📰 How To Cut Through The Noise Of Economic And Business News Headlines
We are set for the release of a ton of economic and business data this week, U.S. consumer confidence, U.S. Q2 GDP, Euro Area inflation & Q2 GDP, U.S. personal consumption expenditures, consumer spending, and a slew of major corporate Q2 earnings reports such as Apple, Alphabet, Amazon, and Microsoft. However, the spotlight will be on The Fed's interest rate decision and press conference on Wednesday. Heading into this week, many leading economic indicators suggest that growth is decelerating due to rising prices, geopolitical events, and the natural deceleration to a strong recovery.
We discuss in this episode of The Wealth Effect Podcast:
💸 U.S. GDP, Money Supply, and Velocity of Money
📈 The Dollar And Major Global Currencies
📉 Yield Curve and Leading Economic Indicators
Matt Faubion, CFP®
Founder - Wealth Manager
Show notes and charts:
The current consensus estimate among economists is that the economy grew about .5% in the second quarter. Even if this turns out to be wrong, this would not be unexpected given rising inflation. What is driving this inflation, how long it will last, and who is politically to blame are matters of heated debate. One contentious area since the pandemic emergency economic policy response has been the money supply and whether its growth has driven prices higher across the economy.
The money supply has grown significantly since 2020
The chart above shows one measure of the money supply known as M2, which includes components such as U.S. currency, checking and savings accounts, and money market funds. This measure rose dramatically as Congress and the Fed responded to the pandemic.
A stronger dollar naturally tightens economic conditions
All of this is fairly technical, but there is a simple point: Fed actions affect the economy with a long lag and can often impact consumers and businesses in unexpected and indirect ways. For example, interest rate hikes have helped strengthen the U.S. dollar to the point that even the Euro is hovering around parity, which has two implications for inflation and growth.
First, a strong dollar is great news for American travelers and consumers buying foreign goods who will find that their currency goes much further. This naturally lowers inflation since the prices that consumers pay will decline. In theory, a stronger dollar reduces oil prices since the commodity is predominantly denominated in U.S. dollars in the global market.
Second, a strong dollar slows the economy somewhat since foreign buyers will find U.S. dollar-denominated products more expensive. This can also drive down inflation since there will be less demand for certain goods and services. Thus, a stronger dollar naturally tightens financial and economic conditions, which may slow the economy but, more importantly, combat inflation.
Leading indicators suggest the economy is slowing
Of course, the challenge lies in the balance between battling inflation and preventing a deep recession. Fortunately, corporate earnings and consumer balance sheets remain strong, increasing the argument that any recession may be mild. Regardless of the exact outcome, market prices have been adjusting accordingly. The S&P 500 is still hovering slightly above bear market levels, bringing valuations to their most attractive levels in years. However, should these trends continue, that would not be unprecedented given the macro-economic backdrop of tightening monetary and fiscal policy, rising interest rates, a strong dollar, slowing (or contracting) economic growth, and high single-digit inflation levels.
The bottom line: So while there will be many economic news headlines crossing our screens this week, with particular attention to The Fed's monetary policy decision and press conference, most of this data is all noise in the context of successfully building, protecting, and compounding wealth over time.
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