From Fort Circle Drive to the Beltway

As early as the 1880s, roadway engineers and planners floated the idea of a circle surrounding Washington, D.C. to improve travel within and around the city. The proposed “Fort Circle Drive” would have connected the Civil War-era circle forts that defended the Capital, but this concept was never realized. Several ring road proposals were contemplated in subsequent decades, including multiple concentric highways radiating from the city center. Absent execution of the multitude of plans, by the 1950s, Washington’s growing suburbs had overwhelmed the existing transportation network. After prolonged negotiations over everything from the route to the name, the final plan for the Washington Circumferential Highway was approved on September 28, 1955, as part of the Interstate Highway System backed by President Eisenhower. Over the years, the roadway was constructed in stages until its June 1960 completion. It was then that the highway was renamed the “Capital Beltway” by both Maryland and Virginia. On August 17, 1964, Maryland Governor J. Millard Tawes cut the ribbon to officially open the final stretch of Interstate 495.

Anyone who’s visited the nation’s capital in the summer can attest to the extreme heat emanating from one monument and museum to the next. As for the record, D.C.’s hottest was recorded on July 20, 1930, when 106 degrees was hit well before the Beltway opened. As for the runner-up, that was the 105 degrees logged on July 7, 2012. Rather than extreme heat, it’s the cooling in the labor cycle in D.C., Maryland, and Virginia that poses the greatest threat.

Labor demand in DC/MD/VA has already pierced a cyclical peak. At 451,000 last July, regional job openings fell sharply last summer, well under December 2022’s top of 604,000. To contextualize, as of the latest available month, March 2024, job openings were -21.5% below that high point (teal line). To wit, nonfarm payroll employment growth in the area has downshifted to a 1.1% year-over-year (YoY) rate through April, below that of the nation’s 1.8%. For completeness, weakness in trend job creation in D.C. and Maryland, both of which posted 0.2% YoY gains in April, drove the compression, while that of Virginia’s 1.8% is in line with the nation as a whole.

The sustained decline in demand for warm bodies transitioned to an upcycle in unemployment. Unrounded, the combined DC/MD/VA unemployment rate troughed in June 2023 at 2.39%. Since then, the three-month average has risen steadily and breached the McKelvey rule – a 0.3 percentage point rise in the three-month moving average off its prior twelve-month low – in October 2023 (lilac line).

Regardless of the outcome of this November’s Presidential election, the Biden Administration is seeking only modest increases to the Federal workforce in fiscal year (FY) 2025. According to govexec.com, most major agencies are poised to grow their ranks less aggressively than envisioned in previous proposals aligning with spending caps Biden has signed into law. The overall civilian Federal workforce would grow by just 1% with the Department of Homeland Security and Treasury leading the way. Some agencies that have long been in hiring mode, like the Department of Defense and Veterans Affairs, will now see their headcount contract.

The Biden FY2025 proposal is fundamental in nature. In the five quarters ended 2023’s final three months, real government receipts have sequentially contracted on a YoY basis (fuchsia line). Historically, a five-quarter downdraft has been associated with recession as was the case in 1948-49, 1953-54, 1969-70, 1973-75, 1981-82, 2001, and 2007-09.

What distinguishes the current episode is the spread between government net dissaving and private (household plus business) net saving, which has inverted. At the end of last year, this gauge plumbed to -$70.8 billion on a four-quarter moving average basis, a massive departure from the +$400 billion average in the four quarters which capped off 2022. The current figure stands in stark contrast to postwar history, wherein private saving outpaced government dissaving (or borrowing). Critically, this role reversal has only been on display once, during the Great Recession.

For capital deepening to occur in an economy, and thereby raise productivity, requires an increase in net saving. The inversion that’s manifest illustrates this process is at risk flagging cyclical vulnerability to the capital spending outlook. Moreover, the prolonged decline in the volume of government receipts risks an amplified need for borrowing over the course of this year.

Revenue challenges aren’t contained to the Federal sector. In FactSet’s latest Earnings Insight, John Butters’ compilation of first and second-quarter S&P 500 revenue growth draws the starting line; profiling both quarters and taking the difference between the two of them marks the end point.

What jumps out is the deceleration in S&P 500 sectors exposed to cyclicality and interest-rate sensitivity. Real Estate, Consumer Discretionary and Industrials are visibly suffering a top-line deceleration in 2024’s first half. The same can be said of noncyclical Consumer Staples and Communication Services. The weakest of the lot is Financials, which represents the ‘rate sellers’ who disseminate the credit impulse, or lack thereof, to the broader U.S. economy.

A quick glance at the table’s S&P 500 line waves the ‘All Clear’ to the casual observer. But a Higher for Longer Fed constrains private credit creation, impairing private demand. While a young nation called “The United States” no longer requires circle forts around its Capital for protection, the same cannot be said of an equivalent economic moat for its private households and businesses.

Posted in Daily Feather.