“A soft landing. That sounds so pleasant.”
I’m not a fan of soft landings. Don’t get me wrong: I absolutely LOVE soft landings when I’m flying Southwest. Or any other plane for that matter. But I’m not a fan of economic soft landings. No, I’m not advocating for a recession. I simply prefer robust growth! So I’m disappointed the signs are pointing to a soft landing in our near future. Maybe.
If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/
According to the IMF (the ‘International Monetary Fund’), the world’s annual GDP is about $80 trillion today. US ‘current dollar’ GDP now exceeds $20.66 trillion. In Q3 of 2018, nominal GDP grew by 4.9%. We remain about 25% of global GDP. Other than China — a distant second at around $12 trillion — the GDP of no other country is close.
The objective of the SHI10 and this blog is simple: To predict US GDP movement ahead of official economic releases — an important objective since BEA (the ‘Bureau of Economic Analysis’) gross domestic product data is outdated the day it’s released. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth. In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending. Consumer spending is clearly a critical financial metric. In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric. I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.
If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.
Not only did the Dow, S&P 500, and every other major index take a huge dive by the time 2019 rolled around, but so did the 10-year Treasury yield. On November 9th, it peaked at 3.21%. Today, it is closer to 2.7% — a 50 basis point decline.
Yes, we’ve seen about a 10% recovery in stock prices since then. Good. The market was definitely oversold. But it’s pretty obvious to those of us watching closely that all is not right with the world. Economically speaking, of course. After all, this is the Steak House Index, not a political commentary blog.
The list of economic headwinds is long. Let’s go from large economies to smaller:
In a world where global GDP is around $80 trillion, the 3 above economies make up about 2/3 of total global GDP. Which means if they are slowing, global growth is slowing. At the same time, the central banks of each have either eliminated all ‘quantitative easing’ or, in the case of the US, actually begun a cycle of quantitative tightening. So here in the US, interest rates are up and the FED is shrinking its (now) $4.1 trillion balance sheet. Their counterpart in Europe, the ECB, is no longer buying bonds, but is maintaining the size of their $5.3 trillion balance sheet, and leaving rates unchanged. Remember, the ECBs ‘short term’ rate is currently a negative 0.4%
China has shrunk their balance sheet by about 10%. It now totals about $5.2 trillion.
The bottom line: Even as the world’s economic engines are beginning to sputter, central bank conditions today offer more headwinds than tailwinds. This is why we see fear and uncertainty in the markets.
Let’s see if steak lovers are more or less certain they want an 800 degree filet Mignon from Ruths’ Chris.
They do! This week, pricey steaks are popular again! Reservation demand improved across the board. As you see above, this improving trend is consistent with this same time last year. I’m guessing that for the first two weeks of the new year, folks struggle with two choices: Should I go to the gym and work off a few of my newly acquired “holiday” pounds … or should I blow it off and head to Mastros and carbo-load on that Lobster Mac! For two weeks, the gym wins. But by mid-January, a perfectly cooked, fabulously expensive T-Bone is sounding pretty good! Here are the individual restaurant results for the week:
Finally, the FED ‘Beige Book’ was released today. The headlines:
In New York and Kansas City, economic activity was flat. In most other districts, growth continued, albeit at a slower pace.
The bottom line: The pace of economic expansion is definitely slowing. Here and globally. This does not suggest an economic trajectory heading into a recession. But the 3+% GDP growth rates of last year are likely a thing of the past. For now.
– Terry Liebman