Looking out the side window

“It’s tough to make predictions,” said Yogi Berra, “especially about the future.” Nevertheless, financial market participants constantly try to predict what lies ahead. Meanwhile, critics often accuse policy makers (looking at you, Federal Reserve) of being overly focused on the past, comparing their decision-making to attempting to drive by looking in the rearview mirror.

Today there is no shortage of concerns on the horizon including the conflict with Iran, the upcoming mid-term elections, a new Fed chair, and the ongoing evolution of artificial intelligence, to name just a few. In this environment, when there are obvious macro uncertainties and big disagreements on the outlook and appropriate policy paths, we think it makes sense to focus on the here and now, by looking out the passenger side window, if you will. We believe this focus on what’s happening today can help keep us appropriately positioned and ready to react should the terrain change.

Below, we offer a roster of measures that give a real-time read on current activity in the US economy. And, as has been the case for a number of years, we find the pace of travel to be much steadier than might be expected if we were to focus only on the popular press, measures of sentiment, or the parade of doomsayers in the financial media. 

• Employment US layoff announcements remain subdued and weekly jobless claims are relatively modest; in fact, compared to the size of the labor force, they’re at historic lows. Further, two sectors where weakness invariably appears as we enter a downturn — manufacturing and construction — are both showing growth, with total construction employment at an all-time high thanks to the data center boom (the ongoing weakness in housing notwithstanding).
• Travel CoStar, the company that provides hospitality data tracking national activity, just increased their projections for the year. Hotel performance with respect to both rates and occupancy continues to surprise to the upside, particularly in luxury and upscale properties. Security checkpoint data shows US airports at peak levels of activity. These are not the conditions we would experience were the US consumer as hunkered down as the consensus seems to believe.
• Shopping We are believers in the old market saying that US consumers shop when they’re happy and shop even more when they’re depressed. Whether out of an abundance of happiness or sorrow, spending has recently accelerated to a four-year high per the weekly Johnson Redbook Index of Same Store Sales.
• Economic activity With both the Institute for Supply Management’s Services and Manufacturing Purchasing Managers Indices now at 54 or better (with anything over 50 indicating increased activity), things seem to be improving. Similarly, the Federal Reserve Bank of Dallas Weekly Economic Index, which is designed to signal the current state of the economy, just hit its highest level since 2022.
• Inflation Oil prices per barrel are already down more than 35% from their recent highs and now sit just a few dollars above the pre-conflict level; prices at the pump should soon be following. Further, given the ongoing weakness in both the for-sale and rental residential markets, and the lagged construct of the input to inflation measures, housing seems poised to be a continued drag on aggregate price levels.  
• Credit Both investment grade and high yield spreads remain within striking distance of modern-era lows. Issuance activity is ramping up, and we aren’t seeing signs of distress in the public markets.
• Liquidity and volatility Measures of market volatility like the VIX index (for equities) and the MOVE index (for bonds) are above recent lows, but they have moderated from the spikes at the beginning of the war in Iran. The initial public offering calendar is at the onset of the largest wave in history in terms of the capitalization of companies entering the public equity space. The ability to absorb this volume of new issuance is a positive signal on the overall functioning of markets and liquidity. 

Conclusion
While the view in front of us seems particularly cloudy and the road behind provides few clues about the curves ahead, with time the outlook for the economy and the markets will be easier to assess. Meanwhile, we take some comfort from real-time indications that suggest our broadly bullish view of the economy’s health remains appropriate.