Dear Diary: Cracks in the Economy

I am not feeling good about the state of the U.S. economy. This is not meant to be a scare tactic, but an honest evaluation of what I see happening and how I am preparing. I want to be an optimistic economist, but you are reading this because you value my take on the economy.

Here is my gripe list:

1. Unemployment Numbers

The jobs report comes out today at 8:30 AM. Market expectations are for a gain of 59,000 new jobs. As you might recall, we lost 92,000 jobs last month.

Jerome Powell recently said:

“Effectively, there’s zero net job creation in the private sector,” after accounting for revisions over the past six months.
“But actually, that looks like that’s about what the economy needs, in terms of dealing with very, very low—nonexistent, really—growth in the labor force, which of course we’ve never had in our history.”

Earlier this week, ADP jobs came in stronger than forecasted. According to private data, 62,000 new jobs were created in March.

Most of the gains are coming from education/health services, as well as construction. Trade and transportation continue to shed jobs, followed by manufacturing.

2. Gas Prices

My commute to work is 7 miles. I fill up my gas tank once a month. My demand for gas is relatively inelastic.

That said, gas prices are affecting me. They are in the back of my mind.

According to AAA, the average gas price in Kentucky is about $3.87 per gallon. I have yet to see it hit $4, but market expectations are that it will soon reach that level as the U.S. war against Iran continues.

While gas prices are the direct concern, I am more worried about the impact on inflation. Increases in gas prices are passed on to other products and services.

With declining labor market outcomes and increasing inflation, stagflation becomes a real concern. My economics training and history tell me that stagflation is a bad place for the economy and for people.

3. Stock Market

My finance friends have told me that the economy is strong because stock market returns have been great.

The market has been bullish despite everything thrown at it. It has been resilient—maybe too resilient, from my perspective. Well, the cracks are starting to show.

It is no secret that I check my portfolio daily. This year has been a volatile experience and has tested my willingness to stay informed. Sometimes it is easier to ignore the news to avoid the emotions. A case of Ostrich Effect Bias.

The S&P 500, my preferred index to follow, is down 4.02% year-to-date.

As my portfolio value falls, I am becoming more cautious with my spending and rethinking big purchases, travel, and discretionary expenses. I expect many of you might be feeling the same way.

4. Private Credit Fears Grow

Private credit, where non-banks lend money to riskier companies, has been a booming business for the past five years.

Blue Owl, a leading private credit company, has seen its market value drop 40% as investors have started withdrawing their money.

Their tech-focused fund experienced redemption requests equal to 41% of its $6 billion portfolio, up from 15% in the previous quarter. Blue Owl cannot meet these requests and is capping payouts at 5%.

Bottom Line

I can’t be sure whether my apprehension about the U.S. economy is valid or if I’m just being a grumpy economist. The data will tell, and time will show.

For now, I keep looking for cracks—and they are starting to show.

How is YOUR economy doing?