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June 2023 Economic Risk Factor Update

Dear Clients & Friends,

It’s time for our monthly economic risk update. A quick preface for the

newcomers to our distribution list: both our monthly economic risk updates

and market risk updates are not intended for professional financiers, but for

our small family of clientele who appreciate real data presented in a manner

that they can absorb. So don’t fret, because it’s not terribly complex.

I also wanted to comment on the recent debt ceiling noise that seemed to

consume mainstream media. At no time were we concerned that the US

government would default on our debt. The fact is that, whether they would

admit or it not, the overwhelming majority of our congressional

representatives were well aware of the potentially catastrophic implications of

defaulting on our debt. In addition, mainstream news can’t control themselves

when they are given the opportunity to scare their audience, because doing so

is profitable, and that’s the world we live in. Fortunately, the market has gone

up 5% since the debt ceiling debate came and went.

Now for our risk update!

We continue to have a strong conviction that the US economy will not fall into

a deep recession with a hard landing, but rather gently slow with a soft, very

tolerable landing. While we will not attempt to forecast short-term general

market performance, we are highly confident that the market is likely to

experience a full recovery and reach its previous high of late 2021 by the end

of 2024 (hopefully earlier). We’ll discuss this further in the coming weeks. For

now, let’s get into our economic risk update.

Much of the data below has been compiled and presented by our good friend

Peter Esele, as well as by Dan Levinson from our Philly office. We follow four

indicators that have historically done a good job of warning us of an impending

economic slowdown. They are the Service Sector, Private Employment, the

Yield Curve, and Consumer Confidence.

ISM Services: PMI Composite Index

Because the service sector makes up roughly 75% of American economic

activity, it warrants close attention. The index dropped from 51.9 in April to

50.3 in May. While this marks five consecutive months of expansion, the trend

downward, in addition to recent volatility in the index, warrants a yellow flag.

Private Employment: Annual Change

The US economy beat expectations by adding 339,000 jobs over the month of

May, higher than the anticipated 195,000 jobs. This marks 29 straight months

of job growth, despite the plethora of headwinds during this time span. The

continued strength of the US labor market leaves this indicator at a solid green


Yield Curve: 10-Year Minus 3-Month Treasury Rates

The yield curve inversion grew larger in May, with the 3-Month treasury rate

rising from 5.1% in April to 5.52% in May. The 10-Year rate only rose from

3.44% to 3.64%. We are taking this data point with a grain of salt, as the

short end of the curve tends to rise more quickly in response to Fed action

than the longer end of the curve. However, it would be remiss to dismiss that

this marks 8 months in a row of an inverted yield curve, as the curve is one of

the most widely followed indicators of pending economic trouble. Caution

should be taken going forward. For this reason, the Yield Curve remains at a

red flag.

Consumer Confidence: Annual Change

Consumer Confidence dropped from 103.7 in April to 102.3 in May. While this

number remains in positive territory on an absolute level, this does mark 15

straight months of decline. While the absolute numbers remain outside of the

historical danger zone, the trend of continued decline does warrant some

attention, and we are giving this risk indicator a yellow flag.

In conclusion, May has brought a mixed bag of results. A strong labor force

continues to provide strength to the US economy and consumer, despite

dwindling confidence and economic headwinds. We expect slow and steady

economic growth going forward. However, the risks are real, and we should

remain cautious as we tread forward. Our aggregate economic risk factor

remains a yellow flag.

Keep in mind that part of the reason that the Fed raised rates was in order to

slow the economy and bring inflation down. Inflation is half of what it was one

year ago but remains high. While the Fed’s rate hikes have helped inflation a

great deal, they have not yet negatively impacted the labor market (which is

incredible). In fact, the United States is currently over-employed! (Yep, believe

it or not, our employment rate is higher than what is considered “full

employment.”) Therefore, we know that unemployment must rise in order for

inflation to fall further. So, when the media is screaming that the world is

coming apart because unemployment has risen by 1/10th of a percent, just

remember what Spock said in Star Trek: “the needs of the many outweigh the

needs of the few, or the one.” If unemployment has to rise by a fraction of a

percent in order to protect 99% of Americans from high inflation, that is

generally a good thing, not a bad thing (for most people.)

With that, we wish everyone a lovely weekend.

-Matt, Dan, and the rest of the MORWM home office


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