Topic Tags: U.S Economy

The Back to Work Barometer

The allure of work-from-home flexibility continues to impact the utilization of office buildings across the United States. Based on analysis of data from key fobs — the form of identification that grants one access to an office building — average occupancy across the country in the last week was roughly 49.7%. Cities in Texas like Houston (60.0%) and Austin (58.9%) lead the pack in terms of office occupancy, thanks in part to population growth in the last few years, attractive employment opportunities, and newly developed office assets with attractive amenities. It is also worth noting that the occupancy spread across specific days of the week continues to be significant at the national level. As of the end of September, Tuesday (59.4%) and Friday (32.9%) were, on average, the highest and lowest days of the week in terms of occupancy, respectively.

Many are paying close attention to these trends, as utilization is a robust indicator of future demand for office assets. For instance, real estate managers can identify in- and out-of-favor trends within portfolios based on occupancy levels. Additionally, companies can study the patterns of employees to understand future office footprint needs. To that point, among businesses with at least 10,000 employees, 68% plan to undertake a reduction in office space in the near future. Smaller employers seem less inclined to reduce space at present, with 36% of businesses with fewer than 1,000 employees planning to downsize according to a recent publication by The Real Deal, a leading source for real estate news and information.

The data points displayed in this week’s chart underscore the notion that work-from-home trends will likely persist into the future, which will have impacts at various levels of society. For instance, cities must continue to adjust to a relative lack of foot traffic, which has already been disruptive to demand for restaurants, shopping centers, and parking garages. City budgets may also exhibit ongoing strain due to reduced funds collected from public transportation and lower tax revenues resulting from depressed office asset valuations. In conclusion, it is impossible to omit the “stickiness” of full or hybrid work-from-home environments which have persisted for more than three years when discussing the outlook for the office market at both the national and local levels. Marquette will continue to monitor dynamics within the office market and provide education and guidance to clients accordingly.

Survey Says…

During its September meeting, the Federal Open Market Committee (FOMC) opted to keep its policy rate unchanged — within a range of 5.25% to 5.50%. In doing so, policymakers signaled a commitment to keeping rates elevated over the coming months in order to achieve the central bank’s long-run inflation target of 2.0%. Fed officials appear to be taking a deliberate and cautious approach to recent policy now that interest rates have entered firmly restrictive territory and could potentially hinder growth. The Fed also noted the “lags with which monetary policy affects economic activity” in its September FOMC statement. These lagged effects would likely be an argument in favor of slowing the pace of tightening since the impact of previous rate increases may not yet be reflected in current economic data. To that point, the most recent Summary of Economic Projections, which in part serves as an assessment of FOMC participants as it relates to appropriate monetary policy, indicates that a majority of officials favor one more rate hike in early November before policy loosening in 2024 and beyond.

The September Summary of Economic Projections yielded additional interesting pieces of information related to how policymakers are viewing the current and future macroeconomic landscape. For instance, the median response of FOMC participants for 2023 GDP growth was 2.1%, which represents a significant increase from the 1.0% figure reflected in the June survey. The median estimate of long-run GDP growth in the September survey was 1.8%. Additionally, the September survey suggests that the median FOMC official expects the unemployment rate to tick up to 4.1% in 2024 before moderating to 4.0% over the longer term. Finally, median estimates for PCE inflation, which is the preferred measure of the Fed, sat between 2.0–2.5% over the coming years.

While it is encouraging to see inflation expectations moderating without substantial decreases in future growth or material increases in the projected unemployment rate, the Fed still faces obstacles related to obtaining these desired outcomes, including a potential government shutdown. Marquette will continue to monitor the actions of the central bank and keep clients informed accordingly.

The Implications of a Government Shutdown

The federal government will shut down if Congress is unable to pass funding legislation by October 1, and a bill appears increasingly unlikely amid contentious debates among lawmakers regarding levels of future spending. While some essential government employees (e.g., law enforcement personnel) will be unaffected and benefits like Medicare and Social Security will continue to be paid, other disruptions will likely arise as a result of a shutdown. This newsletter seeks to outline these disruptions and the potential implications of a prolonged stoppage on certain functions of the federal government.

Read > The Implications of a Government Shutdown

2023 Investment Symposium

Watch the flash talks from Marquette’s 2023 Investment Symposium livestream on September 15 in the player below — use the upper-right list icon to access a specific presentation.

 

Please feel free to reach out to any of the presenters should you have any questions.

The State of the IPO Market

After a red hot 2021, the initial public offering (IPO) market has materially slowed over the last two years amid an environment of equity price volatility and higher interest rates. Additionally, many of the companies that came to market during the post-pandemic boom have struggled in recent time as investors sought the safety of more proven business models and solid balance sheets. Listings within the Information Technology sector were hit particularly hard last year given widespread concerns about future growth and profitability.

Despite the recent headwinds within the IPO market, there have been several notable company debuts over the last several days. For instance, Arm Holdings, a British semiconductor and software design company, debuted last Thursday and climbed nearly 25% in its first day of trading before paring back gains to start the week. Additionally, Instacart, a grocery-delivery company, and Klaviyo, a global technology company, both started trading this week to varying degrees of success. According to Renaissance Capital, a total of 77 companies have gone public in 2023, which is higher than last year’s figure of 71. These developments have renewed hope among some that the IPO market will continue to heat up into 2024, as many companies that postponed public listings over the last two years are now reconsidering that course of action. That said, investors appear less likely to dive into these investments with the same levels of exuberance displayed in 2020 and 2021, which saw a combined total of more than 600 company debuts. Uncertainty related to future policy decisions of the Federal Reserve is partially responsible for this sentiment, as is the difficulty of actually valuing these newly listed companies given the changes to the interest rate landscape over the last few years. To that point, the majority of companies that listed in 2020 and 2021 are currently trading below their respective IPO prices, meaning investors that purchased equity in those deals are likely sitting on losses.

Marquette will continue to monitor dynamics within the IPO market and provide guidance to clients accordingly.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Feeling the Squeeze

As investors and economists meticulously analyze data to predict future actions of the Federal Reserve, the domestic economy has maintained resiliency thanks in part to robust consumer spending in recent months. That said, challenges exist for the American public, including the fact that consumer interest payments now constitute an increasing proportion of U.S. household incomes. According to the Bureau of Economic Analysis, this figure, which excludes payments related to mortgage debt, reached 4.3% as of the most recent report published on July 31. Incidentally, this marks the highest level observed since 2008 during the Global Financial Crisis.

To this point, U.S. households have managed to withstand these increases in debt servicing payments while simultaneously confronting elevated levels of inflation. However, there are warning signs that this resilience may not be sustainable, particularly among lower-income households that have depleted robust savings amassed during the pandemic. One indication that households are beginning to feel financially squeezed is the fact that delinquency rates have escalated over the last few quarters. According to the Federal Reserve, new 30+ day delinquency rates for consumer credit card debt and auto loans have spiked since bottoming out in late 2021, reaching 7.2% and 7.3%, respectively, as of June 30. While current rates of delinquency remain well below those observed in the aftermath of the Global Financial Crisis, both figures now exceed pre-pandemic levels and may be poised to continue rising.

There is also another challenge with which millions of citizens must now grapple — the resumption of student loan payments, which were reinstated earlier this month. Given this new reality, the proportion of total interest payments relative to household income will almost certainly increase, which may lead some consumers to rely more heavily on credit cards to maintain current spending levels. This type of waning consumer strength would likely have significant ramifications for securities markets and the broader economy, and Marquette will continue to monitor indicators related to these dynamics as we head into the fall.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

CHIPS Ahoy!

The U.S. Department of Commerce recently celebrated the one-year anniversary of the CHIPS and Science Act, which was signed into law on August 9, 2022. This federal statute provides nearly $280 billion in new funding and is aimed at boosting domestic research and manufacturing within the semiconductor sector. Additional goals of the statute include increasing onshore manufacturing jobs, bolstering domestic supply chains, and improving the positioning of the United States within the global semiconductor space. Specifically, the CHIPS and Science Act provides over $52 billion for U.S. semiconductor research, development, and workforce enhancement, including $39 billion in manufacturing incentives and $13 billion for research. Also included within the statute is a 25% investment tax credit for capital expenses related to the manufacturing of semiconductors and similar equipment.

U.S. Census Bureau data on private manufacturing construction spending by industry can be analyzed to help determine the effects of the CHIPS and Science Act on business activity. To that point, over the last decade, private manufacturing construction spending in the computer, electronic, and electrical industries (“CEE”) represented less than 15% of total domestic manufacturing construction spending. However, spending on CEE-related manufacturing construction increased significantly within the last 12 months, surging to more than $110 billion at the end of July. This spike in spending represents an increase of roughly 125% over the last year, and CEE expenditures now account for more than 55% of total private manufacturing construction outlays in the United States.

Perhaps unsurprisingly, the return of the S&P 500 Semiconductor & Equipment index is significantly in excess of that of the broader S&P 500 index since the CHIPS and Science Act was passed (53.7% vs. 13.3% for the trailing 12-month period ending July 31). While a portion of this rally can be attributed to optimism surrounding the prospects of artificial intelligence, the increase in manufacturing spending detailed above has also been a material tailwind for semiconductor companies and those in related industries. Additionally, the fact that the statute contained a clause that prevents companies from using taxpayer money to repurchase stock or issue dividend payments suggests that the majority of recent gains within the semiconductor space reflect organic growth. The sector could be poised for continued strong performance given the importance of semiconductors across the globe, however, investors should weigh any potential benefits offered by the space against risks which include increasingly lofty valuations.

Where’s the (Affordable) Beef?

Readers who have recently shopped for Labor Day barbeque supplies may lament the fact that beef prices have climbed to extreme levels. This sharp increase in the cost of beef is in part thanks to an elevated price of corn, which, as the primary feed source for cattle, is a key input in the beef manufacturing process. Due to this relationship, the two prices have moved in a highly correlated matter over the last few decades, albeit with a lag. For instance, corn prices rose from roughly $2 per bushel in 2000 to over $8 per bushel in 2012 as ethanol usage became more prevalent during that time. Live cattle futures increased by roughly 70% over that same interval and kept climbing to nearly $1.70 per pound before tapering off in 2014.

The lagged nature of this relationship is attributable to beef market dynamics. Specifically, when corn prices increase, beef producers first try to pass these higher input costs on to consumers. However, this can only be accomplished to a limited extent before the margins of producers begin to come under pressure. At that point, farmers are forced to cull their herds to reduce the supply of beef, raise prices, and protect margins. Since it takes an extended period of time to rebuild herds, beef prices often moderate over several years after the initial reversion of input prices back to normal levels.

After the onset of the COVID-19 pandemic, corn prices skyrocketed due to various shocks, including a spike in demand from ethanol producers and a fertilizer shortage that increased production costs. The invasion of Ukraine further boosted the price of the commodity given the nation’s status as the fourth-largest corn exporter in the world, accounting for roughly 15% of the global corn trade. After increasing by more than 110% since the start of 2020, corn prices peaked in July of last year at roughly $8.20 per bushel. Perhaps unsurprisingly, these dynamics have led to a commensurate rise in the cost of beef in recent years, with prices rising from less than $1 per pound at the beginning of the pandemic to an all-time high of over $1.80 per pound today.

The good news is that it does appear that corn prices have started to moderate, falling by roughly 42% since last summer. That said, it will likely take a few years for beef prices to fully reverse course due to the factors detailed above. Until that time, grillmasters everywhere may need to find more cost-effective ingredients to use during their cookouts.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Revisiting the Banking Industry

Though the regional banking turmoil that surfaced in March has largely faded into the background, Moody’s brought focus back to the sector last week when the rating agency downgraded 10 regional banks one notch (all remain investment grade). Moody’s also placed six larger lenders under review for a potential downgrade and cut the outlook for another 11 banks from stable to negative, indicating their ratings could be downgraded in the future. The rating agency cited interest rate and asset-liability management risks, as well as growing profitability pressures and expectations for a mild U.S. recession in early 2024 as reasons for these changes. Similar to Fitch’s downgrade of U.S. credit the week prior, the timing of these moves is being critiqued as deposit flows have generally stabilized since March, the Federal Reserve is likely at or near peak rates, and a soft landing appears increasingly likely.

Bank stocks pulled back modestly on the news, after notably outperforming the broader market in July. From here, a number of moving pieces remain at play. These include sensitivity of the banking industry to commercial real estate issues, tighter lending standards, and potentially higher-for-longer rates, though it is important to note that overall credit quality remains strong and the banking system remains well capitalized. Though the Moody’s downgrades may have little practical impact, they do serve as a reminder — especially after the strong performance of equities since the start of the year — that a number of uncertainties remain and, therefore, market volatility along with elevated dispersion could likely continue for the remainder of 2023.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Honey, I Shrunk the Money Supply

M2 money supply, as defined by the Federal Reserve, includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers’ checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds. M2 rapidly increased throughout 2020 and 2021 amid COVID-related monetary stimulus, to a peak of almost $22 trillion in July 2022. As the economy reopened and inflation accelerated — with headline CPI hitting a peak of 9% year-over-year in June 2022 — the Fed responded with a series of rate hikes and quantitative tightening measures. The result has been a rapid decrease in the money supply, with M2 down 3.6% year-over-year as of June 2023. The effects of the swift reduction in M2 have likely only begun to be felt, but a continued contraction — facilitated by higher-for-longer rates and continued quantitative tightening — could help cool inflation further and contribute to a soft landing for the economy.

Print PDF > Honey, I Shrunk the Money Supply

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.