Economic Commentary – Our Economic Holding Pattern

This represents a marked broadening from the last several years, and, if sustained, would be the broadest participation level since 2009 and, before that, 2002.

Prospects For The Near Term

Turning now to some of the economic data behind all this, we again see evidence of a holding pattern. A quick summary of recent data shows:

• Job growth remains broadly unchanged – strong in some months, then weak in others, with private sector jobs growing at a 0.5% annualized rate. Nothing to be excited about, but also nothing to be concerned about.
  
  
• Industrial Production decreased about 0.5% in March. This is the first decline in four months, but the details provide some positive caveats to the overall decline. Auto manufacturing actually accounts for much of the decrease; looking at a “core” measure of industrial production, March actually saw a 0.2% increase. No breakouts one way or the other are necessarily on the horizon.
  
  
• Retail sales rose 1.7% in March, but…. Overall retail sales grew only 4% in the last 12 months, and in the face of inflation, that is a “real” growth rate of 0.7% for the last year. Inflation-adjusted retail sales are still below their post-COVID 2022 peak. So, no growth in 4 years. We’re not going anywhere fast up or down.

With ongoing hostilities in the Middle East, relatively low U.S. economic growth, and a sidelined Fed (see below), we don’t expect any significant near-term improvement. But in all honesty, we can’t really see any significant near-term deterioration. We’re in a holding pattern until further notice.

What About The Fed

As just mentioned, we see the Fed sitting this one out on the sidelines. A review of recent history reminds us that the Fed acted too quickly right after the COVID shutdown – putting too much money into circulation to somehow prevent a recession – and then, in reaction to this mistake, the Fed acted too slowly to pull money out of circulation before it sparked inflation. Accordingly, from February 2020 to March 2026, we’ve experienced both a sharp recession (19.2% GDP decline peak to trough) and 27.6% cumulative inflation.

Currently, the broadest measure of inflation (the consumer price index) seems to be running at a 3.3% annual rate as of March 31, 2026. The Fed has sometimes looked more at what they’ve called “supercore inflation”, but even that measure is up 3.1% from one year ago. While a 3% inflation rate is very close to the post-WWII average, it is above the Fed’s 2%/yr. goal and seems to remain stubbornly so. It is neither so high as to cause massive concern, nor low enough to support another near-term rate cut.

The Fed’s own meeting minutes show it to be both chastened and reluctant to act too quickly and repeat errors driven by a “just-do-something” attitude. It seems to prefer a more gradual process of consideration, decision & implementation than perhaps at any time in the last 45 years. The Fed has placed itself on the sidelines. We’re going to be here awhile.

War In The Middle East

Many commentators remain tempted to attribute to the war more economic impact than has thus far been evidenced or than is likely to occur going forward. We have not seen the massive fallout from the war, which was believed to be inevitable when hostilities broke out. All of what we’ve written above is evidence of that. But predicting the course of this war – or any war, for that matter – is fraught with uncertainty.

The immediate focus of commentary is on the perceived inflationary impact of the war on oil prices. Such a focus is irrelevant. Milton Friedman famously taught that inflation is always a monetary phenomenon: a mismatch between the supply of money and the demand for money.

Increasing oil prices may have an economic impact, but inflation is not one of them. The increase in oil prices will necessarily be offset by decreases in other prices such that the overall level of inflation will not be impacted.

The war’s primary economic impact stems from its potential effect on supply chains. It is more than just oil that travels through the Straits of Hormuz. If supply is restricted in the long term, then recessionary forces are put into play. But the severity of those recessionary forces depends upon the length of the supply constraint and the availability of alternative supply sources.

We’re seeing much of the world move toward alternative supply routes, and the longer the straits remain closed, the more will be employed and built. The most severe long-term negative economic impact is likely to be felt by Iran and other oil producers in the Middle East. Meanwhile, other producers and suppliers will come online as time progresses.

Regarding the length of the current closure, the market’s assessment seems to be that Iran will have to capitulate before the industrialized world does. It is possible that assessment is wrong, that Iran has a stronger hand and can force the world into a deep recession, but that is not the collective assessment of all the competing forces in the New York Stock Exchange, which is the largest stock exchange in the world with $2.6 trillion in monthly trading volume and a market capitalization exceeding $30 trillion.

Furthermore, looking to the truly long-term, if the war’s conclusion succeeds in removing terrorist elements, reducing the chokehold the Middle East has on certain commodities, and reinforcing the primacy of freedom of navigation, the entire world’s economic future will be brighter.

We cannot say that the near-term economic impact will be recessionary or expansionary; again, it is a very unclear picture of waiting to see.