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Inside the Economy: Consumer & Corporate Health

By December 14, 2022No Comments

This week on “Inside the Economy”, we discuss the economic health of the consumer and corporations. For the consumer, hourly wages have leveled off and personal savings have decreased. Housing continues to be a sticking point for the consumer with the house-price index coming down and home equity withdrawal on the rise. Corporations on the other hand show strong profit margins despite sticky inflation, but what does that look like for 2023? Tune in to learn about this and more!

Key Takeaways:

        • Oil drops to low $70s
        • 3rd Quarter GDP revised up to 2.9
        • Mortgage rates under 6.5%

    Full Transcript:

    Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. I’m gonna touch on financial health, consumers, corporates, what’s going on in corporate America and talk a little bit about what’s going on with our new favorite trading partner. In the numbers, we had some good and bad out of the ISM, the Institute of Supply Management. Regular manufacturing has dropped below 50, which means it isn’t growing it just sort of hanging in there, 49+. Technically, if it ever got low enough to be about a 46, then manufacturing would be in a recession. The service side of ISM is doing great. Well up, I think that’s going to continue, and when we look at consumer spending, we’ll see there’s a lot more going on the service side of things.

    Almost everything on the bond side of things suggests that rates have peaked. Mortgages down. Long treasuries are down a little bit. Short treasures, the two year and the 3 months. Well, they’re still anticipating an increase. In a couple of days, we should be at 4 & 1/2 and then be on hold for about 3 months. The rest of the numbers are sort of anticipating all of the data catching up since we got so much increase in the cost of money in the last 6 months. We’re still waiting for some of the data. Average hourly earnings is up there. It’s been here for a little while. Lot of people got pay raises.

    Certainly, the lower they were, the higher they went, and the low end of the salary range is hanging in there. It is fundamentally already behind the cost of even basic food stuffs about 15%. It’s going to have to adjust when the bad news starts coming in the first quarter next year. The personal savings rate continues to plummet. We’ve seen this the extra money in the system from COVID and other stimulus programs is being used. It’s being spent, it’s being spent on groceries, higher rent, higher fuel costs, all of that stuff. That money is being depleted out of the system in a hurry.

    Consumer revolving debt, credit card debt, and revolving lines of credit, so on and so forth has been picking up. It has been a source of capital. It has been a place where reserves are being used just to keep up with the cost of everything. Non revolving regular long-term debt isn’t increasing. In fact, it’s sort of peaked and started to come down. Credit card spending, if you take a look at this, it’s sort of the inverse of what it normally is this kind of year. Normally, see a lot of credit card spending on retail side of things. It picked way up September, October, November. Well, they’re way down.

    The blue is the retail side. That means your standard Christmas retail spending. The red is more services and travel and sort of stuff is still kind of up. But fundamentally, the spending on the credit card side is down and continuing to trend down. Given that we’ve had all these increases in rates, it’s to slow things down, slow inflation down. House prices are where that process generally starts. We haven’t seen much of it yet, nothing like we had in 2008 and in the 80s. It has a long way to go. It’s not going to plummet. I don’t believe house prices are going to plummet or even need to plummet. They just need to come down 20% or so.

    Anyway, depending upon where the Fed goes with interest rates. It’s just not showing signs of being affected by the increased cost of money yet and it needs to. Real estate values, some of that is inflated but they’re up, they’re not a bubble like they were in 2008 but they’re up fundamentally because COVID. A great deal of work at home is permanent in this economy. Not just transitory. It’s going to be the new offices at home. People liking their homes. People having detached homes, people so on and so forth. The consumerism part of that has changed a little bit. So those values aren’t going to plummet like they have in the past. But they need to come down. It is part of the affordability that has to be corrected before this housing market moves along. The mortgage numbers, they aren’t bad.

    The affordability numbers through the roof, this is part of what’s going to drive the slowing of spending, slowing of the economy if we do have a recession. And I tell you right now, there’s a 50/50 chance we’ll have a recession. Right now, there’s very little indication other than an inverted yield curve that we’ll have a recession. But the affordability number needs to come down a long way and that’s probably not going to be cheaper mortgages. The Federal Reserve is still targeting 2% inflation. 3% money markets, mortgages 5½, 5 ¾ . It’s a good spread. It’ll bring the yield curve back into a normal sort of curve.

    So, what has to correct are prices. This is people pulling more money out of their equity. This is not a bubble; this is not anything like it was in 2008. It is moving along, but it is still one of the last sources of available capital to a lot of people for the foreseeable future. Lot of people ask me, oh gee, how many different kinds of inflation are there? Well, it’s an extensive list. This is just some of them. Median CPI, PCE, all of them. None of them have really turned yet. If you look at very current data, if you can actually get current data, a lot of them have turned fuels down, rents are down, number of things are down and they’ll be down a lot more by January.

    Some of this other stuff like wages, hasn’t changed. It’s part of being behind the inflation curve. It’s going to be resolved not by changing wages. It’s going to be resolved when we start seeing significant layoffs which we don’t have. Unemployment is still 3.7. It probably needs to go to five in the next three months. The Federal Reserve is going to take a hiatus here for a while after they meet on Wednesday. They don’t meet again until sometime in March. We need to see bad news between now and then or they will be tempted to increase the cost of money more. We don’t want that. 4 ½ is pretty good. We don’t want them to go to 5 or 5 ¼ or 5 ½. Today I don’t think that’s very likely. But we have to start seeing slowing in spending. Slowing in everything. So, housing prices come down. Rent comes down. A lot of things either stabilizer have to come down. And wages are going to have to adjust again not by adjusting wages because you don’t lower wages you lower headcount.

    Corporate America still doing well. The S&P 500, the Dow, all of them have pretty good margins. There have been a fair amount of layoffs on the tech side of things. The one that’s been in the media and a few others, it’s technology all over. They’re reducing headcount keep their margins up. You keep your margins up, you keep the price of your stock up which is very important to the founders a lot of these tech companies. The rest of corporate America is going to have to have some more bad news. They’re going to have to have slowing in spending which will bring their margins down and if they want to keep their margins up, there again we’re back to reducing headcount.

    I think it’s inevitable. Bond issuance is down. It’s been down for a year. Why would you issue a new bond when rates are going up? Well, rates have probably peaked. It’s likely that they’ve peaked. So, this bond market is going to start issuing new bonds. Not necessarily on the corporate side but on the municipal and the junk side of things. There’s a lot of municipalities and states that have a lot of projects in the wings just like Colorado does and they like keeping people employed. And there will be a lot of popularity when you see a quality municipal bond at 3 ½ and 3 ¾. Which is what we’ll see that will start attracting money out of the equity side of things out of the stock market into the bond market. Because they’ll come to you and say, gee, I can basically guarantee a 3 ½, 3 ¾ maybe 4 for 10 years. It’s going to look attractive when we have all the bad news in the first quarter next year.

    Finally, Mexico and Canada swap back and forth who our biggest trading partner is. It varies. Canada for buying a lot of wood, wheat, oil, that kind of stuff is a big trading partner. The momentum behind Mexico has been building. They’ve been in the car assembly and sub-assembly business for a long time but they’re getting into a lot of electronics because their sub-customers, China. It’s probably the best avenue that China has to continue to do business with what used to be its best customer. That is fading. Direct contact with China and direct trade with China is not going to improve for the foreseeable future so it’s coming in through Mexico. They’ll send a whole bunch of manufactured laptops and computers into Mexico. Mexico will put it in a box and put a label on it and ship it over the border. It’s okay. It’s still good for the US consumer because it’ll help keep prices down, but Mexico is going to build momentum to sell us everything. It’s not going to stop with just car assembly and computers, they’re going to get into anything they possibly can. It’s going to be furniture. It’s going to be stuff in the Philippines from Vietnam all over the world. They’re going to run it through Mexico. It’s okay. Unfortunately, we still have a pretty crude crumpled border to try and get across but their momentum is building and it’s probably a good sign considering the peso has been taking such a beating this year.

    Well, I appreciate you joining me. Naturally, if you have any questions, send them along to I’m happy to deal with them and thanks for joining me.
    Closing: This will be the last inside the economy for the year. We all wish you a very happy holiday season and the most prosperous New Year. Don’t forget to look for our quarterly letter and the embedded video which you will receive after the first of the year.

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