30 Sep It’s a Mad, Mad, Mad, Mad Economic World!

By Pasadena Private Lending President Mike McAdams

A not-so-memorable comedy from back in 1963 with the memorable title “It’s a Mad, Mad, Mad, Mad World” comes to mind in trying to chart the way forward from this month’s economic data. The movie involved an attempt to find hidden gold by a long list of experienced movie stars in an improbable script; that, too, parallels today’s efforts by economists to find true value in current economic events!

This week the Federal Reserve (Fed) dropped short-term interest rate by ¼% signaling their recognition that inflation might be less of an issue going forward with it hovering at the Fed’s target of 3% and below what it has been for some time. The rate call was also a signal that the Fed sees job growth slowing with a four-year-high unemployment rate of 4.3%. The exact balance of “how much less inflation” vs. “how much less job growth” that drove this month’s decision is still one of the economic mysteries to be determined over time. Complicating more definitive forward-looking analysis, we should throw in the Bureau of Labor Statistics’ newest annual large downward recalculation of several years of job and unemployment numbers AND the fact that there has not yet been enough time for much of the tariff data to show up in inflation. So, while the Fed’s Chairman did foreshadow two more modest rate cuts this year (with his repeated incantation that “it all depends on the data”), it remains less than clear what plot line truly lies ahead.

So, in the context of conflicting data crosswinds, how about this attempt at economic humor: “Did you hear the one about interest rates being down but inflation being up?” That is, what if we haven’t yet seen the full impact of tariffs? Imagine how perplexing that fact pattern might be to a Federal Reserve Governor, say… in a month or two… when those Governors are saddled with the responsibility to decide interest rate policy to bring about both full employment and low inflation within this choppy economic environment?

The point is, economic data is the basis of all (at least short-term) wisdom and that data is thought to be absolute. And while historically there have been data adjustments in the past, of late it seems that data is increasingly less sacrosanct and subject to recognition delays. For instance, concerns for federal budget-based higher rates were a constant threat. Where is that in today’s rate concerns? And, in the real world, while lower interest rates make qualifying for a home easier (and some refi’s possible), mortgage experts express concerns that lower rates will increase demand from people who might not have been waiting for rates to fall. And as they as a larger group of buyers enter the market, they will drive up demand and home prices. While home prices are not a direct or immediate CPI component, they will over time have undeniable inflationary impact. The devil will be in the details and only clear over time.

For business owners, we still see mixed signals and crosscurrents. Trade issues, tariffs, immigration constraints, “Buy American” trends and phased-in… or out… tax policies will all add additional complexities. Even a Bureau of Labor Statistics analysis expressed concern for possibly stubborn food inflation, the decrease in America’s crucial immigrant workforce in both high technology and farm labor, construction, and restaurants and indeed, overall economic uncertainty. Experience tells us that keeping dry powder for uncertain times makes sense; that is, this may not be the best time to push growth to the max. On the other hand, on a national scale, if everyone embraces that philosophy, it does foretell slower times. With that said, we have borrowers that come to us with extraordinary opportunities that are “now or never.” And sometimes, opportunity just must be grasped.

For lenders like PPL, we are well aware that any time change occurs, some borrowers may stumble… and not necessarily from expected reasons. Change is thus a funny thing that can both reward and penalize even the best-managed firms. We are as always careful, but especially now we seek to discuss issues early and often with existing borrowers and structure new loans to provide ample cushion against both possible and unforeseen issues.

In the end, we will see if national economic policy will pull us along in a positive direction or weigh us back despite the best of intentions. While maybe not a “4x Mad” world, it is certainly a world where attention to detail and readiness to adjust to new data will be essential to successful outcomes.