Were we to channel our sympathetic side, we might feel bad for central bankers. Relying on their models (which didn’t see the extent nor persistence of inflation) to try to slow down or juice the economy (with fiscal policy pulling in whichever direction it chooses) and with their tools working “with long and variable lags”, it must be both frustrating and very worrying. In fact, it’s not hard to imagine that when it comes to the current monetary tightening, Jay Powell and FOMC members might be wondering, this time with apologies to Whitney Houston, ”How will I know if rate hikes are working?”. They certainly aren’t the only ones trying to figure out where things are headed, with commentators debating the likelihood of “hard-”, “soft-”, or even “no-” landings. There are plenty of big names on all sides. Stan Druckenmiller recently reiterated his view that the U.S. is headed for a hard landing, while Ray Dalio said that he expected “a weaker economy going forward” but reiterated that “It doesn’t have to be a big downturn”. MI2 should be added to the sour camp, but TFTD tries to remain agnostic despite it being hard not to notice the slowing and dumpster fires in various sectors of the economy. That said, there is much more utility in focusing on Whitney’s eternally relevant meta question: how will the Fed know?
“Property developers and owners are grappling with a financing market that’s freezing up”
If the theory is that in raising rates, the Fed is “restricting the availability of credit”, then that should be a good first place to look, and judging by the state of “interest rate-sensitive sectors”, the Fed does seem to be on the right track. In real estate, we’ve discussed “fire sales”, the defaults, the foreclosures, and the gating. As noted in a recent Bloomberg article, Howard Hughes Corp, a real estate development firm headed by none other than Bill Ackman, was turned down by more than 40 different lenders as it solicited bids for a recent project in Texas. Some might say that this reflects the springtime banking sector fireworks, but surely we should give the Fed some credit for engineering a slowdown in lending, even if there was a little collateral damage? The other side of that coin is that if they want recognition for indirectly tightening credit, they might also acknowledge some responsibility for causing said fireworks… Credit available to auto dealers and buyers is draining away rapidly as well as company after company exits the space, with some lenders giving but a day’s notice. We’d recommend CarDealershipGuy for those interested in keeping up with the subject. We doubt it is the only space seeing banks retreat. This is all in line with the much-anticipated and rather ominous SLOOS report we discussed a few weeks ago.
“Those are all consumer spending items – it’s weakness in consumer spending that is a symptom of an oncoming recession”
And yet… the consumer still appears impervious? Despite the credit tightening discussed above, the consumer, the behemoth of the US economy that we discussed last week, still appears to be able to fund its purchases without too much difficulty, as evidenced by the latest consumer lending figures. This despite the warnings from Macy’s and Costco regarding consumer behavior at the margin. Oddly enough, the consumer side of real estate, i.e., residential, hasn’t taken quite the same hit as its commercial brethren. Sure, there are some problems in multifamily, but it’s not yet systemic. As explained in a spate of recent articles and conference calls, the lack of existing home supply coming to market has not only kept a floor under housing prices (in aggregate, that is, people in Austin and Oakland may not be so lucky) but also enabled home builders to sell into a market where demand may have dropped, but supply has dropped even more. Could there be hope yet that activity in new home construction (read: construction jobs) remains strong in the face of the headwinds? As a reminder, we’d point you to one of our newsletters from 2018, which discussed how “Housing Is the Business Cycle”. Not only does the paper live up to explaining its title claim, but it also provides further evidence to back up the warning from last week’s newsletter:
“After residential investment as a contributor to prior weakness come consumer durables, consumer services, and then consumer nondurables. Those are all consumer spending items – it’s weakness in consumer spending that is a symptom of an oncoming recession.”
Slowing the economy is so bittersweet.
