Jay Powell used the word “excess” five times in his latest press conference. All of them referred to too much of a good thing, which leads him to believe Main Street can withstand higher interest rates better than persistent inflation.
Start with household balance sheets . . . so strong enough that they earn two of Powell’s five “excesses” on their own. Here’s the quote:
One is households and businesses are in very strong financial shape. You’re looking at, you know, excess savings on balance sheets, excess in the sense that they’re substantially larger than the prior trend. Businesses are in good financial shape.
Granted, there’s nearly $16 trillion in debt on those household accounts now, but remember, those dollars are already 12% smaller than they were before the pandemic and on track to shrink another 6% at least in the coming year.
In real terms, the overall debt load has only climbed 1.7% across the pandemic era, which makes sense given the tribulations a lot of families have faced in the intervening time.
And yes, that additional $186 billion in debt is backed up by a stunning $3 trillion more cash in household bank accounts. That’s the “excess” Powell thought was important enough to mention twice.
It’s also the free money he and his Fed colleagues want to vacuum out of the economy to hit the brakes on out-of-control prices. Lower bank balances make each purchase matter more. People will prioritize their spending again.
Right now, the big banks don’t seem all that afraid of defaults. Mortgage debt remains at a relatively sustainable long-term level of 65% of annual disposable income. And with new loans plateauing for the time being, housing leverage is not going up.
I know it sounds insane for the Fed to think U.S. families to have an “excess” of cash on hand, but everything is relative. Too much cash compared to a limited number of things available to buy means that each hard asset attracts more dollars.
Prices, in other words, go up. And the purchasing power of every one of those dollars shrinks. Taking some of those dollars out of circulation helps to mitigate the cycle.
As Powell said, he’s focused on breaking out-of-control demand for stuff. He wants us to stop chasing material objects quite so hard. He won’t mind if we stop chasing higher-paying jobs, either:
But there’s a job to do on demand. And that you can see that in the labor market where demand is substantially in excess of supply of workers. And you can see it in the product markets as well.
Too many jobs to choose from, along with an “excess” of demand for labor. It’s the same thing. The job market is too hot to handle. While it sounds insane for the Fed to want Americans to accept slower salary increases, that’s exactly what Powell wants to do here.
A slightly cooler job market would help limit wage inflation. Even a few layoffs would get people back into the job market to fill some of the openings that are out there.
How hot is too hot? That’s Powell’s fourth “excess” . . .
If you look at it’s essentially almost two to one vacant job vacancies to unemployed people. There’s a lot of excess demand. They’re more than five million more employed plus job openings than there are the size of the labor force. So there’s an imbalance there that will, that we have to do our work on.
For real full employment to happen at this point, five million job listings need to vanish. That means hiring managers need to scale back on what they think they need.
They need to slow down. Until they feel comfortable with the talent pool and application pipelines they have, they’ll keep having to pay up for warm bodies . . . and even then, the “great resignation” will continue.
I just saw a company hire an executive assistant right out of college for the equivalent of $83,000 a year. How do you think that makes people at a much later stage in their career who were once content earning $60,000 on very difficult and intricate tasks feel?
Unless they really love what they’re doing, they’re going to quit. It’s that simple. They can do better elsewhere. And their costs are still rising just as fast as everyone else’s . . . even if their compensation has fallen behind.
That’s the delicate situation the Fed finds itself in. Inflation spreads. Even when a good thing is concentrated in one industry like restaurant work or retail, it’s contagious.
Add it all up, you’ve got Powell’s fifth and grandest “excess” stalking the economy today:
You can see places where the demand is substantially in excess of supply. And what you’re seeing as a result of that is prices going up, and at unsustainable levels. Levels that are not consistent with two percent inflation.
We have too much cash. More cash is coming in. We have our pick of jobs to keep the cash coming in. There’s a limited amount of stuff in the system due to supply chain shocks. When we want the stuff, we pay more to grab it while we can.
That’s the inflationary mindset that Powell is trying to break. It’s going to take time.
Just look at the latest Home Depot (HD) results. Customers are coming in less often because a lot of us have already done all the renovations we need . . . but everyone else is trading up the price chain toward premium products.
All in all, even factoring for inflation, business is better than ever. And CEO Ted Decker has a superlative of his own:
We believe that the medium-to-longer term underpinnings of demand for home improvement have never been stronger.
Never. Been. Stronger. He isn’t talking about the past. He’s talking about the medium future and beyond.
That’s not an immediate recession call. The banks watching credit card balances aren’t making recession calls. They’re the bulls.