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Inside the Economy: The Consumer

By April 19, 2023No Comments

This week on “Inside the Economy”, we take a look at the consumer and financial stress in the system. Headline inflation came down year over year in the month of March. Many of the supply side contributors seem to be returning to pre-pandemic levels, however the consumer seems to be staying strong. How will this impact the Fed’s decision making for the rest of the year? Tune in to learn about this and more!

Key Takeaways:

      • 2-year Treasury around 4%
      • Oil on the rise to about $83 per barrel
      • Mortgage rates still above 6.25%

Full Transcript:

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

Want to talk about stress in the system right now, consumer stress, market stress, that kind of thing, considering we’ve been in an increasing interest rate environment for over a year. A quick look at the numbers. The cost of money has gone from a quarter of a point to probably be five and a quarter by the first week of May. And you think there’d be a lot more stress in the system than there really is.

And I’ll do some detail here in a minute, but you look at these numbers in the ISM, manufacturing and non-manufacturing are down a little bit, not very much. CPI has rolled over the CPI inflation numbers. We got nine months in a row of CPI cooling. Unemployment numbers aren’t bad. Unemployment is at three and a half.

The interest rates, yeah, well, they’re up, flat yield curve. Oil is up a little tiny bit. Mortgages are still in the sixes from a practical matter, low sevens. We’ll try to evaluate what’s going on and draw a couple of conclusions where we think the market might be going. Here’s the CPI, food, energy, core goods, they’ve all cooled, they’re coming down. Headline inflation down 100 basis points 1%. Core still up a little bit.

Inflation has cooled. It is continuing to cool. The goal here is 2%. And the Federal Reserve, we’re not there yet. It’s simply going to be a matter of time until we get there. Unemployment, there are some initial claims even after all of these announcements of known layoffs. Silicon Valley, Amazon, a lot of these guys, the people they laid off have been absorbed in the job market already.

It’s evidently very popular to have a job these days, so they’re getting jobs. And a lot of the numbers we used to see about look at all of these vacant jobs, as it turns out, a lot of those were a little bit of exaggeration in the system. A lot of employment firms would say, well, we got seven job offers when in fact they only really had one. And those numbers are clear enough.
This is from the Federal Reserve. It’s really showing what the consumer is doing.

They have money to spend. They are spending money. They are when it says revolving credit, that’s credit cards has picked up a little tiny bit, not much non revolving debt, boats, car loans, that kind of stuff pretty stabilized. But the consumer is spending. They aren’t using debt, they aren’t using stimulus money, they’re using their own money.

Retail sales is a great example. We went through this period of, oh, retail sales are through the roof. Well, actually they’re not through the roof. There is a fair amount of inflationary pressure in these numbers and things cost more for a while. So spending was up. The actual slope of the growth of spending hasn’t changed very much, but it certainly hasn’t dropped. They’ve slowed and the rate of growth has slowed.

Credit cards are not piling up. The actual usage of credit cards, this is bank of America is actually down, significantly down. Part of that is that credit cards cost a lot more now. But there’s a lot of people that remember when credit cards were in 30%, high 20s. Well, right now it looks like they’re going to peak about 19. But normally that would have a huge impact because people were living on their credit cards. Some do, but the majority do not. This is merely a reflection of the cost of money.

Real estate prices and it was a reasonable expectation that we would have much more costly money by now in the system. The home mortgage, the residential mortgage and refinance market has done an amazing job keeping the price down. Fact that Freddie Mac says you can still get a 6.26.3, you can’t, but even call it 7% is pretty cheap. Some prices have adjusted some places for the market to move along, but the inventory didn’t stack up like everybody assumed. There’s not for sale signs everywhere.

The market is not raging and going out of their way to say, come buy my property. Properties are still rented at a premium, real good ones. You definitely pay a premium for it. Don’t have any stress in the real estate market yet. We don’t have any stress in the job market. We don’t have any stress in the consumer spending market, very important market yet.

Commercial real estate, boy that was anticipated being as soon as the COVID and everybody stayed home hit. People are going, well, office space is a thing of the past, hotels are a thing of the past, so on and so forth. Well, there were some delinquencies, there were some credit issues, there were a number of things. But as of just a little while ago, there are some delinquency issues with a few commercial loans, but it isn’t much, it isn’t very dramatic.

And it’s actually recovered most of the loans for commercial properties, for malls and hotels and that kind of stuff that’s in regional banks. And they’ve been very, very cautious and prudent about who they lend to. Now there’s some banking issues going on and they don’t want it to turn into some kind of contagion. There might be some commercial loan issues, but again, so far there’s no evidence. We’re waiting to see where the impact of this increased interest rates, where it’s going to hit. This is the Kansas City Fed stress test.

This is stress in the system, complex series of calculations. This is very indicative that the Fed is not in any hurry to lower rates. It’s just an expectation and maybe wishful thinking. I hope it isn’t wishful thinking that if they raise a quarter point here in a couple of weeks that that will be the end. And then we’ll simply sit with higher rates for a while, they won’t continue to keep increasing rates. That would probably be bad, but we don’t have any stress yet.

We don’t have any issues. That is really slowing things down. Things are just sort of status quo. Corporate profits have slowed a little bit, but they’re still pretty good. S&P 500 is still pretty profitable. Sales haven’t slowed very much. Employment has slowed a little tiny bit. Wages are up a little bit, still profitable. They haven’t been really taken apart. Maybe this will happen. No evidence yet.

We’re at about 18.2. Not a bad number. It didn’t collapse. We went down to eight in 2008. Not this time. I don’t think we’re going to see it either. The equity market right now is more anticipating when they start lowering rates or how far they’re going to lower rates. Ideally, let’s say for example, the cost of money is five here pretty soon. It might be great if they, over the course of the next couple of years, lowered to three, not to zero, which is where we’ve been.

Three mortgages adjust in the high fives, low sixes, and everything else accommodates after that. That might be a great economic environment going forward, but we’re not there yet. We’re going to have to sit at five for a while until we get a little more slowing in the system. And they’re confident that there isn’t a lot of lingering inflation building the indexes, the S &P 500, Nasdaq, they’ve been pretty positive the last quarter.

Maybe that’s overreacting, maybe that’s anticipating. I don’t know. It’s not all based on earnings, but there certainly isn’t a bubble here. They’ve just stopped dropping and continued their, let’s call it recovery. One of the things of the many positive things that’s going to come out of the Silicon Valley Bank and the media based bank crisis and we don’t have a bank crisis. People are leaving their banks. They’re going into money market instruments, short duration bond instruments by the tens of billions.

All these short term bond funds, and there’s a lot of them out there, are taking what used to be bank deposits and buying short term debt with them. That has a way of lowering rates itself. You start buying all this short term bond product, rates start coming down. It’s sort of working against the Fed. But when you start throwing hundred and hundred and fifty billion dollars ($150,000,000,000) into that market in the course of a week, it’s going to start pulling rates down a little more and take some of the stress out of that market. That too is not a place that there’s a lot of stress. They just have a lot of money they need to invest.

Finally, as a reminder, and a good client asked me about this, what is corporate America doing if money is getting more expensive? Is money hard to find with rates going up? Are they out borrowing? Are they out issuing new bonds? Well, in this little chart, the 2023 interest rate cycle, we’re almost in negative new debt issuance. That means that bonds are just rolling off. Corporate America is not out selling bonds because they need money. For the most part, they don’t need money, and there’s a lot of places to get it: banks, private equity, individual deals, all kinds of things.

But there’s not a lot of new debt out there. No pressure there. Okay, let’s say the Fed goes to five and a quarter. It stays there. Great! They’ve got to stay there through the rest of 2023. I wouldn’t think it’d be all of 2024 at some point. They’ll come down. Today, I wouldn’t tell you where a recession would come from. I think GDP in the first quarter of 2023 right now, it’s still looking positive. There’s nothing that indicates we have a recession building.

And if they leave rates where they are now for a year, maybe things will slow. But there just isn’t any clear direction where they might slow, because none of these markets are really showing the stress yet. Okay, now that’s all for now. Obviously we’ll talk about this before the Fed meets again. Any question, just send them along to I’m happy to deal with them, and I appreciate you joining me!

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