Week Ending July 7, 2023
Nonfarm payrolls increased by 209,000 in June… The consensus was 220,000 and there were downward revisions to April and May that, combined, showed 110,000 fewer jobs than originally thought.
What does it mean – Par for the course. Another day of confusion by the Bureau of Labor Statistics (BLS). According to the payroll survey, it looks like there is strong growth, yet the household survey says there were job losses, and the unemployment rate rose .3%, which suggests the household survey might be a bit more accurate, yet still way off.
I would not bet on the BLS. Payroll numbers may be much slower, but we are not sure what the real numbers are as the government continues to report numbers that get revised down. The point of this is that Wall St and the media, and of course the White House, grab the payroll headline number and claim job growth is strong. However, reality might be it is slow now, and getting slower.
The real problem is what numbers is the Fed using? We do not know. The best estimate based on conversations with economists is there are less jobs being created than the data indicate, but there is still growth.
And the crowd goes wild…The third estimate for Q1 GDP saw an upward revision to 2.0% from 1.4%.
What does it mean – Don’t get too excited. In real terms it’s a rounding error. One must remember this is based on an annualized number not the quarter. This means that GDP growth for the year is expected to go up 2% for the year based on this quarter’s number. The good news is it is up from just over a 1.4% estimate for 2023.
What is missing from the media is that government spending increased over 5% for the quarter accounted for .85% of Q1 growth. Along with the $4 Trillion increase in debt, government spending is unsustainable at this level.
Import prices fall…On a year-over-year basis, import prices were down 1.2%, and down 0.7% excluding fuel.
What does it mean – Globally, inflation is easing a bit. Not to mention as the Fed increases interest rates, this also strengthens the dollar against foreign currency if those countries are unable to react to the rise in interest rates by the Fed making the dollar more attractive to international investors. From the graph below you can see as the Fed was raising rates the dollar strengthened vs. almost every major trading partner.
Manufacturing down…The ISM Manufacturing PMI report showed further deterioration in US factory activity last month.
What does it mean – Hard to see real economic growth if we do not make stuff people want or can afford to buy.
Manufacturing employment has shifted back into the negative supporting the household survey.
Real Estate continues to struggle…With mortgage rates near 7%, cost of financing continues to put pressure on buyers and sellers.
What does it mean – as well as depressed inventories, interest rates remain a headwind for the housing market. See graph below.
Tighter credit conditions typically precede labor market weakness…Cost of capital and tightening of credit usually hits the job market.
What does it mean – The slowdown in job openings has been concentrated in rate-sensitive sectors but is starting to spread.
You could have to pay taxes on your catch-up contributions to your 401K if you make over $145,000 per year…In 2022 Congress passed the Secure 2.0 Act. They promised you that you would not pay more in taxes.
What does it mean – If you make more than $145,000 per year starting in 2024 and are over 50 years old contributing to the catch-up in your 401K, the amount in the catch up will be taxable and treated as a ROTH contribution. Meaning the contribution will be an after-tax contribution and would result in higher taxes. The good news is the contribution will go into a ROTH account and grow tax free. Per the IRS, this section fully applies to individuals who earn $145,000 or more. They may fully deduct the income that they contribute to a 401(k) account up to the standard annual limit. They cannot deduct any income that they use for catch-up contributions and must pay taxes on that money. They must put this money into a Roth account, which will return its growth untaxed.
Let’s roll America!!
Doug De Groote, CFP®, MBA, CTC
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