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Inside the Economy: The Consumer & Inflation

By March 8, 2023No Comments

This week on “Inside the Economy”, we discuss the consumer and inflation. Over the past 2 years we have seen household savings decrease and shelter prices increase, yet we have seen historical wage growth and strong consumer spending. As the Federal Reserve continues its fight against inflation, what does that mean for the consumer and prices as we move further into 2023? Tune in to learn about this and more!

Key Takeaways:

      • Q4 2022 GDP estimate 2.7%
      • Unemployment remains at 3.4%
      • Mortgages bump up to 6.6%

Full Transcript:

Welcome to another edition of Inside the Economy. I’m Larry Howes. Thanks for joining me!

This time I want to talk about the consumer reactions to the ongoing battle for inflation. Quick reminder, the last battle for inflation that we’ve had 43 years ago, it went on for a long time, and basically, no one in the process today was really involved in that operation.

So it’s not like they’re learning from scratch, but there are a lot of things that are reoccurring now. So a quick look at the numbers. Latest estimate for GDP is still positive, 2.7. There’s been an adjustment in the durable goods orders. I remember saying that the durable good’s number is up so high, it’s great. It was aircraft orders, a little over-inflated.
Well, durable goods are down a lot because of the adjusted aircraft orders. Otherwise, US manufacturing is pretty flat. All of the interest rates have cranked up, as you might imagine. And Freddie Mac this morning was saying you can get a 30 year mortgage at 6.6. There is no way you can do that. Best I could find any place in the marketplace was 7.2, and that’s with about a half a point.

All the rest of the interest rates are up in anticipation of the Fed adding another quarter point here, I think it’s the 22nd of March and I think it’s a safe bet that they will add another quarter point. Take the cost of money to five, interestingly enough, two year treasury, 4.9 for two years, more on that later. Quick reminder, this has basically been the consumer and how they pay their debts and delinquencies for the last decade, basically since the Great Recession back there in 2008, 2009.

A lot of consumer adjustments back then; consumers been getting better, paying off their debts, getting rid of their debts. They’ve been current. They’ve been very prudent. Now you notice there’s a real weird lineup here on student loans. Yes, it is clearly in a category of its own.

We don’t know as of today what the Supreme Court is going to do with student loans, but everything else has just recently turned, starting to see some delinquencies, 30 day and 90 day delinquencies. Remember when we got COVID, there was a huge amount of money tossed into the system, stimulus money to help people.

Today I still think that was a good idea, but the household savings rate went way up. 2020, when COVID was having its impact, we got a bunch of stimulus money in the system, so the household savings rate went way up. People didn’t spend all of their money right away, and it was a great boost for paying rent, for paying bills, mortgages, so on and so forth over the course of time.
And on this chart, it says, “Yeah, I paid it down”. And then the last year or so, negative numbers here, people have been finishing spending that money, and they’ve not been saving their money. Tiny little blip in the positive turn of household savings is basically how the BEA handles paying income taxes.

That rate has not changed. People have depleted those assets. People are living on what they’re making now. And fundamentally, when you look at the reason here, 2020, we had a huge bump in wages everywhere. COVID had its impact. People were staying home, and just for minimum wage, $7 an hour had to go to $15, then $18, and then $20 an hour just to catch up because there really hadn’t been any wage changes for a long time.

Well, it caught up, and it’s been persistent. So there’s money to spend. The Federal Reserve started this battle because wages went way up. Wages had to go way up; they had to adjust. Here’s the cost of shelter, both CPI and PCE, cost of shelter goes way up. The FED increases the cost of money, cost of housing, cost of interest rates goes up.

So theoretically, in this whole process, you start with consumers and their housing make it expensive. Their spending slows, other spending slows everywhere, and then the economy slows down. Well, between you and me, I’ll tell you, if you look back on the historical records of the last battle for inflation, this takes two years and we’re only in it for a year so far.
The FED has been very aggressive and I think, very prudent on how they’ve been raising rates. But it’s really only been a year, and we’re just starting to see a little bit of problem in housing. It was looking great here a little while ago, the last several months in 2022. Oh, spending is going down. That’s great. Things are slow, and we’ll have this taken care of by third quarter 2023.

Well, some of that was people not interested in consumer spending for Christmas anymore. So November and December were way down. Lo and behold, January comes along. People are buying, they’re buying cars, they’re buying houses. They’re buying a lot of things, not accumulating a lot of new debt. They’re just out buying with money they have already.

So far, the consumer is not feeling it existing. Home sales are down. This is rate of change. So basically, they’ve kind of slowed down to where they were several years ago. They haven’t collapsed. Good houses, good locations, in great shape, they’re still being auctioned up at closing the good properties, everything else they’re kind of slowing. You’d think there’d be a huge change in the home price index.

Well, there’s been a small change in the home price index. It sort of shifted positive this month because there were a lot of sales in January that wasn’t even part of the spending numbers. There were a lot of homes purchased, people moving forward, people feeling that the Federal Reserve is close to being done with raising rates.

So the drama in the housing market driving, slowing spending really hasn’t occurred yet. You’d think the value of all these houses have really taken a hit so far. Well, we were at about 45 trillion in residential value just a little while ago, and we’re down about two, nothing like 2008. We’re looking for bubbles in the housing market. We’re looking for places that the financing was bad. We’re looking for all kinds of things that need to be corrected, and no shows, no bubbles, valuations are right up there.

They’re just requiring a lot of consumers that have the money to buy houses now. They’re just requiring that the houses be in a good spot, updated, tidy. They’ll buy it, and they don’t care what it costs.

Back to the fundamentals for a minute. This is basically the number of people employed in the service side of things and manufacturing side of things. If you notice back in about 2000, when China entered the World Trade Organization, well, we had a precipitous decline in people in manufacturing as China became the world’s low-end global manufacturer. Things have changed. A lot of those people left manufacturing. They moved into services. And services are 70% of the economy. And what goes on in there really counts.

At the very beginning, if you look at the ISM numbers, ISM for non-manufacturing is about 55.1. Anything over 50 is expansion territory. So the service side of things is doing fine, and everybody associated with that are still out spending.

And I want to add that the people that are in US manufacturing, the numbers are down a little bit. They’ve sort of stabilized, but the productivity is probably close to the best in the world. And on a side note, here’s sort of a reminder. Considering how many people we have in manufacturing, they are very productive.

Now, a lot of this is robots, computerization, new plants, a lot of reasons, but they are very productive. And it’s reasonable to assume we’re not going to increase the number of people in manufacturing. Growth is going to be in the service side. Finally, we’re waiting for consumers to slow, which will make corporate America slow, which will add to layoffs, which will add to increased debt. That’s kind of the way that works.

And then you work through the cycle. Consumers have really not started to slow. They really haven’t impacted sales as a whole yet. They probably will this year. And certainly, corporate America has got lots of money, and they’re doing fine. This is the spread between BAA corporates in America, and it’s very tight, it’s very strong, it’s very confident.

If you look at what it was back in 2009, the spreads are wide, meaning the price of a BAA corporate is down. It means the yield is up. People buy treasuries, and this is the spread against the same term treasuries, spread is very close. That means the prices are very high for these corporate bonds. They’re very valuable. They’re nearly as valuable as a risk-free treasury.

So corporate America is showing no signs whatsoever of slowing down. That’s all for now. We’ll keep up with this, and it’s safe to assume that the Federal Reserve is going to add 25 basis points here this month. Put us at five, and it’s a safe bet that we’re going to stay there, or some iteration of there, maybe five and a quarter.

That isn’t as important as how long we’re going to stay there, and we’ll be at five or more for the rest of 2023. We’re not going to see a reduction in the rates until next year. As always, if you have any questions, send them along to I’ll be happy to look at it.

Thanks for joining me!

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