Hoisington Investment Management Q4 2025 Review And Outlook

Disinflationary Forces - Concerns over accelerating inflation in 2025 were unfounded as wage and price increases slowed due to eight influential factors suggesting disinflation will persist into 2026 [4] - Labor markets weakened broadly despite claims of resilience, with the unemployment rate rising to 4.4% by late 2025 from 4.1% at the end of 2024 [8] - Real disposable income growth slowed sharply to 1.4% in the first three quarters of 2025, down from 2.5% in 2024, indicating eroding consumer spending power [11] - Monetary conditions were more restrictive than recognized, with commercial bank loans remaining virtually unchanged in nominal terms despite Federal Reserve rate cuts [13] - The U.S. budget deficit decreased to $1.7 trillion in 2025 from $2.0 trillion the previous year, with tariff revenues contributing significantly to this reduction [21] - Idle manufacturing plants outside the AI sector increased, and major economies like China, Japan, Germany, and the UK faced stagnation [26] - A study indicated that tariff hikes initially boost inflation but have a longer-term effect of suppressing demand and contributing to disinflation [27][28] - The shift towards AI is considered disinflationary, potentially leading to excess capacity and compressing margins, which could further restrain income growth [29][31] Labor Market Dynamics - The broader unemployment rate increased from 7.5% in January to 8.4% in December 2025, indicating a serious deterioration in the labor market [8] - The ratio of part-time to full-time jobs surged, reflecting a lack of full-time employment opportunities [8] - Payroll employment growth was significantly overstated, with the Bureau of Labor Statistics revising job gains down to 1.524 million from an initial 1.923 million for the year [9] Consumer Spending and Financial Health - Real disposable personal income remained unchanged in Q3 2025, a concerning sign for a supposedly robust economy [11] - The personal saving rate dropped to 4.2% in Q3 2025, financing the increase in real personal consumption expenditures [11] - Consumers entered 2026 with weak financial health, relying on large tax refunds to repair their balance sheets [12] Monetary Conditions and Credit Availability - Loan rates for lower-risk consumers declined but remained high, with delinquencies and bankruptcies increasing, limiting credit availability [14] - Real world dollar liquidity fell by 8.3% in 2025, marking a fourth consecutive year of decline [20] Economic Indicators and Future Outlook - The divergence between GDP and GDI suggests a potential structural problem in income and expenditure flows [10] - The Fisher equation indicates that ongoing disinflationary forces may lead to a decline in long-term Treasury bond yields [32]