This week on “Inside the Economy”, we discuss jobs and housing. Layoffs and initial jobless claims remain at low levels, along with increases in the labor participation rate. Mortgage payments as a percentage of income have jumped as we continue to see mortgage rates increase and home prices adjust down, but how is this different from what we saw in 2008? Tune in to learn about this and more!
- Jobless claims hold steady
- Corporate profit margins on solid footing
- Mortgages approaching 6%
- Consumer spending starting to slow
Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. Just want to talk about a couple of things this time, jobs and housing, and the cost of money. Pretty good ISM numbers. That’s the Institute of Supply Management, what’s going on in the manufacturing and the service sector. Numbers are good. Initial claims are pretty good, not climbing. Unemployment went up a teeny tiny bit of 3.7. Fundamentally, everything else in the economy, oil was down around 88 for a little while. It’s up back in the 90s. It’s cooling. And we’ll talk about the interest rates here, just saying.
I mentioned last time that assuming we’re in a recession or we’re going into recession, it always starts with housing, ends with jobs. I’m going to talk about both today and see where we are in the process. Jobs are pretty good. The JOLTS report, the initial claims, all of that stuff are pretty good. There are a fair amount of job openings. There’s a fair amount of people getting hired, moving more money, wage is up, all of that stuff.
What we have is an increase in people coming back into the labor market after the COVID thing. Increase in the labor participation rate. A lot of people, thousands of them coming to the market, they’re finding jobs. Whether it’s a gig economy, not so much as it has been in the past, but it’s large employers.
Here are the numbers for people getting jobs at employers with 500 or more employees. Manufacturing is coming online. The new chip plants in Arizona, Michigan, they’re coming online. Even when Amazon is closing some of its facilities and sort of scaling back a little tiny bit, people are still finding these jobs.
I’m going to shift into housing here. What happened in June is we started getting an impact on the increase in interest rates and the increase in the P&I payments for people that paid large numbers for fairly basic houses, not talking up or in I’m just talking normal run of the mill stuff. It started climbing out of the teens into the 20s as a percentage of people’s disposable income. And you’re rapidly approaching, “This is unaffordable.” That was in June.
Spending in general is, well, starting to show signs of how the Federal Reserve is slowing the economy down. This is May, June, and July of this year by income, and this is from Bank of America, their internal credit card numbers. People in all the families with incomes above 125,000 have slowed significantly. They’re not buying. They’re in no hurry. They are going wait and see with a cost of money is going to be. On the low end of the spectrum, much lower income. They’re spending is up. Well, a lot of that’s the grocery store and Walmart.
It is indicative of sometimes, people get a little worried if they’re going to have a job or not, more on the lower end of that. But when the people on the upper end start slowing, now you have something significant. Home prices went through a big, not a collapse, a big adjustment, nearly as big an adjustment as what happened in 2007. Though the issue was very different from it was in 2007, 2007, we had all kinds of delinquent mortgages from people that couldn’t afford the houses anyway. And they were going out on the market empty, abandoned, so on and so forth, having to sell these things. Well, we don’t have that issue. In fact, we don’t have any of the issues we had going into 2008 currently. It’s a different set.
Prices are too high. They’re going to have to adjust. They’ve started adjusting already, especially in places like Boise, Denver, Salt Lake City, real hot markets like that, the dark here is how many more deals, and there still are real estate deals going on out there. How many deals are actually out there that are closing that have had price reductions. And we’ve talked about big price reductions, 20, 25, 30%, then they sell. The cost of money goes up, prices got to come down.
One of the primary differences between now in 2008 is the number of listings. The listings were up through the roof back then because there’s so many properties. We don’t have that now, even though it’s still they’ll kind of seasonal, listings are kind of where they are on the way down. Not a lot of new things coming on the market and normal transactions, kind of normal transactions, more of them all cash, but way different than they were in 2021 and 2020.
In corporate America, the source of a lot of these new jobs, profit margins are still good, very good. They’re down a little bit, primarily from supply side issues that are being quickly resolved. There’s more truck drivers. Chips are showing up. All kinds of things. That part of the problem for people manufacturing things and getting them sold is resolving itself. They’re getting new employees. The situation now is what is the Fed going to do here their next meeting in September? The cost of money right now is 2 and a half. They’ll either take us to 3, or 3 and a quarter, depending upon how conservative or aggressive they’re feeling like being. Their target is 4. So, we’ll get close, or a little further away from 4.
The inflation pressures are decreasing all across the board. We’re not going to have public numbers on those until the 1st of October, but they will be down. The other side of the coin is right here. This is the Fed balance sheet. And the Fed balance sheet is a nice way of saying, “This is the money that they put into the system since 2007.” Remember we had something of a crisis in 2008 that could have been a real crisis. So, they put $3 trillion into the system, funding banks, buying assets, buying all kinds of things to get money out in the system. And ever since then, they’ve been buying all of the mortgage products that Fannie Mae and Freddie Mac have put out, plus a few other things, keeping the market very liquid.
Then we had COVID here a little while ago, quick, another 4 trillion. Okay, now we’re at 9, 9 and a half trillion dollars, and they have to do something about that. What they’re going to do is start taking this money out of the system. This is going to be reflected in M2 in the next several months. That money is not going to remain out there available to banks or to lenders or to anybody. It’s going to have to come out of the system. That is going to increase rates. It’s certainly going to increase long-term rates and tenure. It’s supposed to. And this will take a couple of years to get this resolved. They’re not going to pull $9 trillion out of the system and next 5 months. Might be 4 or 5 years. That’s going to have a long-term impact on the market, much more so than the cost of money right now.
So, what we care about is what they do in September and then what they do subsequently in November. If they get close to 4, if they’re at 3 and a half or 3 and 3 quarters, they might signal, “Oh, yeah, we’re going to wait here for a while.” And the market will go, “Yay.” The equity market will feel more expansive. The mortgage market will have a much better idea what the cost of money is so they can develop products to get affordability back in the housing market. And we’ll know more with a lot less fear than we have right now. Okay, as always, any questions, send them along to email@example.com. I’d be happy to deal with them. Thanks for joining me.