Dire Straits for Now
My advice for the risk averse …
Nobody knows how all this will play out. What I know is that many stocks, metals, and real estate are still overpriced. It’s foolish to pay on the high side for something amid so much risk.
Unless you love risk, avoid risk. Remember, not that long ago, the reciprocal tariff shock of April 2025 triggered a -19% drop in the S&P 500 from its high of February 2025. Stocks were recently down by only -4.2% from their current record high of January 2026. As long as oil heads toward $100 per barrel, the drop in stock prices will continue.
For now, there’s nothing wrong with money in the bank, including CDs.
Over the near term, inflation will rise. However, over the long term, an inadequate pace of jobs creation will slow income growth by enough to lead to lower-than-expected consumer spending. An unwanted increase in inventories and an underutilization of staff will prompt price discounting and layoffs. In response, the Fed will cut interest rates deeply and both Treasury bond yields and mortgage rates will sink.
Nevertheless, getting to a much lower rate of inflation will not be painless. And it’s what happens during this transition that worries. It’s not clear who the winners and losers will be.
Interest rates will climb until war ends …
Perceptions of a burdensome cost of living weigh on Republican Party prospects for November’s midterm elections. Trump may choose to cut tariffs during July if the high cost of living is still a major issue for the November midterms.
Both with and excluding food and energy prices, the monthly and yearly percent changes of February’s CPI conformed to expectations. Nevertheless, a subsequent 14% price jump for WTI crude oil has ruled and the 10-year Treasury yield ascended to a recent 4.25% for its highest reading since the 4.29% of February 4, 2026. Even more jarring was the recent 3.71% yield of the 2-year Treasury, which was the highest since the 3.73% of August 21, 2025.
Futures market now says “one and done” for 2026’s prospective Fed rate cuts …
The latter brings attention to how the fed funds futures market now expects only one Fed rate cut in 2026. As inferred from the CME Group’s FedWatch Tool, the implied probability of a fed funds rate lower than the current 4.625% does not break above 50% until the FOMC’s September 16 meeting, or when the odds favoring a less-than-3.625% fed funds rate reach a less-than-convincing 58.3%. Moreover, the implied probability of a less-than-3.375% fed funds rate at the end of 2026 is only 32.2%.
Economic slowdown will slash interest rate views …
However, if recurring payrolls growth fails to materialize and real consumer spending averages a monthly rise of less than 0.2%, 2026 will be home to more than one Fed rate cut. The continuation of meager jobs growth and lackluster household expenditures will disinflate consumer prices. In turn, year-end 2026’s short- and long-term Treasury yields will be less than what the futures market and consensus now expect.
The now historically slow growth of payrolls may now be taking its toll of consumer spending. To the degree any deceleration by household expenditures prompts an accumulation of unwanted inventories and a glaring underutilization of consumer services production capacity, firms will be compelled to either limit price increases or cut prices outright. Moreover, related layoffs will further curb consumer outlays and put additional downward pressure on prices.
GDPNow cuts economic growth forecast by full percentage point …
Please discard forecasts calling for US real GDP growth of 3% or faster for calendar year 2026.
In response to January’s -0.2% monthly dip by retail sales and February’s loss of -92,000 jobs, the Atlanta Fed’s GDPNow forecasting model slashed its projection for the annualized quarterly growth rate for the real GDP of 2026’s first quarter from 3.2% to 2.1%.
The one-two punch to the macroeconomic outlook supplied by limp retail sales and the shrinkage of payrolls lowered the annualized quarter-to-quarter annualized growth rate estimates from 3.0% to 1.8% for real consumer spending, from 6.2% to 5.1% for real business equipment spending, from 6.6% to 5.9% for real business investment in intellectual property products (including R&D outlays), from -2.1% to a deeper -2.7% drop for real investment in business structures (despite all the hoopla over data centers), from a 0.8% rise to a -0.5% dip for residential investment spending, from 5.6% to 5.2% for real exports, and from 8.8% to 8.2% for real imports.
Record shows jobs growth has already slowed to a recessionary pace …
As shown in the following chart, the year-over-year growth rates for payrolls are less than they were during the early months of the recessions of 1990-1991, 2001, and 2008-2009’s Great Recession.
Jobless rate’s rising trend challenges upbeat economic growth views …
Though the number of first-time applications for state unemployment benefits remain at historically low levels, the unemployment rate has been trending higher since the spring of 2023. After bottoming at the 3.5% of April-May 2023, the unemployment rate’s moving three-month average equaled 4.4% as of the span ended February 2026. Previous increases by the jobless rate of nearly a percentage point occurred in the context of a recession. Once the seemingly indomitable US consumer curbs spending to a greater than anticipated degree, recessionary forces will be unleashed.
Look for major slowdown by early 2026’s consumer spending …
Consensus projections for January’s monthly growth rates of 0.3% for both consumer spending and the PCE price index supply an implied forecast of 0.0% for the monthly change in real consumer spending. All else the same, if, after stalling in January, real consumer spending rises by 0.2% per month, on average, in February and March, the real consumer spending of 2026’s first quarter will grow by 1.3% annualized from 2025’s final quarter. If real consumer spending’s monthly increase were to average 0.3% in February and March, real consumer spending’s annualized quarterly growth rate would equal 1.6% for 2026’s first quarter.
Lopsided jobs growth of past three years warrants concern …
For several years , I’ve brought attention to severely lopsided jobs growth. For the three years ended February 2026 (or since February 2023), nonfarm payrolls added 3.400 million jobs, wherein private-sector payrolls grew by 2.615 million and government payrolls increased by 785,000. The three years ended February 2026 included losses of -452,000 jobs in professional and business services and -325,000 jobs in manufacturing. In stark contrast, private-sector jobs in healthcare and social assistance increased by 2.515 million. In turn, all other private-sector jobs rose by a disproportionately small 100,000.
Healthcare and social work approximate 96% of private-sector jobs added since February 2023 …
Thus, during the three years ended February 2026, healthcare and social assistance supplied 74% of the overall increase in jobs and accounted for a stunning 96% of the growth in private sector jobs. The contribution to jobs growth by private-sector healthcare and social assistance well exceeded the shares of outstanding jobs supplied by private-sector healthcare and social assistance, which averaged 14% for all jobs and 17% for private sector jobs.
Healthcare and social work supplied 24% of private-sector jobs growth for 3-years ended February 2020 …
Lopsided jobs growth is atypical for a mature economic recovery. For example, during the three-years-ended February 2020 (or the three years prior to the COVID shock), the 6.447 million jobs added to payrolls consisted of 5.916 million new private-sector jobs and 531,000 new government jobs. The increase in private-sector jobs included gains of 393,000 for manufacturing jobs, 729,000 for construction jobs, 1.050 million jobs in professional and business services, and 1.400 million jobs in healthcare and social assistance.
Over the three years prior to COVID’s March 2020 arrival, the 1.400 million jobs added to the private sector’s healthcare and social assistance categories approximated 22% of the overall increase in payrolls and 24% of the number of jobs added to private sector payrolls. By comparison, the number of outstanding private-sector healthcare and social assistance jobs averaged 14% of all jobs and 17% of all private sector jobs during the three-year span ended February 2020.
Aging population stokes growth of healthcare and social assistance payrolls …
The number of jobs added to healthcare and social assistance payrolls rose from the 1.400 million over the three years ended February 2020 to the 2.515 million over the three years ended February 2026 partly because an aging population requires more healthcare and social services.
The unprecedented aging of the US population profoundly affects the US economy. Tolerance of earlier illegal immigration on a grand scale may have wrecked prospects for needed legal immigration. It is important that those who facilitated illegal immigration at least pay a considerable political, if not financial, price.
Costlier mortgages trigger -13% drop by homebuilder stock prices …
Unlike unit sales of new homes that are tallied at the signing of a contract to purchase a home, sales of existing homes are recorded at the closing of a home buying contract.
Thus, February’s 1.7% monthly increase by unit sales of existing homes was more the consequence of a drop by the FHLMC’s 30-year mortgage yield from its 6.39% average of the three months ended October 2025 to the 6.18% of the three months ended January 2026 than the dip by the 30-year mortgage yield from January 2026’s 6.10% to February’s 6.05%.
The recent 4.23% 10-year Treasury yields suggests the 30-year mortgage yield now approximates 6.20%. Nevertheless, a 6.20% 30-year mortgage yield would still be well under the 6.65% of a year earlier.
For the week ended March 6, or the first full week of Operation Epic Fury, mortgage applications from potential homebuyers advanced by 7.8% from the prior week and were higher by 10.8% year-on-year. The weekly increase occurred despite both the Iran war and a 10 basis points weekly increase by the MBA’s effective 30-year mortgage yield to 6.19%. However, the yearly increase by homebuyer mortgage applications owed something to the -49 bp yerarly drop by the effective 30-year mortgage yield.
The unfolding climb by mortgage yields in response to the Iran war has dealt a major blow to housing related stocks. Since hostilities began, the S&P 500’s index for homebuilder shares was recently down by -13%, while the index for the shares of home improvement retailers was off by -8%.