Energy Prospectus

Nice to see someone agree with me.
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MKM Partners.
"Let’s get something straight right here and right now: an economy is not in recession when it
creates more than 2.7 million jobs over a six-month time span. Indeed, despite a down GDP
quarter during Q1, and expectations that there could be another down quarter during Q2,
non-farm payroll employment rose 1.6 million during Q1 and 1.1 million during Q2. For those
who say the jobs data lags, consider the 12-month change in the level of the unemployment
rate, which has been a nearly perfect coincident indicator of U.S. business cycles. Anytime the
unemployment rate has risen 0.5 percentage points from year-earlier levels, the U.S. economy
has either been in a recession or on the cusp of one with no exceptions to the rule in post-
war history. During the month of June, the unemployment rate held at a cycle low of 3.6% and
was down 2.3 percentage points from year-ago levels. We’ve said it before, and we will say it
again: those arguing that the U.S. economy is in recession now or has been in a recession for
months are suffering from a profound misunderstanding of what an actual recession is (it is
NOT simply two down GDP quarters).
Michael Darda, Chief Economist & Market Strategist

In addition, GDP is just a number, and there are no shortage of ways this simple measure fails to actually measure what really matters. Our economy is very complex and our international trade and inventory are very complex. Trying to boil this down to a single Tell All Number is ridiculous. Then betting your portfolio decisions upon that number is even more laughable.

The biggest value I see in this number is that others put faith in it, and so it can be used to gauge what direction the market herd might stampede.

EPG Forecast Models
Now there's something I can put some faith into.

Kevin

From First Trust
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/11/2022

Some investors think the US is already in a recession. As we wrote two weeks ago and as recent data have confirmed, we don’t think that’s the case.

Industrial production is up at a rapid pace so far this year, while payrolls have expanded at a monthly pace of 457,000 and the unemployment rate has dropped to 3.6% from 3.9%. Real gross domestic income (Real GDI), a companion to real GDP that is just as accurate, but which arrives a month later, rose at a 1.8% annualized rate in Q1.

Nonetheless, the recession story is out there and some claim adjustable rate mortgage resets are going to knock the economic legs out from under consumers. The idea is that with the Fed raising rates rapidly, as the rate on adjustable mortgages reset, homeowners are going to have to make higher payments, which means less money to spend on other goods and services.

Let’s start off by noting the most basic problem with this theory, which is that even if mortgage resets increase some families’ payments, the holders of those mortgages will get the extra payments and their purchasing power will increase. On net, purchasing power should remain unchanged.

But, to be cautious, let’s indulge the reset theory by pretending the extra payments are money that just disappears, with no one on the other side of the transaction. Even then, our calculations show the theory doesn’t add up.

Households have about $12 trillion in mortgage debt, according to the Federal Reserve, so, yes, the top-line number sounds scary. But, according to the Federal Housing Finance Agency, only 3.7% of these loans are adjustable, or about $450 billion. Now let’s say that one-third of these mortgages reset every year. That’s $150 billion worth of mortgages resetting. Still a big number, still potentially scary.

But when we calculate how much a reset would change the payments on these loans the problem suddenly gets much smaller. An extra two percentage points in interest on $150 billion in debt is $3 billion.

Obviously, the people making these extra $3 billion in payments won’t like it. But the extra payments equal only 0.018% of annualized consumer spending. That’s not a typo. Not 1%, not 0.1%, but only 0.018%. Which means that even if all of the $450 billion in adjustable-rate mortgages reset upward by two percentage points at the same time, we’d be talking about 0.05% of annual consumer spending.

The bottom line is that we think a recession is eventually on the way because monetary policy will have to get tight enough to wrestle inflation back down and that should be tight enough to cause a recession starting in late 2023 or beyond. But those rate hikes won’t work like they did in 2006-07 when nearly half of all mortgages were adjustable in ‘05. The mortgage reset story makes superficial sense. But when you work through the actual numbers, it’s not something to worry about.