Solid Economy?

Mounting inflation concerns and a solid economy were cited as the main reasons for the Fed to pause its rate cut in January.

Indeed, rising food inflation is back.

The cost of groceries increased by 1.8% from a year earlier in December, rising at the fastest pace in more than a year, according to Labor Department data released last month. The cost of food overall was 0.3% higher in December, after increasing 0.4% in November.

Declining business investments is another red flag that the solid economy could come unstuck

“Decline in business investment, flat reading in net exports and a sharp decline in inventories is holding back growth.

The drawdown in inventories, especially at the wholesale level, indicates that retailers also scurried to stock up before possible tariffs. This could continue into early 2025,” wrote the BEA.

An increase in consumer spending is more likely due to inflation rather than a solid economy

US households spent more on groceries in the quarter because the same basket of goods costs a lot more than the under-reported inflation rate. 

Global Food Commodity Prices have returned to 2021 levels.

With the ongoing war in Ukraine, the breadbasket of Europe, sanctions and the deportation of migrant workers in the US, global food inflation could worsen in 2025. The wild card is oil prices, which have remained relatively low. Crude oil is 73 USD a barrel at the time of writing.

“Every time you get a 10 USD move down in oil, you can count on a half a point coming down on the CPI,” according to Jeffrey Gundlach.   

So, if oil prices go to 83 USD a barrel, that would mean a half-a-point increase in CPI. 

Worsening geopolitical conflicts in the Middle East could send oil prices spiralling.

Mounting layoff in a solid economy?            

Nearly half of managers predict layoff in 2025.

Nearly half 45% of US managers said their company will likely lay off workers in 2025, according to a Jan. 15 report from Resume Templates.

Managers cited several reasons for layoffs, including economic struggles, industry-specific challenges, automation and artificial intelligence, overstaffing and anticipated policies from the Trump administration.

If it is a solid economy, why in the first month of 2025 considerably more job cuts than in December 2024? 

Meta, Amazon, and Microsoft have announced layoffs and even begun cost-cutting measures. Since the start of 2025, about 25 IT companies have laid off 5,461 workers.

If this trend continues, 2025 could be the year of massive layoffs.

The so-called solid economy could spiral into a deep recession or something worse

But Q4 2024 corporate earnings do not flag an economy in trouble, with more than a third of corporations reporting actual results, 77% of S&P 500 companies have reported a positive EPS surprise and 63% of S&P 500 companies have reported a positive revenue surprise.  

Quarter earnings are backward indicators, and it is the jump in layoffs in January, the drop in CAPEX and other cost-cutting measures that shatter the solid economy narrative.  

Why are households cutting spending and trading down in a solid economy 

Customer use of Walmart Apps increased by 11% as buyers turned to the discount store to stretch their dollars. Wages are not keeping up with inflation, leaving households with depleted savings and maxed-out credit cards. 

Aggregate delinquency rates are rising. The share of loans in some stage of delinquency edged up in the third quarter to 3.5% from 3.2% in the second quarter. 

Household debt increased by 0.8%, or $147 billion, to $17.9 trillion.

Moreover, about 3% of all mortgages were in some form of delinquency in September 2024, up 20 basis points year over year, according to a CoreLogic report released in December 2024. 

So, with households tapped out, it is no surprise real retail sales have been negative for the last three years, leaving consumers unable to afford these prices.  

Wage growth is likely to follow the pattern of previous recessions as it comes crashing down, which happened in the 80s and 2000s and in the 2007 recessions.

Rising layoffs and a drop in business investment crushes wage bargaining power, and it is a dynamic that could worsen in the age of AI and robotization. 

So, most households could see discretionary spending budgets squeezed even further. 

Wage growth expectations are crashing, and those with jobs are cutting spending.

It is looking more like a recession than a solid economy. 

Commercial real estate crashing in a solid economy 

Buckland Hills Mall was bought for nearly $26 million in January 2025.  

In 2021, the same Mall had an estimated value of $95 million.

The purchase included a hotel and restaurants surrounding the Mall. 

How long will the Fed hold interest rates in restrictive territory as the solid economy narrative gives way to an economy tanking with rising delinquencies and layoffs?  

At some stage, when the solid economy narrative becomes laughable, the Fed might need to cut rates to boost the economy and raise rates to keep inflation down.

But that is the stuff of a magician, not monetary policymakers. The bond market and gold prices flag scepticism.