Reconciling micro observations with macro trends? (is the economy really doing well?)

[scotti]

N.B.: this question is asked with no political under (or over) tones, and is purely a discussion of what other investors, active or passive, think is happening in the US and global economy.

The US is a big country, and there are multiple epicenters and microcosms that make it hard to relate what we are seeing locally to what is happening at a macro level. I have lived and earned money/paid taxes in 4 corners of it (MA, WA, CA, FL), and from my current location in SoCal/Los Angeles area, I am seeing:

• no shortage of new cars, which is a market I know well, and prices on used cars remain inflated (finally starting to deflate), and dealer markups ("ADM") still the start of the conversation, before negotiation
• housing prices remain well above their Jan 2020 (pre COVID) level, in spite of the 2006-like interest rates
• meals and grocery store goods "feel" expensive to me, but that's probably just standard inflation
• lots of other items, like clothing bought from brand names rather than at outlets or stores like Target/Walmart, "feel" high compared to 2020 timeframe

When I read newsfeeds or (very rarely) watch news, I am told that

• consumer debt, especially credit cards is at an all time high
• the S&P is at an all time high, but propped up by "the magnificent 7"
• CPI numbers... I won't comment on, because I don't trust this compared to my own math on my grocery bill
• unemployment numbers seem to indicate that there are more demand for workers than there are workers
• major metro areas like SF have an issue with heavily mortgaged commercial buildings that are under-rented
• Used car buyers/re-sellers hit a wall in the last 8 months of inventory they overpaid for and couldn't move at a profit
• There are some unusual bank failures, but no widespread mortgage default news

When I look in the circle of people I know

• none of them understand car prices/values/depreciation, so I am not surprised that they are making questionable choices about how they spend their car money
• all of them are talking about residential real estate like it's 2004-2006, i.e. real estate always goes up
• none of them are talking to me about credit card debt, but I don't see them or their kids wearing clothes from Target or switching their grocery shopping to Aldi
• I have a strong feeling that few of them are maxing out their 401k contributions, because none of them are talking about riding the wave of stock growth

Me, personally, I am starting to feel like the kind of investor who has successfully predicted 15 of the last 2 recessions. I am still <20% in cash (in spite of 4.5%+ interest rates available readily), so I am clearly not putting my money where my mouth is - but is the whole country really going into credit card debt to keep paying their mortgages and buying from Amazon, and they are going to be underwater on that marked-up new car until it is paid off?

Apologies for the hyperbole in that last paragraph, but I am wondering if anyone has found a way to reconcile these types of conflicting signals, and turn that into a viable investing strategy, or if I am seeing an exponentially worse set of example cases by living near an epicenter of visible wealth and people willing to spend on style/trends?

(All observation and feedback is welcome, but please try not to let it drift toward any of the past 4-5 presidential elections or the upcoming one. I want to discuss where we are investing, not voting!)

 

[LateToFIRE]

IMO, living near an epicenter of visible wealth and people willing to spend on style/trends is definitely coloring your view, though I'm seeing the new car trends play out even in depressed rural areas (I suspect owing to a combo of bordem and pandemic relief benefits financing new car purchases)

 

[jimbee]

CPI is the Consumer Price Index, not the scotti grocery index. Odds are it won't align with your personal grocery buying habits and pricing.

 

[GrayHare]

IMO much of what you are seeing is fallout from COVID. Work from home changed office and commuting needs, and the economy was propped up with handouts. Things are still gradually readjusting.

 

[CSdot]

Not a political statement, but with the US debt clock adding a new $1,000,000,000,000.00 every 100 days, the decrease in the value of our dollar will accelerate for the foreseeable future. Depending on how other central banks handle their currencies, probably good news for near term investments in real estate, equities and commodities.

 

[mrfeh]

My first 2 thoughts after reading your post:

1. anecdotes are anecdotal; when there is nation-wide data available, it doesn't make sense to pay any attention to your corner of it, at least when discussing macroeconomics
2. your impression of the economy should not affect how you invest; choose an AA and ignore the news/noise

 

[Dash man]

We invest primarily in companies with solid balance sheets that pay dividends that grow each year. Companies that can ride out the storm when it comes, which we know it will. Companies with a proven track record of consistently paying dividends even during recessions. Companies with payout ratios that are easily covered by their income.

 

[donheff]

Everything I read leads me to believe we are doing very good relative to the rest of the world. The dollar is still pretty high vs the Yen, and Yuan. About mid-level vs the Euro. Unemployment is low. The biggest struggle I see is commercial office space and city downtowns slowly adapting to vastly changed remote work changes accelerated by the pandemic lockdown. How that will pan out over the next decade remains to be seen. The debt may or may not be an anchor but compared to elsewhere appears still manageable.

Having just watched the world survive a two-year shut down, I worry more about some attack destroying the communications infrastructure or a nuclear war than a total collapse of the economy due to sclerosis. Long term, climate change promises some global disruptions bigger than the debt. It already seems like we have crossed the Rubicon on that hot mess unless we can engineer our way through.

 

[retire48in2018]

I look at it in a few ways -

The S&P 500 recently set a new high - but from a couple years ago - so the gain as a percent divided by the couple years - means return has been 5%ish - or half the long term rate. Not great

Inflation over last few years- cumulative- is higher than recent history - especially that 10% year. Not good.

Taken together- it’s not great. Not as good as recent history.

However, there have been multiple worse times. It’s been a while since interest rates were this high, inflation biting into earnings, and investment lower than historical norms.

Recency bias plays a factor.

Employment is too complicated a factor. How we keep changing the metric, who is included/excluded, etc. it’s played with so much, it’s not a trustworthy number or good metric. Just as GDP is played with way too much. As a metric - it’s hard to compare with history as they are not measuring the same thing. The changes are meant, perhaps, to make it comparable - but changes make comparing in short term inequitable

So, I think using the other metrics, collectively, over a couple years is decent metric - S&P 500 return %, inflation % & mortgage rate %.

Of these, inflation % is least trustworthy as it also is changed a lot (not as much as employment though).

 

[DJRR]

For anecdotes, using your chosen date of 1/1/2020 for me:

CPI All Urban Consumers +19.6%
Salary +24.2%
Portfolio +66.5%
Net Worth +57.8%

During that time I have "downsized" to a slightly more expensive condo, paid for trade school masters program and wedding for DD1 (off the payroll), and putting DD2 through college.

Clearly this is one of the best 4 year periods in the history of humanity

I also live in a bubble (DC area), however I believe the data is real. Labor is tight due to the boomer wave leaving the workforce combined with large decreases in legal immigration. Participation is down a few %.

Corporate profits are at a record % due to the current market combined with the reduction in corporate tax rates.

My credit card bill is up 2-3x since I can again borrow cash at 0% and invest it at 5% risk free.

The S&P 493 can be argued to be undervalued based on projected profits/cash flow.

The Fed would like to cut rates, but can't because the consumer won't quit. Maybe the rich are spending much more than the poor and we are close to a Marie Antoinette moment, or not.

For investing I keep diversified, which currently seems stupid. I would have done much better if I had no international or bonds or small cap but just large cap growth. It hurts, but after living through so many different markets you learn to trust the process. Currently gliding down from 100% stock to 60/40 and at 80/20 now.

However, if you are on the wrong side of the investor divide or did not maintain your inflation adjusted income things are rough. Housing specifically is more expensive than anytime in my lifetime. First time ever my tax adjusted cost of ownership is higher than the equivalent rent.

 

[marko]

With more information than ever at our fingertips, we're more confused than ever.

I wonder if the metrics we're using are outdated.

We seem to be running two parallel realities. By that I mean that each "reality's truth" is confirmed over the long run rather than one being disproven as 'untrue'. Maybe it boils down to the realities witnessed by different personal financial situations (?). Every position taken seems to have an exact opposite position that can also be proven.

I don't know but it's a theory that I've been working on lately.

Investing-wise, I have my own reality which is doing just fine: highly diversified with well known, successful companies in a 60/40 aiming for a 'get rich slowly' approach.

 

[Rianne]

Regarding the economy, I think about what is in my control and what is not. I control my spending, income, and lifestyle. What I hear and read via news and opinion has nothing to do with my daily living. I don't follow trends except for the fact interest rates increased enough for us to buy safer, long-term fixed income. I don't allow myself to be manipulated by noise anymore. It's not good for mental or physical health.

 

[OldShooter]

"The only function of economic forecasting is to make astrology look respectable.” Often attributed to John Kenneth Galbraith but apparently actually from Ezra Solomon, a member of the Council of Economic Advisors during the Nixon administration.

My sig line applies.

 

[Toocold]

My observation is:

Our economy
- Prices are higher than pre-covid, and that is making people feel bad
- Our economy is doing better than most other economies
- Unemployment is still low
- Wages are up, but not compared to inflation
- Market is doing what it's always doing, which is trying to predict the future

Political
- Election years are always an interesting time, and for many, it colors everything people see
- IMHO, anybody who blames either Biden or Trump for their own situation are clueless angel.

Personal:
- I'm glad I retired and I'll be fine no matter what happens.

 

[rk911]

It all depends on how 'economy' is defined. I do the shopping and have noticed a large spike in our weekly grocery bill. OTOH, we are still living well beneath our means. We have no debt, pay off CCs each month and have more than we can ever spend allowing us to support many charities. We are blessed but we know people who don't have it quite so easy as us.

 

[rodi]

OP... My observations are similar, but I'm also in SoCAL ..

But I am not changing my investments, just rebalancing my 60/40 portfolio as needed. The 40% fixed has changed some from bonds to high interest CDs and money market... That's the closest I come to market timing.

Yes there are a lot of people spending a lot. Doesn't effect me or my investments. All of my friends and their kids, who want to be employed, are employed... So that is a positive.

 

[pb4uski]

My observation is:

Our economy
- Prices are higher than pre-covid, and that is making people feel bad
- Our economy is doing better than most other economies
- Unemployment is still low
- Wages are up, but not compared to inflation
- Market is doing what it's always doing, which is trying to predict the future

Political
- Election years are always an interesting time, and for many, it colors everything people see
- IMHO, anybody who blames either Biden or Trump for their own situation are clueless angel.

Personal:
- I'm glad I retired and I'll be fine no matter what happens.

Generally agree. Even in normal times prices now would be higher than pre-covid, 4 years ago. Per BLS CPI calculator it would take $119.55 in January 2024 to buy what$100 would buy in January 2020... that is 4.57%/year... higher than normal and what we were used to but not horrible.

On the next to last point, I have some friends who are insistent that whoever is POTUS can greatly influence gas prices and the stock market and it drives me nuts. It just doesn't work that way.

 

[threeonesix]

When it comes to cars, the vast majority of people are going to buy what they want, no matter the price today, no matter what the car will bring in 5-10 years on trade-in or resale. IME the only people who even think about resale value are auto dealers/salespeople. Dad and uncles had over 200 years of auto sales experience combined, and ridiculed me every time I bought a truck from anyone else. Yet I have never driven one for under 10 years and never once had one break down in any fashion. Do the maintenance the manual tells you and that's the result.

As to the economy ... my portfolio was up 31.42% in 2023, 14.7% so far in 2024. Seems it's doing well by me. Where is it headed? If you can tell me that with any sort of accuracy, I'll give you all of my money. Here in Flyover Country / Middle America things seem pretty stable at the moment. We don't ever see the wild swings seen on the Left / Right Coasts though.

 

[Toocold]

When I look in the circle of people I know

• none of them understand car prices/values/depreciation, so I am not surprised that they are making questionable choices about how they spend their car money
• all of them are talking about residential real estate like it's 2004-2006, i.e. real estate always goes up
• none of them are talking to me about credit card debt, but I don't see them or their kids wearing clothes from Target or switching their grocery shopping to Aldi
• I have a strong feeling that few of them are maxing out their 401k contributions, because none of them are talking about riding the wave of stock growth

This is the vast majority of people, where few people save, equate looking rich to being rich, and then cry foul / blame others about why their dollars don't stretch and feel poor, so FI is out of reach for most.

I suspect that participants of this forum are not like the vast majority of people.

 

[Montecfo]

I do not see a way to use micro observations to drive macro investments.

But there is a lot of data out there. I suspect the economy is in worse shape than believed. State unemployment rates are rising almost across the board. I think FOMO type spending on travel and experiences by the well off (e.g., perhaps many of us) is kind of obscuring the rest of the economy where a lot of people are struggling with high prices, wages which have not kept up and difficulty bridging that gap. The evidence to me is the growth of part time (2nd or 3rd?) jobs, reduced labor hours, and rapid growth of credit card debt.

So what to do? I am more heavily into bonds and similar likely to benefit from lower rates. Also the 493 stocks that are not the Mag7 (but own some of them too but not all) and similar logic on the equity side.

 

[Koolau]

There is a new story every night on the news about something that is about to cost our state a ton of money (several stories lately on folks still living in hotels at state expense due to the wildfires on Maui. IIRC it's a billion/year so far)

HECO (our electric company - already the most expensive electricity in the nation) is trying to anticipate the fall out from the Maui fires AND trying to become green by 2045 and fixing crumbling electrical infrastructure. They want to add even more "special categories" to our rate bills. IOW, without ever turning on a light, your light bill is already over $20. So now they want to pass all their poor planing onto rate payers.

The Rail project is an abject failure and almost no one is using it. When it begins to break down due to lack of maintenance, it will get even more expensive.

There was a story last night that we don't have enough condos in the state. What a revelation! Well, it turns out that the COST of building condos here is (wait for it) 56% due to (wait for it) regulations! So more than half the cost of a condo is to be sure there are building permits, environmental assessments, burial ground assessments, traffic assessments, on and on, etc. I still recall our first Walmart being held up for something like 2 years because they found a couple of ancient bones on the site.

Property crime is through the roof. The big complaint that retailers mention: "They cost me $2000 in damage to steal $100 in petty cash or $200 worth of merchandise." The police only catch the thieves if they happen to catch them in the act. Hundreds of such break ins occur and maybe once or twice a year, there is a story of a "ring" being busted. They're all on camera (every business has cameras) but the police don't use the footage to track them down - even though vehicles are always involved and visible.) Guess who ultimately pays for all of this crime.

I could go on, but my point is, on a micro basis, the economy is under a lot of stress. And we are one micro-recession away from a tourism crash which will REALLY be devastating since we now exist on tourism and military - that's it. That's our economy.

Oh, and the Covid money (which has been sustaining our economy) is finally drying up. So there is a "feeling" of "doom" among people here. Things are humming along, but everyone knows that the next shoe to drop could be a state wide disaster. YMMV

 

[marko]

There is a new story every night on the news about something that is about to cost our state a ton of money (several stories lately on folks still living in hotels at state expense due to the wildfires on Maui. IIRC it's a billion/year so far)
along, but everyone knows that the next shoe to drop could be a state wide disaster.

YMMV

+1. Great observations. I truncated your post for brevity, but it seems every area of the country has a similar story.

 

[HI Bill]

Living in Hawaii, I have a biased perspective. But here's what I see: Travel is back. Cruise ships are back. Hotels are full. Rental car prices are up. Employment is full, and lack of qualified workers are impeding almost all industries. Inflation is up, but so are wages. Housing prices are up 70% over 2020. I see no shortage of new muscle cars, sports cars, BMWs, and high-end Jeep Rubicons.

All that said, your AA shouldn't change with the economy.

 

[Koolau]

Living in Hawaii, I have a biased perspective. But here's what I see: Travel is back. Cruise ships are back. Hotels are full. Rental car prices are up. Employment is full, and lack of qualified workers are impeding almost all industries. Inflation is up, but so are wages. Housing prices are up 70% over 2020. I see no shortage of new muscle cars, sports cars, BMWs, and high-end Jeep Rubicons.

All that said, your AA shouldn't change with the economy.

All basically true, but we (as a state) have taken "advantage" of two things: VERY generous Covid money AND a once-again robust tourist industry. When BOTH of those are no longer true (the next down turn) our state will suffer as will its people. I've seen it before but at least back then, we had 3 legs of the income stool. Ag, military and tourism. We no longer have the Ag that we used to have though we're trying to add some cocoa and coffee now.

IOW it's great until it's not.

Oh, and eventually we have to pay for the Rail but that's another story. When they send me a bill for my share, I'm probably gonna move to the mainland.

 

[USGrant1962]

...
Housing prices are up 70% over 2020. I see no shortage of new muscle cars, sports cars, BMWs, and high-end Jeep Rubicons.

All that said, your AA shouldn't change with the economy.

You don't live in a normal place - but your bottom line is correct.