This week on “Inside the Economy”, we look at an array of economic data, most of it showing signs of a decently healthy economy. The Fed continues to fight inflation with a 0.25% increase next month still on the table. The debt ceiling debate seems to have a resolution as a deal is being finalized. Where will inflation and the Fed’s policy take us into the summer months and end of the year? Tune in to learn about this and more!
Key Takeaways:
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- Bond yields on the rise
- Oil around $74 per barrel
- Mortgage rates around 6.5%
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Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me. Titling this one the summer doldrums. It’s not that everybody’s on vacation, but there’s still a lot of chitchat going on in Washington, somewhere between the White House and Congress on what they want to do for the authorization for treasury. It’d be nice if we got that resolved. But there’s also a lot of pencil tapping on the desk in the marketplace waiting to see what happens. A lot of speculation, a lot of theories. Do people get Social Security? Does Newport News get their payroll?
I mean, everything just goes on and on and on. So, there’s a lot of things going on in the marketplace that are just slowing things down unnecessarily. Those of you that know Joel Javer, he made a wise observation in the investment committee this morning. He was saying, as I was going through all the latest data, it seems like we didn’t get a lot accomplished with all of this increase in the cost of money. You’d think we would you think we’d have bad news? You’d think we’d do better than just slow inflation?
Well, unfortunately, it isn’t necessarily bad news, but the ISM numbers are both up, the manufacturing and non-manufacturing. The adjustment on the estimate for the first quarter GDP is up a little bit. It’s up to 1.3. Unemployment hasn’t changed 3.4. The initial unemployment claims really are down relatively low. Interest rates are up. Mortgages are up a little tiny bit. Oil is up, but it’s still inexpensive. It’s not the kind of economy that you’d think is having its costs squeezed by the Federal Reserve.
You look at the consumer. Yes, their household checking and savings accounts, deposits in the bank have come down a little bit. Most of this is from the stimulus money for COVID, but they’ve come down a little bit. It’s still a big number. I know I mentioned M2 a lot. It’s a very important measure. And we had that bump due to COVID. Fortunately, that bump, the total amount of money in the system is coming down very important. That is an underlying theme that has to be taken care of.
And the Federal Reserve knows this. Household debt, you’d think the Federal Reserve would want people to fill up their credit cards, to overspend, to still want stuff and pay more for it, get themselves in trouble so they’d slow down. It’s not just so the Federal Reserve can lower rates and save it. It’s trying to get inflation out of the system. And the household is doing a pretty good job not overspending and they’re not accumulating debt.
Housing Market, this is new houses here on the left. The sales of new houses adjust a little bit, but they’re back up. It’s not just huge deals of the developers. It’s people going, yeah, I understand it costs a little more, but I want that house. I’ll refinance in three years. Okay, median price adjusted a little bit thinking they were going to take some of the heat out of the inflation market. Well it has adjusted a little bit.
There’s no evidence that the price is going to adjust a lot more. Inventory isn’t very high. Existing home sales, well, National Association of Realtors that tell you that existing home sales was actually down a little bit. What isn’t in these numbers are all the real estate transactions that didn’t have anything to do with realtor’s private deals, private money, so on and so forth. It hasn’t collapsed, it has adjusted, it has started to recover a little bit. Federal Reserve wanted problems in the housing market to slow everything down and we don’t have a lot of it yet.
Look on the corporate side. Look at corporate America. Raise the cost of money, and things will change. Well, I care a lot about profit margins and this is the vast majority of the S&P 500 reporting their margins are fine. They’re still above 10%. Sales have slowed, inflation is up. People are paying for the increased costs, and don’t seem to have a problem with it.
And manufacturing efficiency isn’t falling apart. They’re keeping their margins up there which means when sales do pick up and it could be before the end of summer, earnings will pick up very well compared to the history of the last couple of recessions here. Corporate America looks okay. Supplier deliveries has been a problem a little bit. Oh, people aren’t delivering, things are slow, they can’t get parts, so on and so forth. That isn’t necessarily the case.
A lot of this is inventory buildup, some of this is airplanes, some of this is well Boeing can’t deliver because they can’t do this. Well, it wasn’t a parts problem, it was a supplier not putting the tails on their airplanes correctly. The point is you’d think things would be worse going from free money to 5% money.
They’re not. The Federal Reserve will probably not raise rates in a couple of weeks when they meet again and that depends on whether we have a debt-ceiling deal or not. If there’s no deal and pandemonium hits the markets, they’re not going to raise rates. But if we get a deal, things will be fine, and there is a 50-50 chance they’ll raise again and go from 5% to five and a quarter. I don’t think the markets will care.
It’ll just sort of get them out of their system. Right now, I don’t think there’s any way we’re going to see 2% inflation which is their target in the foreseeable future. We’re at a pretty resilient four and a half right now. There’s mathematics to get us to three and a half inflation in maybe six or eight months, two more as the data changes. And as always if you have questions, send them along to Info@shjwealthadvisors.com. I’d be happy to deal with it!
Thanks for joining me!
