At the Money: What Data Matters and What Doesn’t (April 24, 2024)
Bill McBride has spent the past 20 years taking apart economic data, creating “opinion-free” analysis of the economy, and accurately identifying booms, busts, bubbles, and recoveries in real-time, including the great financial crisis and its subsequent housing bottom + recovery. He discusses the data that matters, and the data that doesn’t, and how investors can tell them apart.
Full transcript below.
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About this week’s guest:
Bill McBride has been publishing Calculated Risk since the early 2000s, where his economic analysis has become required reading among investors, most especially those who focus on the housing market.
For more info, see:
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Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.
TRANSCRIPT
[Music: So remember every picture tells a story, don’t it? Every picture tells a story, don’t it? Every picture tells a story, don’t it? Every picture tells a story, don’t it?]
Barry Ritholtz: When it comes to the economy, it seems like everybody has an opinion about what’s going to happen next. Are we getting a recession? Can we execute a soft landing? Is the Fed about to cut rates? Or are they standing pat? And what about inflation? Has it stabilized at a bottom, or is it about to pick up again?
The answers to these questions are mostly just opinions and guesses from folks with rather questionable track records. As it turns out, you can cut through all of this confusing noise and let the economic data tell you its own story.
I’m Barry Ritholtz, and on today’s edition of At the Money, we are going to discuss how to allow economic data to reveal itself to you without the guesswork, opinions, or the usual pundit pontifications. To help us unpack all of this and what it means for your portfolio, let’s bring in Bill McBride. He runs Calculated Risk.
Bill has used economic data to create opinion-free analyses of the economy over the past two decades, and he has accurately identified the problem. booms, busts, bubbles, and recoveries in real-time and at major turning points, including the Great Financial Crisis and its subsequent housing bottom and recovery.
So Bill, let’s just start with economic data. Typically, it’s noisy, most of the time, not especially meaningful. How do you identify what data series to follow, and which releases are important?
Bill McBride: Well, there are several major releases on the employment report, and the GDP report, and since my major focus is on the housing market, there are also housing starts and new home sales, but I follow quite a few other data releases.
Mostly just to see if something’s not tracking what you kind of expect. And it’s really kind of the surprises that change your views or bring you insights, into what’s actually changing in the economy.
Barry Ritholtz: So it sounds like you’re paying the most attention to nonfarm payrolls, which comes out every month, GDP, which comes out quarterly, and then housing, sales, and new home starts, both of which are monthly. Do I have that right?
Bill McBride: That’s correct. I think those are the major releases to follow.
Barry Ritholtz: Do you think those have the most predictive value as to what happens next?
Bill McBride: I think the employment report actually tells you the best of what’s happening now. The GDP report tends to, you know, it’s quarterly, it’s, it gets heavily revised.
The unemployment rate is monthly and so you know when the unemployment rate’s at 3. 9 that the economy’s in pretty good shape. New home sales and housing starts do have some predictive value. Not always, but generally, if new home sales and housing starts are increasing, the economy is going to be fine for the next few years.
If they decrease sharply, there’s a potential for a recession, but it’s not, you know, no model is perfect. We saw a number of major economists get fooled by the inverted yield curve and, and the sharp drop in housing starts and new home sales that were related to the pandemic.
So you always have to take everything with a grain of salt, but I think, there is some predictive value in, in housing starts.
Barry Ritholtz: I like the concept of GDP, Unemployment, and Housing Starts as past, present and future. It really gives you a broad range of what’s going on.
But let’s talk about the flip side of that. What do you think people both investors and economists pay too much attention to? And what data series perhaps, should they be spending less time with?
Bill McBride: I think probably the one people should ignore the most is, uh, is anything doing with sentiment? It’s more of an opinion, especially in the last decade or two. We’ve seen a real political tinge to it. Especially on the conservative side. When there’s a democratic president The economy is terrible to many Republicans. And the Democrats, it’s a little bit the same way, but there are some surveys that that’s all it does is really tell you who’s president.
Barry Ritholtz: That’s, that’s fascinating. I always find it amusing when. You look at certain models that have a survey component. Owner’s equivalent rent. What do you think you can rent your house for always kind of cracks me up. And the one that really I couldn’t agree with you more about ignoring sentiment is the Federal Reserve asking ordinary people, where do you think inflation is going to be in five years? I can’t imagine a more useless question than that.
Bill McBride: There’s probably a little value to that. But I, I understand what you’re saying. Sentiment in general is hard to measure.
Barry Ritholtz: So let’s talk a little bit about inflation. Are there things that you pay close attention to? Rent, food, fuel, mortgage rates? What are you looking at when you want to figure out what’s happening in the world of inflation?
Bill McBride: Inflation is an especially interesting topic right now, obviously, because it impacts what the Fed’s going to do, which also, impacts interest rates. Part of the problem is we had a huge surge in rent. related to household formation, really mostly in 2021, but going into 2022. And now asking rents are basically flat year over year and have been for some time now.
But the measure of rents that go into CPI and PCE. They include renewals, which they should, you know, the people that are getting and renewals are still catching up to the fact The rent surged a year or two years ago. But this is this is a key point is monetary policy cannot impact what happened to rents two years ago It can only impact what’s happening today, and today’s rents are basically flat asking rents.
So, you know, there’s a different people where sometimes renters say to me, well, wait, my rent still going up. Yeah, but that’s because it’s a renewal and monetary policy doesn’t impact that at all. So when you look at the CPI reports for the last few months, the government’s reporting, one of the sentences in there has been 50 percent is related to rents (or something close to that) of the CPI increase.
So what I’ve been doing is I’ve been taking rents out of the inflation measures to see where we’re at. And we’re much closer., and for several months, we were at the Fed’s target. So this is a little balancing act for the Fed is how much should they look at rents and how much should they exclude it from what they’re doing.
Now, very recently, in the last two or three months, we’ve seen services pick up a little again. And so that is concerning. But still, if you look at the Cleveland Fed, the median CPI, I think it was close to 4 percent last month annualized. If you take out rents, it was under 2%, so it was at the Fed’s target.
So this is, this is really one of the key areas on inflation that I’m looking at.
Barry Ritholtz: Let’s talk real estate. There are so many different elements that go into residential housing. It’s people’s incomes, what mortgage rates are at, local housing supply, and the aforementioned rentals. What do you watch most closely in this area? What do you think people should be watching that perhaps they’re not?
Bill McBride: I think, the key to watch is inventory. Um, that’s, that’s important. You know, it’s a there is supply and demand. We still have pretty good demographics. We have a large cohort in the home-buying age group in their thirties. On the flip side, the inventory, of course, has been very low, but it’s starting to increase.
It’s still 30 percent below kind of a normal level. But since sales are down so much, I’ve been looking more at months of supply, and that is probably going to get back to 2019 levels later this year (2024). And that says that you know, house prices will basically be flat to only up slightly by the end of the year, I think.
Barry Ritholtz: In 2022 and 2023, just about every economist out there was looking for a recession. You were not, and you got it right. What were you seeing that told you a recession was not imminent when everybody else seemed to be stuck on the inverted yield curve?
Bill McBride: Well, you know, there were several several economic analysts who didn’t think there would be a recession.
Claudia Sam, who you’ve interviewed recently. Jan Hatsias, Goldman Sachs chief economist, who everybody should read if they get a chance, in 2022, I didn’t see there was no reason to expect a recession at all. In 2023, you started seeing some signs of a possibility. The Federal Reserve staff was even predicting a recession in 2023.
The key thing that people were looking at was the inverted yield curve, which is still inverted. And the fact that housing starts dropped off pretty sharply. But what they weren’t looking at was the other parts of pandemic economics, if you will. Auto sales had been really depressed because of supply issues. And so that meant auto sales were going to pick up in 2023, which they did.
And there were other parts of the economy that had similar things where the supply issues were going to start easing up from the pandemic. If you factored in pandemic economics, I was saying, Hey, we need to watch, but I don’t think we’re going to have a recession.
And we didn’t.
Barry Ritholtz: So given all of the above, if investors want to focus on one or two data series to give them some idea of where we are and where, where we’re going, what two data series should they be paying attention to over the next few years?
Bill McBride: The unemployment rate and the payroll report is, is, is critical.
What’s important over time changes. There are times when the weekly unemployment claims is very important. That’s not now. That’s important when you really do think that there’s a possibility of a recession — if that really starts climbing sharply, that’s probably your key indicator, but that only matters in that particular situation.
Right now, probably the most important thing is, is the inflation reports. And being able to look at them, look at them with taking the rents out to kind of get a feel for what’s happening. because of this unusual thing that just happened with rents. So I, you know, I would definitely be following both of the inflation reports, CPI and the PCE report.
Barry Ritholtz: So to wrap up, investors should realize they don’t need to follow every data release, every news report, every economic announcement that comes out, but you should be aware of where we are in the cycle. When we’re closer to a recession, when things are in danger of slowing down, um, the weekly new unemployment claims are worth tracking, but in the meantime, you should be watching unemployment rates, you should be watching housing starts, and lastly, you should be paying attention to both CPI and PCE reports to give you a sense of when the Fed, or if the Fed, is going to cut or not.
I’m Barry Ritholtz, and this is Bloomberg’s At The Money.
[Music: Every picture tells a story, don’t it? Every picture tells a story, don’t it?]
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