This week on “Inside the Economy”, we discuss the Federal Reserve. With inflation beginning to soften, and a Federal Reserve meeting upcoming in late January, all eyes are on the Federal Reserve to see what they do next. Will softening data in the housing, labor, and services market be enough to relax the FED, or will they continue to be aggressive with interest rates as they start the new year? Tune in to learn about this and more!
Key Takeaways:
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- 2022 Q3 GDP adjusted higher
- Unemployment down to 3.5
- Mortgages get back to 6.5%
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Full Transcript:
Welcome to another edition of Inside the Economy, and happy New Year. I’m Larry Howes, thanks for joining me. We’re starting to accumulate new data for 2023, and it’s sort of a question of how you want to interpret it so far.
Probably the biggest issue that’s come out here in the last week or so was ISM non-manufacturing, that’s the Institute of Supply Management, non-manufacturing really dropped. Dropped from above 50 which is in expansion territory to below.
The manufacturing survey is already blown, we were sort of expecting that. But the service side, the non-manufacturing is now below expansion. Fundamentally, that’s good news. Where we are in this cycle is we have to go through housing and jobs and corporations, and we have to make sure we go through a cycle that reduces earnings, and we’re sort of in there right now.
GDP, third estimate for GDP it’s in the threes, will be interested in seeing what the fourth quarter looks like. All those estimates so far have been for the third quarter.
Unemployment, well, it went down three and a half. When you want the job market to maybe go to five unemployment, five and a half, five and a quarter something like that. It isn’t necessarily good news that it goes down, but I’ll get back to it in a minute. Rates have gone up a little tiny bit, the market has adjusted a little tiny bit. Mortgages are up a little bit. It is about interpreting all this data that’s coming right now. Here’s the bogey, here’s inflation.
The biggest fear of inflation has probably turned, it’s not going to keep going, it’s not going to turn into Turkey or Brazil or something like that. It has fundamentally turned. And it needs to turn, it needs to go all the way back down there where you see that red line. That’s down there around two, that’s what the FED is looking for. That’s not going to happen in the near future, that could be a year away. Part of the process we’re going through.
Started in the 20s and everybody remembers this, this is M2, that’s the actual money that’s out in the system. We had a huge influx of new money, stimulus money, COVID money, all this and that stuff woomph, and inflation shortly thereafter went woomph. As soon as they stopped putting new money in this system, they really hadn’t gotten to the point of taking all that money they put in out. So the very top up there, you see it’s kind of peaked and kind of turned. It’s not going to substantively turn down, meaning taking money out of the system until the FED starts selling its assets.
So far, the banks are very happy. Having excess reserves, because they get paid on those reserves, which is a lot of money. So banks don’t necessarily want the FED to start selling their stuff, because that stuff leaves the banks. But the FED is going to have to take that money out of the system, to get fundamentally inflation cool and down to about two.
So everything needs to be viewed in that light. Great news, everybody was thrilled. Oh, new jobs, it was great number, 220 whatever it was. Well yes, it was kind of good news in the stock market really overreacted it’s up like four percent that day.
If you think that the market was looking at this report, you’ll believe that was a weird anomaly. If there’s other reasons for the market to be up. But the new jobs doesn’t necessarily mean anything. Quick reminder, since COVID, a lot of people left the job market.
A lot of people went out and did gig jobs, they did Doordash, they did all kinds of things. They’re starting to come back into the market because they want jobs. Leisure and hospitality is finally starting to fill in a lot of those jobs, hotels, so on and so forth, you know what that is. Good jobs report like that, a lot of those are people simply going back and filling jobs of people that have retired, really retired.
Haven’t seen the pressure in the jobs market yet. Told you a while ago, the wage and hour people, great new minimum wage and so on and so forth. They’re already well behind. And the longer inflation stays up, the further behind they’re going to be. But unemployment is probably got to get to five.
This is the ISM, I mean, this is the non-manufacturing the service side of the economy, zip down below 50. Okay, is it going to keep going? Don’t know, I don’t have to speculate. But in all of the business expansion side of things, it was the ISM service side, non-manufacturing side, the only one that had an inflation in it. A lot of the imports, inflation was down. Basic manufacturing, down. Wages, all the rest of that stuff, down. It was the service side, and that’s starting to cool.
Housing, that’s where you start corrections like this, this is where you start cycles, prices really haven’t adjusted that much. There’s still a fairly active real estate market, upper end real estate market in places like Denver and Charlotte and Austin, and a little bit of Seattle, that kind of, but prices haven’t adjusted and they need to adjust.
What we have is a very active, all-cash negotiating unique properties market. And there’s a fair amount of that stuff going on, but the whole market needs to come down. The people in the mortgage business have been decimated, and they’re not coming back for the foreseeable future.
I don’t believe the housing market is going to recover by January, it could be a year or longer, but housing has got a ways to go. Rent has kind of started, the black is you’re over here and the rate is the mean rent, it has cooled. We haven’t gotten reductions in rent yet. I mean, I think the numbers up there like 1700 a month, it should be down about 14 to make it affordable.
But at least it’s turned, it’s not continuing to inflate up, but it has to correct more. And the housing is the beginning of the cycle, that’s where we are in housing. We’re going to have fourth quarter earnings coming up pretty soon, we’ll see how corporate America is doing, good news that ISM is down.It’s not good news that unemployment is down, unemployment needs to be going up. What we’re looking at right now fundamentally, the FED is probably going to raise some more. Despite my wishes, they’re probably going to raise more. They got a meeting here at the end of January, they scheduled one at the end of January, first part of February, they could do another half a point. That would put the cost of money at five.
And they’ve made it very clear that they want the cost of money at five. Right now, a good money market is paying in the fours, in the low fours. You can get a two-year treasury at four and a half, not bad. I think they want to go to five.
I think the best news the market can see, and by best news, meaning, the stock market will go ah, this is over, we want to get some of the money we lost back. The stock market could do 10% in as many days as soon as it gets a whiff that the FED is done. It might be the best situation if they give us another half a point, end of January, and be close to being done, that’ll have cost of money at five, they may have another quarter, but they need to keep it up, that’s a different story, I’m sure we’ll talk about this some more.
Earnings next time and a few other things, but let’s enjoy the New Year and forget the bad parts of last year. If you have any questions, send them along to Info@SHJWealthAdvisors, and I’m happy to get to them. Again, thanks for joining me.
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