Tariff Talk

By reducing US demand for imports, tariffs reduce the supply of dollars flowing to foreigners. That reduced supply raises the foreign exchange value of the dollar. While a stronger dollar reduces inflation, it makes US exports more expensive. This partly offsets some of the benefits of the tariffs. To reduce imports but boost exports a nation could devalue their currency. That would, however, boost inflation.

Employment Enigma

January net job growth was a decent 143,000, Nov/Dec were upwardly revised by 100,000, and the unemployment rate fell to 4%, its best level since 5/24. But the workweek slid to 34.1 hours, the lowest reading since 3/20, and quite surprisingly, wages rose a very strong 0.5%. I suspect the Fed keys in on the falling unemployment rate and rising wage growth number and holds tight for the near term.

Pending Problem

Pending home sales slipped 5.5% M-o-M in December and slid 5% Y-o-Y. This isn’t surprising, given the nearly one percentage point rise in 30-year mortgage rates since the recent low of 6.08% for the week ending 9-26-24. Moreover, absent seasonal adjustment, the Pending Homes Sales Index is at its lowest since 2001 when the NAR began reporting pending sales. Absent lower rates, sales will continue struggling.

Receding Rate

While the Fed’s favorite inflation measure came in at 0.2% for December (the unrounded number was 0.156%), the six-month rate is running at 2.3%, and the three-month at 2.2%, very close to the Fed’s 2% target. Better yet, while labor compensation was up 0.9% Q-o-Q, and 3.8% Y-o-Y, with productivity growing at about 2%, compensation minus productivity, the underlying inflation rate, is up a benign 1.8%! Inflation continues to soften.

Good GDP

While 24Q4 GDP came in at a slightly disappointing 2.3% annualized rate, down from 3.1% in 24Q3, and 24Q4 expectations of 2.6%, consumer spending, which represents almost 70% of GDP was up a very strong 4.2%. Moreover, the Fed’s favorite inflation measure, core PCE, came in at a bond friendly 2.5%/annum. Much of GDP weakness was due to the drawing down of business inventories and the Boeing strike. Looking good!

Terrible Tariffs

While US exports to Canada and Mexico are both about 1% of GDP, or $315 billion/year, do not be dismissive. Canada accounts for 60% of all US crude oil imports, about 3.8 million bbl/day. As for Mexico, they account for 23% of total US food imports. This includes 63% of vegetables, and 47% of fruits and nuts. Collectively Canada and Mexico represent 30% of all US imports.

Continuing Claims

While initial claims for unemployment remain steady, low, and no different than they were pre-Covid, at about 220,000 claims/week, it’s continuing claims that are raising mild alarm bells. From mid-2018 until Covid they were generally below 1.7 million/week. Since bottoming the week of 6/4/24 at 1.34 million they have steadily risen and hit a 38-month high of 1.89 million the week of 1/11/25, suggesting a rising unwillingness to hire.

Peak Pricing

While just a week old, $9 congestion pricing is having the desired effect in NYC. Cars entering NYC south of 60th Street fell 8% compared to the average January workday from 2022-2024. But that small decline has drastically reduced travel times: through the Holland Tunnel by 65%, the Lincoln Tunnel by 39%, along Canal Street by 33%, along Third Avenue by 21%, and reduced parking garage demand by 20%

California Catastrophe

While the LA fires are likely to go down as the costliest climate disaster in US history, and may top $300 billion, 1% of GDP, the national economic impact is likely to be small. Maybe a 0.2% drag in GDP in 25Q1, a loss of 30,000 jobs, and a rise of 0.1% in inflation. Locally, building products, residential construction labor, rents, and cars, are likely to see noticeable price increases.

Wealth Wellspring

From 1999-2007, median family wealth was $50,000. From 2008 through 2014 it doubled to $100,000, where it remained through 2018. From 2019 through 2022 it vacillated substantially but nonetheless rose to $125,000. However, starting in 2023 through the end of 2024, because of rising home prices and stellar equity gains, median wealth doubled to $250,000, a major reason why consumer spending is so strong. Going forward, equities increasingly matter.

Inflation Indicators

The PCE has, since 2000, been the Fed’s preferred inflation measure. There are several key differences between it and the CPI. The PCE includes things you consume but don’t buy. Thus, healthcare is 16% of the PCE but 7% of CPI. Also, PCE basket updates are much timelier, and the PCE eschews imputed prices. Since 2000, PCE has averaged 0.39%/year lower than the CPI. It’s by far the better index.

Rate Reversal

If you think it odd that the Fed has cut rates by 100bps over the last three months, yet 10-year Treasury rates are rising, you would be correct. The Fed has cut rates seven times since 1989, including the recent cuts. Four times rates noticeably fell, twice they rose trivially, and this time 10-year Treasury rates are up more than 75bps. Moreover, markets fear 2025 threatens more of the same.

Probable Performance

Since 1874, a period of 151 years, the S&P 500 has averaged a return of 9.4%. The median return is between 0%-10% and the modal return, the return that is most common, is between 10%-15%. For 2025, the consensus predicts 14% growth (that’s the modal return!), and get this, not once has the consensus ever predicted a negative annual return though it has happened 29 times. Thanks for nothing!

Dwelling Decline

December existing home sales rose 2.2% M-o-M and 9.2% Y-o-Y, the third straight month of rising Y-o-Y sales after declining Y-o-Y for over three straight years. However, 2024 existing home sales fell to their lowest level since 1995, when the population was 70 million smaller, and 2024 was the second straight year of dismal activity. In 2025 sales should rise 5% and dollar volume 10% as home prices continue rising.

TikTok Totals

Totals The Friday File: 48% of TikTok influencers earn under $15,000/year. 9% earn between $15,000/year and $25,000/year, 7% earn between $25,000/year and $35,000/year, and 5% earn $35,000/year to $50,000/year. 11%, the biggest category, earn $50,000/year to $75,000/year, and 5% earn between $75,000/year and $100,000/year. 6% earn $100,000/year to $150,000/year and 7% earn over $150,000/year. The average influencer earns slightly over $15,000/year. 29% earn over $50,000. I’ll keep my day job.

Bad Brew

Coffee futures just touched a new all-time high, almost $4/pound, foreshadowing significant consumer pain in the coming months. It’s because Brazil is coming off a lousy crop. And with wholesale eggs at over $7/dozen, breakfast may now be the most expensive meal of the day. But there is relief in sight. Pork bellies are well off their record highs of summer 2021. So, load up on bacon.

Tip Top

Americans need income of almost $800,000/year to be in the top 1%, but the amount varies dramatically by state. At the high end, DC leads the way with a necessary income of $1.22 million/year, followed closely by Connecticut at $1.17 million, Massachusetts at $1.13 million, and California at $1.05 million. At the other end, it takes just $426,000/year to be a one-percenter in West Virginia followed by $446,000/year in Mississippi.