Markets continue to recover from the two-day sell-off that began the month of August. Good economic news since the decline is indicating that investors likely overreacted to the weaker-than-expected July jobs number.
The July inflation numbers released this week showed inflation easing as expected, and finally breaking below the 3.0% rate. The annual inflation rate now stands at 2.9%.
Additionally, consumer spending was up 1.0% in July, much better than the expected 0.3%. This is a strong rebound after consumer spending in June was down -0.2%. As we’ve often said, never underestimate the American consumers’ willingness to spend money, whether they have it or not.
https://www.cnbc.com/2024/08/15/retail-sales-july-2024-.html
By the major measures of economic health, the US economy is doing OK in this stage in our bout with inflation.
Unemployment rate: 4.3%, rising slowly
Inflation rate: 2.9%, declining slowly
Interest rate (Fed rate): 5.25% – 5.50%, expected to decline
GDP (2nd quarter 2024): 2.8%
GDP (3rd quarter 2024 forecast): 2.0% Atlanta Fed, 2.24% New York Fed
So, the US economy seems to be reasonably healthy today as the market’s expectation of a recession soon is low.
Now bear with me as I make what I feel is a critical point. These numbers don’t tell the whole story. The economy we have today is the direct result of rapidly increasing government spending in recent years. It wouldn’t be a problem if government spending was reasonably close to what the government takes in from taxes, tariffs, etc., but it’s not close at all.
In 2024, the federal government is expected to spend over $1.5 trillion more than it takes in, and they (or we, actually) will pay higher interest rates to borrow this amount. Sadly, we are going down the wrong financial road and there are no easy solutions to this problem that has accelerated since 2008. I personally don’t believe we can raise taxes high enough, nor do I believe we are willing to cut spending low enough, to meaningfully close this gap. Some are pinning their hopes on artificial intelligence (AI) to miraculously transform our economy, but hope is a terrible strategy. I believe it would take a complete overhaul of our tax system to raise enough revenue and realign incentives to make a meaningful difference, but Washington is too entrenched in the current system to change it without a crisis.
I only bring this up because we’re in an election season, and we’re supposed to be considering the direction of our country. However, I don’t hear any candidates making this topic a priority. But this only makes sense because an increasing number of US voters are willing to sell their vote to the highest bidder, either for government benefits or tax cuts, just as was predicted over 200 years ago.
“A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury.”
This quote attributed to Alexander Fraser Tytler, goes on to say,
“From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”
To be clear, both political parties (and ultimately us voters) are responsible for where we are today. This is not meant to support any party or candidate – just a different financial path forward than the one we’ve been on for many years and every election is an opportunity to change course. As C.S. Lewis said,
“We all want progress. But progress means getting nearer to the place where you want to be. And if you have taken a wrong turning then to go forward does not get you any nearer. If you are on the wrong road progress means doing an about-turn and walking back to the right road and in that case the man who turns back soonest is the most progressive man. There is nothing progressive about being pig-headed and refusing to admit a mistake…. Going back is the quickest way on.”
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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