Weekly Digest: Making Money Moves

Stimulating the economy

Consumer spending increased 2.4% in January, which was the first increase in three months and the largest increase since last June. This was largely driven by the $600 stimulus checks and federal unemployment benefit extension from the last stimulus package. The PCE Index, which is the Fed’s preferred measure of inflation, indicates prices have increased 1.5% compared to last year and inflation is slowly creeping toward the Fed’s 2% target.

Moral of the story: The average American family earns about $69k annually, so a $600 check is about 10% of their monthly income – the $1.4k stimulus checks and extended unemployment benefits in Biden’s $1.9T stimulus plan (which was passed by the House this week) would add another boost to consumer spending and hopefully get us through the spring. As vaccinations continue and we see warmer weather return, it’s largely expected for life (and the economy) to start getting back on track by the end of the summer. It better… for all our sakes. 

Rates on the rise 

It was an ugly week for stocks – pretty much everything was down because interest rates were up. When interest rates increase, a dollar tomorrow is discounted at a higher rate and, therefore, worth less today. So when a company’s future earnings (which is fundamentally how you would arrive at its stock price) are worth less today, it makes sense for the stock price to decrease (also companies are borrowing money at higher interest rates, so their interest expense is increasing, which means earnings would decrease). But, interest rates typically rise when economic conditions are improving. When economic conditions improve, companies should see better growth. 

Moral of the story: The market sold off in a big way because investors got spooked by how quickly interest rates flew higher but honestly, I take it to be an indication of the economy kind of starting to get back on track. The other worry is that inflation might end up picking up too much, but the Federal Reserve has proven to be swift and reactive, and has plenty of tools at its disposal to manage prices if inflation truly becomes a concern. The markets threw a little bit of a tantrum this week but I’d expect rates and the market to settle down in the next few weeks as we look toward the light at the end of the COVID tunnel. 

Good news for goods 

Orders for durable goods (products that last >3 years) increased 3.4% in January, which is the biggest gain in six months. This is a really nice print to see as orders for manufacturers have now returned to pre-COVID levels. The gains were driven by a large increase in passenger jets, fighter planes, and other military products as well as computer and primary metals. 

Moral of the story: Leading up to the pandemic, we’d seen a meaningful shift in the way consumers were spending money – less goods and more services. Throughout the pandemic, as services have largely been curtailed by government-mandated shutdowns, we’ve seen consumers purchase more goods (cars, houses appliances, electronics, etc.). The strength in durable goods orders is in part from this temporary shift in consumer behavior (I’d largely expect us to go back to consuming services when they’re actually available), but it’s good for the manufacturing sector nonetheless. 

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