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Inside the Economy: Pesky Inflation

By February 22, 2023No Comments

This week on “Inside the Economy”, we discuss important economic data. Inflation is trending lower, however it’s uncertain what it will take to achieve the Fed’s 2% target. The housing market continues to soften, and corporate earnings are projected to be lower for 2023. State governments seem to have plenty of funding. Tune in to find out more!

Key Takeaways:

      • 2-year treasury yield climbs higher above 4.5%
      • 30-year mortgages move to 6.32%
      • Oil drops to around $76 per barrel

Full Transcript:

Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me. Really the only topic this episode is what is everybody going to do about this pesky inflation? A quick look at the numbers. Tiny reduction in CPI. Tiny reduction in Core CPI.

Interest rates have come up a little, tiny bit. Mortgages are up a little bit. Energy is down a lot. Not a lot of drama. The market is just shifting around fundamentally the CPI. This is from the Federal Reserve Bank of Cleveland. Really the guys that keep track of this stuff. All of the measures have turned. The momentum up is over.

The drama about the future of inflation is pretty much over. The issue now is how long is it going to take before it gets from here in the sixes, in the mid-sixes, the twos, which is where Federal Reserve wants it, and they are going to get it there one way or the other. Inflation has had an impact positively and negatively on a lot of people’s working lives, mostly on the wage and our side of things, which we’ve talked about before.

You look at that light green line. That’s really where wages and hourly compensation has gone in the last several years. Looks good! The trend is okay. You’re keeping ahead until you adjust the money for inflation. And it’s bad! I’ve mentioned before that a lot of the wage and hour side of the economy really doesn’t know they’re behind already. The question is, how far behind are they? By the time 2023 is over, and the Fed raises, let’s say, another half a point, it’s simply going to be felt, and some of it’s going to be very expensive.

A lot of conversation about jobless claims. Yeah, the numbers are good. One nineties, one ninety-five. The last couple of weeks in the 80s, you look at here and the white line really tells a more important story that’s continuing claims. That’s the number of claims in the thousands that are ongoing. And in the last year, continuing claims have crept up. People are staying on unemployment. More people are getting on unemployment. They get on, and they stay on. It’s not like the states are running out of money. Part of the 4 trillion dollars that was donated to everyone for COVID, some of that went to the states for unemployment benefits and for reserve funds.

Tiny bit more about that later. You always want to look at the consumer first if you’re trying to slow the economy down. And spending was up in January, some say dramatically. It actually was just kind of standard because December and November were down so far. And outstanding balances, consumer credit card outstanding balances just at a trillion dollars right now. It’s not a question of how much debt there is.

It’s a question of is it current. What are the delinquencies? And you look at the credit card delinquencies; this is from Fred. They’re down. They’re historically down, varied loan numbers. People are spending the kind of standard rate. They’re not saving their money anymore. They’re actually spending what they’re earning, but they’re paying their bills.
Mortgage delinquencies are down below 1%. You’d think, given all of the increases that the Federal Reserve has done, up 400 basis points plus in the last year, that the consumer would slow down, they wouldn’t use their credit cards, there would be more delinquencies. There’d be a lot of things.

No evidence of it so far. So the consumer isn’t being slowed down yet to slow spending yet, to slow inflation yet. So the Fed is going to do one of two things. They’re either going to raise rates too far. We’re at four and three-quarters right now. We’ll be to five here in another month or two, maybe five and a quarter by spring, and then they’re just going to hold it there until the rest of these markets slow down.

The consumer has not slowed yet. You’d think there’d be a lot of homes on the market, people trying to get out of something they can’t afford. Well, if you look at 2023, it’s in the middle of the pack of the last ten or so years right here. There aren’t more new homes, new listed homes, than any other time. The bad one here is 2022. It got bad in a hurry for a variety of reasons. Rates are going up. No drama there, even some prices you can see around the country are down a little bit, not dramatically. So the housing market hasn’t really been slowed yet.

You look at the other side of the housing market, the construction side of the housing market, and for the first time ever, new single-family units are being built for rent. Not to occupy, Multifamily, well, they’re always for rent, but single family usually is, oh, yeah, I’m going to move into that and stay there. Now they’re building a lot of them for rent.
Some of the more successful real estate companies are in the business of saying, yeah, we’ll own 15 houses in this development, and we’ll just rent them, keep the price reasonable, keep their renters happy, they make money. That marketplace has shifted. It isn’t collapsing. It hasn’t even slowed down that much.

Earnings have been slowed. S&P 500 earnings have slowed. The growth of the earnings has slowed. It’s not that they’re negative earnings. The positive rate has slowed a little bit. So a lot of people call that negative growth. Lovely term!

When you have negative growth in earnings, the S&P 500 usually comes down, and it has done it this time, too. When the growth slowed, S&P 500 came down as predicted. When that changes, the S&P 500 is going to do the same thing. It’s going to turn around and go back up as predicted. When that turns around, we don’t know if earnings are going to slow a little bit in the first quarter, and the second quarter doesn’t know that yet. But the S&P 500 is really not working on a bubble right now. It is following earnings very closely. Really no drama there!

The inverted yield curve you’re going to hear a lot about that. And here’s the way they chart inverted yield curves. The further down it goes, the more dramatic it is. If you look at the numbers at the beginning, you can get a two-year treasury for about 4.8%. A ten-year treasury is 3.8. Why would you invest your money for ten years at 100 basis points less if you only go out for two years? That’s kind of where we are. You can look at a lot of things in the inverted yield curve. You can interpret it in a lot of ways, but fundamentally there is some anticipation that the Fed is going to raise a little more, which is why the two year is at 4.8.

We’ll go to 5.0. It’ll adjust. They’re just not ready to see rates adjust down to the point where a two-year is less than a ten-year. We’re not there yet. Finally, you look at the money that the states have, all of the states, there isn’t one that has a bigger share of the pie than anybody else. A lot of this stuff came in when the COVID money went into the system, and they still have it. These are state reserves. The state reserves across the country are huge. They’re not running out of money paying unemployment claims. They don’t have a lot of pressure on sales tax revenue being down. It’s not property tax revenue down. It’s not. And they have lots of money. There’s no pressure, inflation pressure, or anything otherwise on the government side of things, either.

We are dealing with some very persistent pesky inflation right now, and it’s going to be that way for a while. Don’t bother trying to predict where you think it’s going to go or how far the Fed is going to go, so on and so forth. The only thing I can assure you is the Fed is very close to being done raising. But how long they keep the rates up here right now, very reasonable to assume a year because this system is not parting with its inflation easily.

I’m always happy to deal with some questions. Just send them along to, and I’ll get right on it. Thanks for joining me!

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