Even in the wake of a third major bank failure in 2023, the US Economy seems relatively unfazed by a continued string of bad news. Earnings season kicked off a couple weeks ago with the large banks and the earnings are in decent shape relative to expectations. Any reasonable person would ask, why on earth is bad news and continued rate pressure from the Fed not having a more pronounced negative effect? The way we see it, the answer is twofold. First, the pandemic, in combination with low interest rates and supply chain issues left a tremendous backlog of work in the construction business. Second, government subsidies.
This combination of problems is either laugh out loud funny or crying in your Wheaties depressing depending on your disposition. On one hand, the Federal Reserve is desperately trying to fight inflation, and on the other, the Federal Government has been pouring gasoline on a fire. While there should be some separation between the two organizations, if Congress could stop for a minute to ask themselves about the consequences of their actions, perhaps the Fed wouldn’t be in such a precarious position. But alas, we are in a must get re-elected world, so Congress does not and will not care what they do to the Fed. That said, perhaps if they did, they wouldn’t be staring down the barrel of another debt ceiling crisis.
Economists have been very frustrated by the “most anticipated recession ever” and they might have some time left to wait. The enormous backlog and massive government subsidies will mean that construction (usually among the first jobs to get cut) will not be the first business to crack. As such, the leading indicators may not seem normal to any of the economic pundits. This may also mean that inflation data remains elevated longer than one would guess, and we may continue to churn higher for longer. Good luck Chairman Powell, you’re going to need it.