🐌 The great wait

Hey hey, happy Monday!

Today, I’ve got a few thoughts for you on how the economy has settled into a waiting period for lower rates — and what that means for the months ahead.

BTW, I wrote this with COVID, so consider this newsletter my flu game🤘

Hopefully, we’ll all bring home a W today.

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We’re bad at waiting these days.

Delivery is lightning fast, information is abundant, and instant gratification is just a phone swipe away.

But lately, a lot of us have been happy to wait when it comes to big decisions, paralyzed by over a year of high rates. A dip in market rates and promises of even more cuts haven’t been enough to stir up activity.

Friends, we’re stuck in the “great wait” economy.

Pull up a chair and get comfy, because we might be here for a while.

Businesses aren’t hiring people, but they’re aren’t firing people either.

Take the latest jobs report, which showed that companies are adding jobs at the slowest pace since 2020. Still, layoffs were low in August, comprising just 1% of the workforce.

Nor are employees making big career moves. The share of American workers who quit their jobs has dwindled to around 2%, the lowest in six years (when you exclude the COVID shutdown days). Yet almost 81% of Americans ages 25 to 54 hold a job, a two-decade high.

Guy Berger at the Burning Glass Institute has coined this job market dynamic “the Great Stay”. Businesses are quietly cutting back, eliminating positions when people leave and reducing hours, while their workers don’t feel good enough about the job market to make a move.

It’s not just the job market. Housing market activity has been frozen for a while, hindered by a lack of homes for sale and sky-high mortgage rates. Experts thought a drop in the 30-year mortgage rate would excite prospective buyers, yet a measure of pending home sales hit a two-decade low last month.

We seem to be at the point where rates are high enough and the economic outlook is dour enough that both average Americans and corporate America have decided to do nothing.

OK, this might be a bit of an exaggeration. We’re still clocking in, eating out, flying to college football games, and hitting up those Labor Day sales.

But we’ve largely decided to punt on any big financial decisions for the foreseeable future.

This particular economic state isn’t necessarily bad. It’s not the desperate penny pinching or job slashing you typically see in a recession. People are still employed and earning money at a pace noticeably faster than inflation.

Atlanta Fed estimates show that the economy likely grew at a 2% annualized rate this quarter, about the average growth we saw in the 2010s. Those college football trips and meals out amount to something in the grand scheme of things.

Also, companies are finding ways to do more with the workforce they have instead of expanding it. Productivity – or the measure of worker output per hour – grew at a 2.7% year-over-year rate last quarter, more than double the average productivity growth we saw in the 2010s.

Still, the wait is excruciating. It feels like we’re constantly on the knife’s edge of crisis with no resolution in sight.

The danger zone, as I wrote last month.

The Fed – that group of nerdy academics in charge of rates – is pulling the right levers. Mechanically, lower rates should entice people to spend, and prompt businesses to hire and invest. But that hasn’t happened yet. Look at the 30-year mortgage rate – it’s down to 6.4%, much lower than the 8% home buyers were facing last October.

How low rates need to go to pull America out of the great wait? Fed members think it’s about two percentage points lower than where we are now. Three percentage points of cuts would get us to the point where the current Fed funds rate is in line with price growth, as measured by personal consumption expenditures data. There are academic formulas like the Taylor Rule that suggest how to calculate the ideal rate for the economy based on expected inflation and economic output gaps.

But at this stage, any calculation – no matter how thoughtful or precise – is just an educated guess. The economy is way too dynamic to be pinned down by a single magic rate.

We might be stuck in a vicious cycle, though. If enough of us delay big financial moves in hopes of lower rates down the road, we may never make it out of this rut. Redfin has noted that homebuyers are waiting to see how low mortgage rates will drop after the Fed starts cutting. It’s hard to say when, or if, enough people will be satisfied.

For what it’s worth, Wall Street seems sick of waiting. They’ve skipped straight to the recession, punishing every economic report that looks somewhat ominous. 

While I don’t fully agree with that interpretation, it may be a sign of things to come in the stock market.

It’s difficult to definitively say we’re in a recession. But it’s equally hard to claim we’re in a good place.

So, for now, we wait while preparing for the worst and hoping for the best.

Don’t give up on the stock market.

This is when resilience and planning matters most.

Thanks for reading!

Callie

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