This week on “Inside the Economy”, we discuss inflation & housing. The Consumer Price Index shows us that inflation may have hit its peak, but goods and services spending remain strong and the Fed continues to show its willingness to raise rates to try to tame inflation. The supply of homes in the U.S. has risen as new loan applications fall with the increase in mortgage rates, but what does that mean for the housing market going forward? Tune in to learn about this and more!
Key Takeaways:
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- US industrial production continues to rise
- Used car market weakens
- Oil hovering around $90
- Mortgage rates back up above 5%
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Full Transcript:
Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. Just a couple of things this time. The inflation issue, I’m calling it taming inflation right now and the housing market. Quick look at the numbers. There’s nothing really dramatic going on. Inflation has curved a little bit. We’ll talk about that. There isn’t anything dramatic in the yield curve or rates or unemployment or initial claims. We’re getting ready for the show that’s going to unfold here in the next 6 months. CPI and all the other measures of inflation have likely peaked meaning the growth rate has peaked.
Again, the growth rate needs to be brought down to about 2%. Let’s call it 8% now needs to be down at 2. That’s what the Fed is Trying to do. Slow the economy. Bring the growth of inflation down to about 2. You get inflation at 2 and the cost of money normally referred to as Fed funds or what the Fed talks about all the time. It’s the cost of money needs to be about 3. You got to have the cost of money higher than inflation. Mortgages 5 and 3 quarter. That’s where a 23-trillion-dollar economy ought to be. That’s what the Fed is trying to do. The idea of a soft landing is to do that very thing.
If the Fed succeeds in doing that and I’ve said before, I think this is a very commendable very hardworking smart Federal Reserve Board. They might be able to pull it off. I give them 20, 25% chance. If that happens they’re not going to lower rates. Don’t anticipate success mean lowering rates success means they leave the rates where they are. Get inflation to 2, keep the cost of money at 3. We’re at 2 and ¾% right now if we get 50 basis points 2 and 3/4%. 75 basis points will be at 3. They should stay there in success and then the rest of the markets are just going to have to accommodate that. The PCE very popular measure of inflation it’s about goods it’s not services. Which is most of the economy, services really haven’t had problems keeping up with very low inflation.
The good side has, the commodity side has. Lower into the labor market has. That is all adjusted. It’s been kind of long overdue. That rate of growth, that’s what they’re going to bring down. Recessions or corrections always start with the housing market and that is underway. They finish with the labor market.
So, quick touch on the labor market right now. Exhaust of unemployment, interesting combination but exhausting unemployment benefits is indicative of things perking back up and people have left unemployment stop getting benefits, stop getting supplemental money after COVID. They’re dropping way down. There aren’t benefits to exhaust because people are out actually looking for work or doing a gig job. There’s not a lot of problems in the labor market. There’s not wage push, in fact everybody’s they’re hiring. There is a huge Intel chip plant being built in Youngstown, Ohio. They need 7,000 workers and they can’t find them. You’re looking at about 3,000 highly paid jobs that are waiting to get the thing built. That’s kind of where the labor market is right now.
All of us are living in an environment that things like used cars and this is the latest Manheim report have adjusted up in value. New car productions slow down significantly due to some labor, chips, whatever the reasons were. Fear of people not buying them during COVID, whatever the reason. Automobiles are just picking up right now. Even though Ford’s going to lay off into the 3,000 people. Overall automobile manufacturing is slowly picking up. The chip thing has been resolved. They are expensive. Those cars are very expensive. They’ve adjusted to the marketplace for a variety of reasons.
Used car are very expensive because that’s where the market has driven it but that doesn’t mean those prices are going to come down to where they were. They adjusted up for a reason. This is one of the places we’ll watch and see how that’s going to impact people on the lower end of the economic scale. A used car is probably fairly priced right now compared to a new one.
It’s the housing market. Home supply is up. Mortgage loan especially refinance applications which in some respects are where the money is, but it’s indicative of what’s going on the market right now. Refi applications, home equity line of credit, all the rest of that stuff are way down. The number of independent mortgage brokers going bankrupt is at a new high. The numbers are in the hundreds across the country.
New, well, we’ve already talked about a lot of people walked away from new home deals and a lot of those mortgage applications simply aren’t happening, because people who need to buy a house right now, a lot of them afford it. They can’t afford a mortgage at 5 and 1/2. Existing home sales, yeah, we knew this was happening. They’re on their way down. If you look at the numbers, this is actually closed sales and Denver’s on here. This is a long list. I only took the top 15%. Denver’s down about 32%. That’s July. That doesn’t help everybody involved in the housing market. That is driven by the cost of money coming up which isn’t the best way to do it but that’s what should be happening right now. So, if you the cost of money where it should be inflation at 2, cost of money at 3, mortgages, let’s call it 5 and ½, 5 and ¾. What has to adjust is price. That’s what’s happening right now. Those prices have to come down. They’re probably 20% over inflated.
The rest of the economy is not showing much in the way of impact on what the Fed is trying to do. Credit is available. There’s a lot of liquidity in the system. There’s not a lot of lack of finance or credit card delinquencies or mortgage delinquencies, nothing. This is the office of financial research and they keep track of what the stress level is in the economy and right now, there’s very little indication that there’s stress in the economy. The Fed has to keep moving until there is stress in the economy and all the activity slows. Industrial production is doing very well.
There’s a lot of new factories coming online when they can find workers. There’s a lot of stuff picking up. Automobiles are picking up, jets are picking up. A lot of upper-end industrial manufacturing is going on aluminum steel so on and so forth. Oil, we’re shipping it all even shipping oil to China. That is one of the things they’re going to have to slow down. With a little luck Fed will go up stay at 3 and ¾ and leave it there and take time for things to settle down lower prices, lower activities. If we have what’s viewed as a recession let’s call it before Christmas. The Fed will have to do the other thing which isn’t best which is very popular. But the other thing is, oh we went too far we have to lower rates. If they lower the cost of money back down to inflation or lower to 2% or lower. We’re just going to have to go through this inflation-busting cycle again. Call it 18 months, 2 years.
I’m optimistic that the Fed will do the right thing. Keep in mind that a lot of these prices except for the price of the home you have on the market right now, which is going down. The rest of the prices, coffee, gasoline should be 3, 3 and ¾, a lot of other commodities prices where we are now. Minimum wage is not going down. a lot of these things are not coming down get used to them it’s just the rate of growth that’s going to slow. Okay. A lot of excitement in Jackson Hall. It’s the great economic meeting and of course I’ll read every word of the minutes.
I appreciate you joining me. Any questions of course info@SHJwealthadvisors.com. I’d be happy to answer it. Thanks for joining me.
