This week on “Inside the Economy”, we discuss jobs and the Federal Reserve. Jobless claims continue to decrease and unemployment remains at record lows. With a slowing economy, what will that mean for employment for 2023? The Federal Reserve continues to raise rates with their most recent 0.25% increase in January. Will the data soften enough in 2023 to cause them to pause, or will they continue to raise rates? Tune in to learn about this and more!
- Headline inflation lowers to 6.5
- Unemployment down to 3.4
- Mortgages hover around 6%
Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. This time I want to talk about the new jobs report that was just huge and what the Fed’s liable to do next. They raised another quarter a point that has us at about hm four and three quarter right now and we’ll talk about what they’re going to do next. Durable goods were real good up 5.6. It was almost exclusively airplane orders. US manufacturing is not doing that well. They are slowing though they’re not in what I would call a recession. The ISM numbers will tell you they’re not an expansion. They are a little bit contraction but not dramatic. It’s the service side. 70% of the economy that is back into expansion.
Initial jobless claims way down in the 180s. Unemployment 3.4. Mortgages are down. Long term treasuries are down. Even the two year very important moniker for what’s going on at the Fed is down. It’s really kind of cheery economic environment when you wouldn’t think we would be having that kind of data given the Federal Reserve has been raising rates for a year. Job openings way up there. They started to cool a little bit. They’re back up. There has been a correction in some of the data, I’ll mention here again. Unemployment 3.4, lowest it’s been in a long-long time. That it’s actually hard numbers. That’s fairly good.
In many ways that is a lot of people that were hired on what was viewed as a temporary basis for Christmas not so temporary, they’re hanging on to them. One of the areas that’s finally showing some response to the increased cost of money, we’re getting out of the Fed are rents. You look at these numbers and you say, oh, rents are really way down. Well, they are down meaning they’re not growing like they were, but we have two years of extreme increases in rent. Everywhere, all over the country not just Denver or Seattle it’s all over the place. And the rents have come down some of that is seasonality. Some of it is the wage an hour end of the economy can’t afford to pay it anymore.
Car loans delinquencies are up. Credit card delinquencies are up a little bit. It’s starting to show the cost of money between a gross restore the rent and then a car payment, they’re running out of money before they can do all three of those. Which is kind of what the Fed is after. New home sales are down. They’re probably not as down as they need to. Prices aren’t as down nearly as far as it needs to be. In some respects, comparing where real estate prices were a year ago, they should come down about 20%. Only down about 9. It takes a little longer for that market to adjust.
In some actually look at this report that came out of the Chicago Fed that does financial conditions. They came out and said, financial conditions are great and when you look at the data they are great. You can get a mortgage about any size you want, if you can get the price you want on the house. Money is relatively cheap kind of. Loans aren’t cheap, but they’re easy to get there’s a lot going on that would on the surface tell you gee everything is really rosy around here low, look at the durable goods in on its way down so on and so forth. And you look at the little white line there it says this is what the Fed has done in the last year raising rates. Yet economic conditions as we look at it today would appear very rosy.
That is not what the Federal Reserve wants to see, they want to see a lot more slowing. They want to see unemployment not at 3.4 but 4.5. They want spending to slow. It’s stand kind of flat. They want a lot of things to happen that will pull the force of inflation out of this system. And today and probably for the first quarter everything’s kind of rosy. Now they understand this data too. It’s not like the data’s bad; we just have some anomalies going on right now, some year end. Some adjustments on how things are being defined in the Department of Labor and census where a lot of these jolts reports and labor and job reports come from. That will adjust fairly quickly. But the news isn’t yet.
It needs to be bad before the Fed is going to think about lowering rates. The Fed has finally gotten rates at the same level as PCE. The Fed has brought the cost of money up. PCE has come down. The rate for money that the Fed charges has to be a PCE. They have to keep moving opposite. PCE needs to come down just like the CPI number needs to come down and the cost of funds certainly needs to go to 5. Whether they go to five and a quarter or not is not important right now but PCE needs to keep coming down. And the more expensive money is, the more expensive credit cards are, the more expensive car payments on, you know the rest, the more that’s going to pull spending down because people run out of money.
You think there’d be lot of bad news going on in the treasury market with the well the debt saving thing in what congress is doing who either giving authority to what so and so forth. But as that gets resolved, you look at what’s going on in the market today. This last treasury auction everything went in a couple of hours. Very small percentage of it was bought by the primary dealers. That’s the big banks, for their own use or to break up for money markets. I mean you buy pieces of treasuries rarely is there enough money to buy your own usually $5-million-dollar blocks.
Anyway, 6% of this last auction was purchased by primary dealers. The rest was purchased by what’s known as Indirects. Indirects, well, that’s the Bank of Japan. That’s Bank of England. That’s everywhere around the world. Insurance companies, pension plans, banks, everybody. They buy all the treasuries. Well, they need to. They need to have liquidity and they need to have it in the currency they can count on. As a remind and I know there’s a lot of conversation that goes back and forth thinking that this is really new debt and the federal government needs this money. When you buy a treasury, you buy $100 treasury if you could, right now you walk in the door with $96 of your own money give it to treasury, and in two years you’ll get your $100.
It’s not like they need that money, they don’t, they can spend all they want. But people come in the door with their own money, they just want to return on it. That’s the nature of the treasury market and it’s everywhere in the world more so than in a long time that the rest of the world has got to have treasuries. The domestic pension market which is gone through the last several years saying, oh, we’re underfunded woe as us, we need the government to take over. But fundamentally the things that have changed in that system have got your basic pension plan in the United States now overfunded.
They pull back on benefits. They changed some of the requirements. There’s been an increase in funding. There’s been a pretty good stock market. All of these factors have combined that we’re now overfunded across the board and right now, these domestic pension plans can’t wait to get in line to get 3.5% on a 30-year treasury. It’s pretty good money and the market shows.
The long-term market rates are coming down because everybody’s buying them and there’s a reasonable psychology out there that says the Federal Reserve are going to start lowering rates in 2023. Today I’d tell you that’s a very unlikely event but even if they crank another quarter of a point here in March bringing us to 5. I suspect they will stay there for a while until all evidence of inflation is expunged out of the system.
More later. As always, send questions along to info@SHJWealthAdvisors.com. Be happy to answer them. Thank you for joining me and we’ll see you next time.