This week on “Inside the Economy”, we look at U.S. consumer, corporate and government data. Consumers have more in their checking and savings then they did pre pandemic. Inflation seems to be impacting some ways in which we spend but the aggregate remains up. Corporate profit margins remain elevated. Will the estimates continue to trend up into 2023? Tune in to learn more!
- 2-year treasury yield is above 4%
- 30-year mortgages are above 7%
- The federal deficit contracts from 2020 and 2021
Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. I wanna talk about wallets this time. Consumer wallets, corporate wallets, the government wallet. It seems appropriate where we are in this cycle and where the markets are. Quick look at the numbers. First estimate for 3rd quarter GDP came in at 2.6. The previous two quarters have been negative as you remember, but we knew this was going to come in. The federal government has been busy exporting. Corporate America has been exporting everything. Oil, all kinds of things, and the biggest export is a very strong dollar that’s made it hard on the rest of the world that we’ve already talked about.
Fundamentally, unemployment and the employment market has not been touched by what the Federal Reserve is doing. There’s not really been any traction in the increased cost of money yet. Unemployment is at the end of the list. Corporate America’s still doing okay. We haven’t even seen much in the way of change in consumer spending yet. The treasury numbers, yield curve is as flat as it can be. The most expensive treasury out there right now is the 10 year and it’s below 4. It’s the only reason. Very much anticipating that the Federal Reserve is going to increase rates from ¾, which is where they are right now to 4. 75 basis point increase. And then from 4 to probably 4 & 1/2 the second week in December. Markets anticipating that, the market has improved itself, the stock market has made some improvements this last week in anticipation of that. Then they sit until March. Very dated dependent on what’s going to happen, but they don’t meet again until March. So, it’ll have an opportunity for everybody to adjust to the new cost of money.
Now individual wallet looks pretty good. Here’s savings and cash deposits at banks. It just peaked under 16 trillion a little while ago. This is money in the hands of individuals. The blue line is in here. Now, Wells Fargo decided to tell you that inflation has eaten the purchasing power of the dollars that are deposited at these banks. So, we’re down from 16 to little under 14. The important thing is there’s a lot of money in the hands of individuals. It hasn’t started to diminish. It has not been spent and the important part of this is the trend line that you can just barely see the little dotted line down there which is how much money has been slowly accumulated over the years until 4 trillion dollars got contributed in the economy for COVID. It’s still there.
As I’ve mentioned before, wage growth and the employment market is the last one hit in an economic recovery. Wage growth right now has peaked. The wage an hour side of the employment market. They’ve gone through large hourly increases. Low end of the salary market has gone through fairly large increases. That is peaked. That has started to shrink. The numbers aren’t coming down. The growth’s coming down. Which is what inflation is, is the number in the growth side. It is slowing.
Spending has slowed a little bit not as much. Purchasing power and income are down because of inflation. Spending is not there yet. We’re still wrapping up Christmas. We’re still wrapping up 3rd quarter spending. That won’t slow significantly, meaning spending coming down and meeting where income is, which is very likely what’s going to happen, won’t happen very likely until the 4th quarter. Personal savings picked up a lot at the beginning of the COVID. A lot of that 4-trillion-dollars went straight into savings. Most of it’s still there.
This chart from Bank of America is very indicative by income bracket of those that have hung on to their money. The dark blue there is household of less than $50,000 worth of income. They’re starting to spend it a little faster because they need to. That part of the employment market is starting to feel that all those wage increases really weren’t enough and they aren’t enough. They’re going to feel it more in the 1st and 2nd quarter next year. The housing market always starts, economic recoveries, sales are down. They’re down as fast as you think they will be down. This date is only two months old so it’s getting better. This is probably going to get worse until prices come down and we really haven’t seen a lot of that yet.
Mortgage applications are it’s 0. The FDIC that keeps track of independent mortgage companies had another 300 mortgage companies close on their list last week. It’s been a bloodbath and it’s not over. For an example, year ago, mortgages, let’s call it 3%. Half a million dollars, payments $2100 a month. Now, that same half million dollars, mortgage is at 7%, payments about $3,300 a month. A year ago, you needed to make $90,000 to qualify for that loan. Now, you need to make $150. There is the difference in the marketplace. It’s not only going to slow sales which is first, prices got to come down. To what degree and how quickly they come down is speculation, but it’s getting all the press right now. So, housing’s the focus.
Industrial side of Corporate America is doing pretty well. There has been a lot of inventory buildup. There’s a fair amount of spending on Christmas. This is inputs textiles and metals cost are down. They’re way below where they peaked last time. They’re headed down to where they were. These corrections in inflation aren’t in the numbers yet, but they will be. The CPI number that came in at 8% and the PCE number core PCE at 5.1. Those numbers are very current. They’re only a month old. That’s bordering on miraculous for people like me in this business. We used to have to wait months and months for inflation data. It’s getting more up to speed. It’s getting more transparent. It’s coming near faster and every time the Federal Reserve says something like our next decision is data dependent, that’s good news.
Once they meet for the last time this year in December, probably raise another half a point. So, money will be at 4 & ½. It’s very good news that a lot of this data will have caught up to them by then, so we’ll take let’s call it CPI from 8, probably in the 3s and low 3s by then. Markets will do great. The Fed will look good. People will feel better. The hard part is going to go from having an inflation at 3 to have it at 2. And the important part here is inflation should be at 2. The Fed is going to do the other part of the program starting this month. They’re going to start selling their assets. They’re going to start selling the assets they acquired when they’re putting money into the system. Payroll and all the rest of that stuff for COVID. They’re going to sell those assets. Pull the money out of circulation. That’ll be reflected in M2 and we’ve talked about this. That might take a few years. But it’s also going to slow down, and that is going to be the component that’ll move us from 3% inflation to 2.
Profit margins are still good in the S&P 500. I’m not at all surprised. Some of that is a result of their buying their own stock back. Some of that is some efficiencies. Some of that is a lot more robots, but Corporate America is doing a good job. They’re bringing more and more of their little components back from overseas and they’re limiting where they’re bringing stuff in from overseas. Actually, the biggest customer rapidly becoming the biggest exporter to us will happen very soon. Mexico.
Finally, the federal government looks pretty good. It’s spending us way down. A lot of the government programs that were put in place for COVID have gone away. They’ve been liquidated. Employment is still good. Middle salaried people and up are still doing very well. Tax revenue is still up, doing very well. They aren’t coming up with new spending programs trying to stimulate the economy and they shouldn’t be and that’s doing very well. That has brought the federal deficit down significantly and some of that is we’ve been exporting a lot of energy. We’re going to export energy for the foreseeable future and it is simply making the balanced budget concept more active. It’s getting better not due to political influence, just because the nature of the beast and how we’ve changed our spending.
We have fundamentally good news in my opinion. The stock market has already got the underpinnings of how its recovery is going to be. It’ll probably do more recovering unless there’s something weird that happens on Wednesday or something weird that happens the second week in December. I think everybody is confident where the Federal Reserve is going to go, what the cost of is going to be. And if you’re a student of the yield curve and that’s the curve of all the federal yields, it suggests, oh the Fed, they’re going to cut rates next year. Maybe. Maybe, maybe not. The point is we know what money is going to cost here very soon. By the time we get there, we’ll have 4.5% by the end of the year. And 3 months to see how it gives traction to this recovery. Before the Fed meets again.
Questions as always. Send them along to info@SHJWealthAdvisors.com. And I’m happy to deal with it. Thanks for joining me.