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This biggest economic news from August was the speech Jerome Powell gave from Jackson Hole.  He admitted that, while inflation is still too high, that it has come down considerably since they started raising rates last year.  He didn’t indicate that future interest rate hikes were imminent but was prepared to raise them again if inflation reaccelerates.  He also gave us, dare we say, one of the most poetic lines ever delivered by a Fed Chairman:

“As is often the case, we are navigating by the stars under cloudy skies”. 

We know that Jerome Powell is a Grateful Dead fan, perhaps he was channeling his inner Jerry Garcia?  In any case, it represents the state of the economy right now and why things are so uncertain.

On one hand, we’re just starting to see the impact higher interest rates are having on borrowers.  Home affordability is the worst it’s been in decades.  The average American household would have to spend over 43% of their income on a new home – worse than the peak of the housing crisis.

Americans are also relying more on their credit cards for spending.  Credit card debt just reached $1 trillion last month.  The average rate for a credit card is now nearly 21%!

Car payments are on the rise as well.  The average monthly payment reached $733, a new record.  If that seems high to you, what do you think about $1000 monthly payments?

“During the second quarter, more than 1 in 4 vehicle shoppers in Texas and Wyoming committed to paying more than $1,000 a month, which experts say is due to the high volume of large truck purchases in those states, according to Edmunds.

More than 1 in 5 shoppers in seven other states – Colorado, Kansas, Louisiana, Montana, Nebraska, North Dakota, and Utah – are also forking over more than $1,000 for their vehicles each month, Edmunds found.”

Truck Purchases are Driving Up the Average Cost of Car Payments

With these increased payments, and the cost of just about everything rising between 10-20% since the pandemic, you’d think the economy would be tanking.  In fact, it’s doing the opposite.  The Atlanta Fed forecasts that GDP growth in the 3rd quarter will be almost 6%, a huge number – especially considering all of the calls for a recession earlier this year.

Why?  Partially because of what we talked about last month – the ability of consumers and businesses to refinance their debt at much lower rates over the last few years.  The economy is also still adding jobs and consumer spending, as measured by retail sales, just rose for the 4th consecutive month.

And that is the uncertainty that Jerome Powell and investors will be dealing with for the foreseeable future.  Tighten monetary policy too much and you’ll cause a recession.  Do too little and inflation will increase again.   We’ll eventually enter the recession that’s been forecasted but will that be in 2024 or much later?

We’ll keep an eye on it.  In the meantime, I’m sure Jerry Garcia would want us to Just Keep on Truckin’.