chart below from the Federal Reserve shows Gross Domestic Product (GDP) declining as lending standards from banks are increasing significantly. This is a result of higher interest rates and concerns from lenders that a possible recession is on the horizon. If that occurs, an increase in business loan defaults is likely. Banks are tightening their lending standards to protect themselves from that possible outcome.

Businesses are not only finding it more difficult to obtain new financing. When they do find it, it is costing them more. The chart below from the Federal Reserve shows the effect of rising loan costs that results in much lower demand for financing.

This lower demand and higher costs for business loans is the exact opposite of what you would expect with the recent employment numbers. Reduced lending/business activity is typically associated with layoffs. However, that’s not the case now. As I said in the title it truly is a tale of two economies.

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The Markets and Economy

Saudi Arabia, is facing off against Russia. The de facto leader of OPEC has been pushing for oil cuts to bolster the price of crude. However, Moscow is pumping as much oil as possible to pay for its war effort against Ukraine.
Home prices rose in March for the second straight month. A shortage of available homes continues to fuel competition among prospective buyers.
China’s era of rapid growth may be over. The world’s second-largest economy is still struggling to recover from the harsh Covid restrictions as well as a renewed crackdown on foreign corporations. China’s economy is also dealing with massive real estate overdevelopment in less-than-desirable areas.
The U.S. and 13 other Asia-Pacific nations agreed to expand supply-chain cooperation. The agreement delivers an early win in a new U.S. led initiative to strengthen economic ties with the region’s “friendly nations” amid rising tensions with China.
350 tech executives and artificial-intelligence (AI) scientists issued a joint statement last week sounding the alarm about the possible threat AI could pose. While the benefits are many, the group believes the technology poses an extinction-level risk much the same as a pandemic or nuclear war.
Job openings rose in April and layoffs fell as employers demand for workers remains strong. Employers reported 10.1 million jobs available in April, rising from March’s revised figure of 9.7 million. Over the same period, layoffs fell to 1.6 million from the previous month’s 1.8.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.

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Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

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