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Inside the Economy: The Consumer & U.S. Economy

By September 22, 2022No Comments

This week on “Inside the Economy”, we discuss the consumer & the U.S. economy. With inventory levels on the rise, the Federal Reserve continuing to raise interest rates, and gas prices moving back down, the U.S. consumer is hoping for inflation to cool as we move into the end of the year. With many saying that the U.S. Economy is heading for a recession, what does that actually mean for the stock market and what can we learn from the past? Tune in to learn about this and more!

Key Takeaways:

      • Oil drops below $90
      • 30-year mortgage rates above 6%
      • Natural gas prices continue to rise
      • Mortgage delinquencies & foreclosures at all-time lows

Full Transcript:

Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. Couple of things this time. Just want to focus on the US consumer and what’s going on in this almost recession. And some of the differences in what’s going on in the economy versus what’s going on in the stock market. So, an update in the numbers. Not a lot of excitement except if you look at core inflation which really freaked out the market when it was announced. Headline inflation with everything in it is down a little bit as predicted. Core was up almost exclusively due to rent.

The rental side of the housing market and the multifamily market is still going great guns. It hasn’t slowed, it certainly hasn’t slowed in the data yet. No increase in unemployment, layoffs aren’t bad the rest of the numbers. Fannie and Freddie came out and said, yes, we believe long-term mortgages are at least 6% now. Yes, well I don’t believe you could get a 30-year mortgage at 6% now. It would cost you a or a point and a quarter to get that but they’re getting better. Yes, rates are climbing.

This morning, the one-year Fed, the one-year treasury note that you could buy was at 4. The two-year, 3.8. Fed is going to raise 75 basis points, three quarters of a percent anyway in a couple of days. It might save everybody a little time if they went to one, more on that later. Sales slowed a little bit; inventories are really climbing. Some of that is cleaning up the supply chain. Some of that is anticipation of a reasonable holiday season. Whatever it is, inventories are way up. It’s not that the consumer has closed their wallets. They’re just being kind of prudent. This is basically where the CPI numbers are, headline down, core up, rent.

Biggest culprit, not necessarily the cost of living yet, not necessarily the cost of money, none of that. It’s just how the data rolls through and I believe that will correct clearly the other way here real soon. The price of crude oil has come down significantly. It’s about $85 this morning. Not surprising, there’s been some intervention in that market. Natural gas however is not. Clearly, oil is becoming less of a factor in the global marketplace than gas. Gas is the source of electricity. Gas is the source of a lot of manufacturing, energy so on and so forth. The US is still going to be sending lots of liquified natural gas to Europe this winter. Maybe another year after that by that time the rest of the world is going to be plugged in and be supplying Europe on their own, but it’s going to be gas.

There’s some gestures and I’m sure there’s some political issues, but lot of oil coming out of the strategic petroleum reserve. It was probably unnecessary. That market was well on the way of correcting self but that might have helped. Gasoline is down. Well, it’s corrected down a lot. I mean, that’s just the nature of that marketplace.
Mortgage debt looks pretty good. This is 2008 when we had a lot of foreclosures, a lot of 90-day lates, so on and so forth. We remember that. We had a little more of that during COVID. That is in the process of correcting itself. Some of that is due to higher lending standards in the last decade. Some of it is due to, well, people that own home now, well, they got a good price for it but they want to make sure they hang on to it. There’s not a bubble in this market. There’s not a lot of homes on fire sales. There’s not a lot of homes coming on saying here, come take me away. In fact, new listings have dropped off the horizon.

Open door very similar to how Zillow had a fix and well not even necessarily fix. Buy and flip home business, they were reporting now that almost 40% of all homes they bought in the last couple of years. They’re selling now at a loss. This is what put the Zillow business out of business and it could happen to them too. Little overpaying, a little underpricing, a lot of issues but the core of the housing market is solidifying. Prices are not going to collapse. It’s an affordability issue and that is going to have to take a little while in wages and other alternatives, more affordable types of mortgages. It’s a very different housing market that I’ve ever experienced in my career.

Lots of money in mortgage equities lots coming up on about $12 trillion dollars. This is fairly prudent money. It isn’t going out the door like it did before 2008. In fact, it was headed way down just a little while ago. Some predictions it’s going to go up, well, we’ll see. Debt as an issue has been on the deleveraging side. Financial corpse, those are banks. They’ve gotten rid of a lot of debt. Of course, the Fed has taken the money back. Regular corporations gotten rid of a lot of debt. Households gotten rid of a lot of debt. Federal government, well, they’ve increased their debt and only slowly trying to get rid of that and we’ve talked about how the Federal Reserve is going to get rid of the money taken out of the system when they start selling their assets in their own portfolio.

Here’s the S&P 500 since the bottom of the depression 29-30. It always grows. It grows on earnings. When you have a company like FedEx, this is just the latest example does poorly, misses the boat, misses a lot of big fundamentals, you’ll get punished. Meta and a few others are probably next. Fundamentally, US manufacturing is doing well. They are growing in depth and quality. They’re growing in less dependence on subcontractors overseas. Most of that’s China. They are getting another round of their act together. They look good. The earnings are going to be there. May not be this quarter. I wouldn’t worry about it. It’s just the nature of the beast. The US economy is not driven on earnings. It’s driven on a lot of things. Cost of money, availability of money, so and so forth. Stock market, earnings.

We have had times when like 2008, earnings just dropped through, went down 30%, 35%, 40%. People stopped. There was a panic. There were bubbles. There were all kinds of things. We don’t have much of that now. There hasn’t been a lot of bad news in earnings. There’s been a lot of OMG. Earnings are down 6% or this company’s down 4% or 11%. Nothing significant and today there’s no evidence that suggests third quarter earnings or fourth quarter earnings are going to be dramatically worse. That might have an impact on where the S&P 500 is. It’s tries to have good days, couple of bad days. We’re still going to go sideways until the Fed decides they’ve had enough. Still believe that number is 4.

Somebody asked a question about this. What is the housing market for the rest of the world look like and how is it going to impact the global recession which we’re going to have? The US is basically the only country on earth that has the depth, the financial depth, the money, the bond market, the availability of money to have fixed interest rate 30-year mortgages. Nobody can do that. Well, we do it because people buy the bonds. I mean, there’s all kinds of reasons. These are the countries that predominantly have all variable rate mortgages. That’s the only thing you can in Australia. You can’t do anything other than a variable rate and that mortgage adjusts every quarter.

Booming housing market a couple of years ago not quite as booming as New Zealand, but it was definitely booming. And it is booming the other way right now because people can’t afford dramatically increased payments. In some respects, those payments have doubled. Yes, the interest rate was very low and now it’s still fundamentally low, but it’s still double from where it was and that is bad. The rest of these places, the UK, Spain, Canada, Italy, everybody. It’s going to hit them hard. Germany’s going to get hit real hard. They’re going to close a lot of factories. Places like glassware and so on and so forth, because they can’t afford to heat the stuff. They haven’t got the gas. They’re probably have enough gas to keep the basics open on a few houses heated but when May comes around, they’ll have nothing left. So, there’ll be a lot of drama over that. Fundamentally, they will work it out.

Okay. S&P 500 still going to go sideways. The fundamentals of the energy market, we have shifted to natural gas even though they’d be easy to say even five years ago. The market is really showing that. I don’t think we’re going to have to wait very long for the Fed to decide when they’re going to stop. I think they’re going to 4 or 2 and 1/2 by the end of the week, at least three and a quarter I got to hope three and a quarter maybe three and a half, that’ll be okay. We still got to make to 4, then that should do it. Okay, thanks for joining me. Obviously, I’m always interested in questions. That’s Thanks for joining me.


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