This week on “Inside the Economy”, we discuss important economic data. The labor market remains strong even as the Fed raises rates. The housing market continues to soften and corporate earnings per share are projected to be lower for 2023. Will we see a recession this year? Tune in to find out more!
Key Takeaways:
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- 2-year treasury yield remains above 4%
- 30-year mortgages move under 7%
- Oil drops to around $80 per barrel
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Full Transcript:
Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. This episode is like the light at the end of the tunnel. A lot of the economic news and the latest stuff the last couple weeks is fairly positive. Interest rates have come down except for real short rates. Oil is stabilized around $80 a barrel. Mortgages have come down. CPI has come down. Bit of manufacturing has come down and consumer spending has come down. But in isolation it looks kind of like good news. Starting with the consumer disposable income has returned to a normal trend. Huge amounts of increases during the COVID stimulus for trillion dollars’ worth helped make savings look real good.
Right now, those savings are in the process of being spent. Half of that money, half of 4 trillion literally went to pay rent and buy food. The other half went into savings accounts and wasn’t used until mostly last year. So, as the numbers catch up, the spending is kind of slowing down. Christmas season was bottom 20% of the really robust ones and spending is cooling for a lot of reasons. Jobs aren’t bad unemployment still 3.5 Initial claims now down below 200,000. What Facebook and a lot of technology companies are doing and laying off people really has no impact on the large numbers yet. Initial claims are still very low. 3.5 is a great number.
Federal Reserve has been raising rates for a year. Unemployment should have cracked from where it was 3.5, 3.7 to 4, 4. 2, but it’s clipped down. Lot of jobs are plentiful, that’s cooling a little bit but the employment rate and active jobs have stayed very stable. Affordability in housing is still off the charts. It is reducing the number of households that can afford monthly payments on what you have to pay for house these days. Prices haven’t adjusted that much but just because the sales are down doesn’t mean that inventory is building. You think there’d be a lot of houses out there with for sale signs on them and people making bargains.
Well, there aren’t especially in the upper end of the marketplace. Over million-dollar homes, they’re still debating prices and still paying premium prices for them. Those are fundamentally all cash deals. People that needed to finance it, mortgages, there’s a lot of, well, we’ll make an affordability adjustment will pay your interest rate down for the first year, couple of points, so on and so forth. And they make it for two years in hopes that rates will be down in three. I wouldn’t bet the farm that rates are going to be down that far in three, but no inventory. It’s still a premium housing market.
The S&P 500, the Dow Jones, the Nasdaq been moving sideways for a little while. They’re trying to recover. The bond market has recovered. Rates are down. Bonds are reported by their yields. Yields went down, price went up. Lot of that in the bond market right now. It’s helping redeem a lot of traditional portfolio management and balancing. S&P 500 is looking for an excuse to start recovering from the money it’s lost in the last two years and it will take almost anything that comes its way as a good excuse.
Normally, that’s done by manufacturing what’s going on in industrial America. Industrial America is slowed. We talked about the ISM numbers that are both below 50, meaning they’re not expanding anymore. They’re kind of contracting but certainly not recession levels. Industry has slowed because spending is slowed and they’re reacted very quickly. They haven’t started laying off people yet, industry wide. Automobile manufactures just a few technology, a little bit but not a huge piece. They’re simply slow in their activities. Cost of capitalism very much. The cost of money is very much. So, they can slow equitably along with spending.
The important earnings per share and the numbers that came out for the 4th quarter are lackluster on the lower end. Well, compared to what they’ve been the last several years, that means a lot of earnings are going to come in growing at 6% instead of 12. That’s kind of where we are. Corporate America’s not coming off the rails. They’re just not making as much money, and any hint from reported earnings or any positive news in Corporate America is probably going to be exaggerated in the S&P 500 going forward.
The chances are the Federal Reserve has slowed. They’re probably not going to do a half a point here next week end of January. They’re likely to do a quarter of a 0.25 basis points. You look at the battle they’re fighting here is inflation long term. The battle is being slowly won. They’re just not going to get to their target. They’re not going to get their victory that they want this year. It’s going to take a little while and they may not have to go to 5% for the cost of money to get there. They still have fundamental targets in place. 2% inflation puts money markets at 3%. Mortgages high fives. That’s a good range for a 23 trillion-dollar economy.
On the political and media front, were having another debt limit crisis, self-created crisis. The various parties in Congress are playing chicken with giving treasury authorization to keep acting like treasury. It has to come from Congress and they won’t give it until they get their spending agenda. You know how that works.
A quick reminder and I hate how this is phrased and presented to everybody. But it’s not like the is going to default, it could possibly default which would be the biggest political disaster in history but it isn’t likely. They just push it along to get their spending agenda. We’re coming up on about $33 trillion dollars’ worth of debt. They call it debt and I’ve explained debt several times in the past. Part of the debt is M2. Piece of debt called M2 which is currency. Your checking account and your savings account. Well, that’s about 23 trillion dollars right there. You have a checking account, the bank you have the checking account is, holds that money in treasuries at the Federal Reserve.
The Federal Reserve actually has authorization from treasury to give it back to the bank so they can give it to you. That’s kind of how that works. So, technically, if they decided they didn’t want to give you your own money back and defaulted, well then you wouldn’t get your money. Don’t imagine you’d be very happy with those in congress if that were happen, because it’s a pure political vote thing. It has nothing to do with the economic viability. Well, to quote the 14th Amendment section 4 and I’m paraphrasing here. One of the things it says is the validity of public debt will not be diminished.
That’s a nice way of saying if Congress can’t act then the president can intervene. The constitution is saying yeah, we understand how the accounting works for government, but take it seriously. We’ll see what they do. The fundamentals of the US economy are still in great shape. There is a 50/50 chance and you can quote me on that today that we won’t have a recession in 2023. It doesn’t mean a lot if we do. That means there might be a little bit more unemployment, a few more layoffs but they probably won’t last long.
As always, if you have any questions, send them along to info@SHJWealthAdvisors.com and I’ll get right on it. Thanks for joining me.
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