July 2023

There’s a lively debate between those that believe that economic growth is slowing and those that believe it’s reaccelerating.  The actual outcome will have a marked impact on the progress made to date on inflation.  Clearly, employment growth has slowed from the torrid pace witnessed earlier this year.  The July nonfarm payroll report registered the first back-to-back sub-200,000 growth since December 2020.  Similarly, the jobs availability measure (JOLTS) has contracted to less than 10 million from the 12 million touched earlier this year.  But with 9.5 million unfilled jobs still available it seems unlikely that the economy is on the verge of a significant stumble.  On the other hand, retail sales for July paint a picture of a confident consumer seemingly unworried about income and willing to spend.  That creates a conundrum for economists.  Clearly certain industries, namely housing and autos, have slowed down or are in outright recession, but that has failed to impact consumption.

Consumer spending could fall in the near future though.  Student loan forbearance will end on September 1st when interest on outstanding debt resumes accrual and on October 1st student debt repayment resumes.  The 3-year COVID forbearance has been a boost to the income of many Americans and a resumption of student loan payments will likely weigh on consumption.

As for the reacceleration of inflation concern, we’re not buying into it, especially when measured year-over-year and excluding the volatile food and energy component.  Instead, it seems likely that the uptick in prices over the last two years will likely be permanent and will fail to reverse to price levels prior to the uptick.  In short, we don’t expect a deflationary impulse.

Last month the Treasury Department announced the 2023 third quarter borrowing plan and one money-center bank described it as a “Treasury tsunami.”  What they were referring to is ballooning budget deficit and the need for the Treasury Department to sell Treasury bills, notes, and bonds to finance it.  Approximately $254 billion of Treasury coupon notes and bonds were issued this past June.  The Treasury Department said the number will rise to $270 billion this month and will rise further to $281 billion this October.  Based on that October amount, the annualized issuance equates to $3.37 trillion, if the deficit does not rise further.  The runaway deficit spending, paired with debt ceiling stalemate in June was what prompted the Fitch debt rating service to downgrade the credit rating of the United States to AA+ from AAA.  The debt to GDP ratio, a measure of solvency, has ballooned since the 2008 financial crisis, then soared well above 100% during the pandemic.  According to the Saint Louis Federal Reserve, the Debt-to GDP ratio currently stands at approximately 120%.  To put that in perspective, the ratio wavered between 35% and 65% prior to 2008.

The Treasury Department also announced the intention to commence a Treasury buy-back operation in Q1 2024 as a means of “liquidity support.”  Bond dealers have complained that older notes and bonds have a wide bid-ask spread.  Treasury responded by announcing that they will buy back a maximum of $30 billion per quarter in an effort to reduce the transaction expense of older issues.  To summarize, Treasury is significantly boosting the debt they auction going forward but buying some of that debt back in the open market (to appease the dealers), while the Federal Reserve continues to let its portfolio of Treasury and mortgage debt run off.  This really is no way to manage monetary policy!


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