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Inside the Economy: Consumer Spending and the Inflation Battle

By November 30, 2022No Comments

This week on “Inside the Economy”, we discuss consumer spending and the progress in the inflation battle. Inflation data, represented by the CPI index, has trended down. However, unemployment remains low lending it’s way to sustained strength in consumer spending. Will the conflicting data keep the Federal Reserve on their rate hike campaign, or will they slow down going into 2023? Tune in to find out more!

Key Takeaways:

        • 2-year treasury yield remains above 4%
        • 30-year mortgages move under 7%
        • Oil drops to around $80 per barrel

    Full Transcript:

    Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. I wanna talk about consumer spending. It’s still kind of an issue and progress in our ongoing battle with inflation. Some of the numbers have changed a little tiny bit. Durable goods are up. That’s positive. We talked that there was a lot of inventory at Target, Walmart, all of those places. They have gotten rid of some of that. Christmas spending has been kind of flat so far. I’d like to remind everybody that Christmas spending is not focused on Black Friday but it goes on for three or four months. And it’s been kind of flat not great not record breaking but not bad either sort of traditional. Unemployment numbers nothing has really changed, initial claims up a teeny tiny bit, and the bond market had a little rally. Yields are down a tiny bit. Mortgages are a tiny bit.

    Let’s start with the consumer. Well, which is the key to this economic recovery and this battle against inflation. The dark numbers down here in the bottom, red and blue, those are credit card balances, line of credit balances. They are not dramatic. Home equity lines of credit balances are down and credit cards. Some places in the media, they’ll say, oh, credit card balances are at a new historic high. Well, they are at a new historic high, not by very much and the available credit is way up there on all of these. Home equity lines of credit, credit cards is simply not being used. The consumer is not burdened, the consumers not overextended. Consumer spending that’s the red line here is very very traditional. Last year with all that pent up consumer demand after the lockdown for COVID that was kind of a busy year. Not this year. It’s right where it ought to be and by the time, we get Christmas numbers they won’t be very dramatic. Neither are foreclosures or bankruptcies. They’re way down. There’s no reason.

    Now some student loan has a little bit of impact here. It’s not significant. I think the current administrations that extended paying those student loans to June now or July whatever it is. But fundamentally, it’s still not had a big impact on this. The consumers not extended. Student loan thing, well, we’ll talk about that when it comes into an issue again. Tiny increase in new applications for mortgages even though the line is headed to the bottom. That industry is really struggling. There were some new applications, not refinance, new applications for new money mortgages based predominantly on this. This is cancelled orders from people that are building new houses now.

    People are looking back going, yeah, I told them to build that house in February, but considering where mortgage rates are now and I didn’t lock it in then. There’s no way I can afford it, so sorry. So, they’ll sell it to somebody else. Unfortunately, a lot of that juggling is not really gone on the direction that we needed to go yet and we’ll get to that in just a second.
    The Federal Reserve is fighting inflation, so they hit us quick and hard. Gone way up short period of time. Here’s the last 15 years. We’re up at 4% right now. The cost of money is at 4% in a couple of weeks they’re going to meet and very likely at another half a point. So, we’ll be at 4 & 1/2 and interesting enough they won’t meet for another 3 months after that. So, it won’t be so much that oh they’re done, it’ll be so much as they won’t meet for three months or whatever the number is. They needed to meet because of the free money for the last decade and we’ve been into that.

    Part of the issue with raising rates is right here. The white line is tightening lending standards. Interestingly enough, you’ve heard the old banking adage, gee banks handout umbrellas when you don’t need them because as soon as it starts raining, they want them back. If you look at the recession numbers on this chart, you’ll see that oh the lending standards got very very tight right in the middle of the recession. Well, they’re starting to get tight again because we’re very likely going to have a recession. Whether it’s small, medium, or large, we don’t know. The rest of the world is definitely going to have a recession. So, they’re tightening lending standards now. Unfortunately, there’s not a lot of people that need a lot of money or are willing to pay a lot more for it. If you remember the line of credit and credit card balances, they have a lot of available credit, albeit more expensive. I’ll summarize that in a minute.

    Part of the problem is here; recoveries start with housing. They start with the shelter component of CPI. Housing prices, average and medium have really not corrected. They need to correct before those numbers come out of that side of the CPI calculation. Sales have slowed. Inventories have gone up. Sellers are saying, oh, well, it was worth this 5 months ago. So, I’m going to hang out until I get that number. They haven’t really surrendered to, well, you’re not going to sell it at that number anymore because nobody can afford it. Those that can’t afford it, well, they’re buying into it if a well-qualified buyer is out there right now. They’re really not getting any bargains. They might wait until they can get some bargains and it’s not yet. It’s going to be first quarter next year. That’s when the bad News will start.

    CPI has turned. The fear of CPI rolling out of control is no longer an issue. A lot of the very initial changes that the Federal Reserve did in the increase in the cost of money has already had an impact. The psychology has had an impact. The media had an impact. All of that stuff. So, a lot of the damage that hasn’t happened yet is having an impact on inflation. It has turned.
    When you look at just the shelter side, it’s called shelter in the consumer price index calculation. There’s a component. It’s a third of the component called shelter. It’s rents, its homes, it’s a lot of things. If you take the shelter component out of CPI right now, we’re in deflation. Nothing else in that whole calculation is as expensive as housing which is why we’re waiting for the prices to correct. The stock market the Dow, S&P 500, they’re working on how we’re going to recover and they have the beginnings of recovery. The earnings for this year are not going to be great. Maybe up 2%, certainly not down 10. We’ll know more later. But the real bad news is not here yet. The bad news on, gee, we have to do real layoffs because we have to slow spending is not here yet. First quarter. Housing prices have not adjusted yet and you haven’t heard about that in the media or oh gee, now I’ve got to have a fire sale because inventories for sale are so high. That’s not here yet.

    Unemployment, big unemployment changes. We’re at 3.7 now. We might have to go to five to slow spending. And we have to slow it from here to get our inflation numbers down to 2, we’re at 6 & ½, it’ll be easy to get down to four or 3 & ½ it’s going to be more work to get down to two and I think it’s very important that the Fed get their 2% target. We’ve talked about that, it is important. It’s going to be the hard part so the bad news in the media and the confusion in the media and the drama in the media, it’s going to be the next 3 or 4 months. Because the Fed’s not going to meet and it’s going to be speculation are they done or are they going to go to 5 or 6. I don’t believe they will, but boy is that going to be overtalked.

    Now globally unemployment is low. And when the rest of the globe gets into their recession and they’re starting into it already this number’s going to go much higher. I hope not above 7, but it might. The rest of the globe is going to be hit harder than the US for a variety of reasons. I think we’re a little ahead of the game We have more resources and there’s some huge, huge adjustments that need to be made out there. Specifically, I’ll start with housing prices in Canada. Canada has had booming real estate residential markets for 25 years. Some of that’s China, some of it’s a lot of things. That was cheap money. Those were variable rates that were very low.

    Well, variable rates are not low now. A lot of the housing issues in Canada, Australia, New Zealand, a lot of these places are going to impact them in a very bad way. Couple quarters from now the damage hasn’t happened. We’ve just set it up for the damage to happen. And a housing market and the value of a home in Canada is 40% of a family’s wealth. It’s hugely important, just like Germany and France and a lot of Europe. Generally, the largest asset an entire family has is that inherited home. Well, that’s going to have to adjust down. It’s going to hit them. It’s going to hit their spending so on and so forth. There’s the other side of the bad news the rest of the world is going to have to go through a recession, hopefully not a bad one but it might be.

    So, here’s where we are. The Federal Reserve has done, I’m telling you, 90% of what they need to do to stop this inflation. Whether they do a half a point in a couple of weeks or three quarters of a point in a couple of weeks, doesn’t matter. They stop the inflation thing. What they’re going to have to decide is when they start cutting is going to be based on how much damage they’re willing to deal with. Damage meaning have bad news, unemployment, so on and so forth. Critical to that is where they stop cutting. Let’s not go back down to zero cost of money again because we’ll just have to repeat this cycle again and again until it’s busted. Go down to 2 & 1/2. Mortgage is at five. You’ve heard all this.

    So, fundamentally, it’s good news. We haven’t heard the bad news yet. It’s going to be bad news but it’s not going to have a big impact on investors. The bond market is trying to recover and it started on its recovery. It certainly knows how to recover. The stock market is certainly not going to continue to collapse due to mysteries and what’s going on, what the Fed is going to do because we know what the Fed’s going to do. Gonna go up a little or a little more, it’s not going to go. Fundamentally, it’s okay. Just don’t let the bad news the next four months bother you and I’m sure we’ll be talking about that but it’ll get grim.

    Well, again, thanks for joining me. I appreciate the input and naturally, I will deal with questions. Send them along at and I’ll jump all over it. Thanks for joining me.

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