At the Money: What Data Matters and What Doesn't

0:00I'm Hannah Fry, and as we rely more and more on artificial intelligence in every facet of our lives and businesses, I'm on a mission to find out how we can build the internet that AI needs. Learn more later in the podcast.

0:28When 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 and bottomed or is it about to pick up again? The answer to these questions are mostly just opinions, 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.

1:21To 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 analysis of the economy over the past two decades. And he has accurately identified 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?

2:09Well, there are several major releases, the employment report, the GDP report. And since my major focus is on the housing market, it's 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 brings you insights into what's actually changing in the economy. So it sounds like you're paying the most attention, 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.

2:54Do I have that right? That's correct. I think those are the major releases to follow. You think those have the most predictive value as to what happens next? Well, 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 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.

3:35If 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 the sharp drop in housing starts and new home sales that were related to the pandemic. and that so you always have to take everything with a grain of salt but i think those there is some predictive value in in housing starts i like the concept of gdp unemployment and housing starts as past present and future it really gives you the broad range of of what's going on but let's talk about the flip side of that what do you think people in both investors and economists pay too much attention to?

4:22And what data series perhaps should they be spending less time with? I think probably the one people should ignore the most 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. So 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. Right. That's fascinating. I always find it amusing when you look at certain models that have a survey component.

5:08Owner'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, you know, ordinary people, where do you think inflation is going to be in five years? I can't imagine a more useless question than that. There's probably a little value to that, but I understand what you're saying. Sentiment in general is hard to measure. 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?

5:48You know, inflation is especially interesting topic right now, obviously, because it impacts what the Fed's going to do, which 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. And renewals are still catching up to the fact the rent surged a year or two years ago. But this is a key point, is monetary policy cannot impact what happened to rents two years ago.

6:41It can only impact what's happening today. So, you know, there's a difference. Sometimes renters say to me, well, wait, my rent's 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.

7:21So 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? Let's talk real estate. There's 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? I think the key to watch is inventory. That's, 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 30s.

8:06On the flip side, inventory, of course, has been very low, but it's starting to increase. It's still pretty 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. And that says that house prices will basically be flat to only up slightly by the end of the year, I think. So 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 recession was not imminent when everybody else seemed to be stuck on the inverted yield curve?

8:54Yeah, 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 Hotsuits, 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. So, but, I mean, the key things that people were looking at was the inverted yield curve, which is still inverted. and the fact that housing starts dropped off pretty sharply.

9:39But what they weren't looking at was 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. So 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. 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 we're going, what two data series should they be paying attention to over the next few years?

10:32Yes. Unemployment rate and the payroll report is critical. What's important over time changes. Yes. There's times when the weekly unemployment claims is very important. That's important when you really do think that there's a possibility of a recession, but that only matters in that particular situation. Probably the most important thing 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. So, you know, I would definitely be following both of the inflation reports, CPI and the PCE report. 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.

11:25But 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, 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 stay pat. I'm Barry Ritholtz, and this is Bloomberg's At The Money.

12:14Just to start a grandma and dad That's it!