This week on “Inside the Economy”, we look at several pieces of economic data, including inflation and housing. Inflation continues its slow decline and approaches the Fed Funds target rate, but is it enough to sway the Fed to pause at their upcoming meeting? Median home prices have started ticking upward, mortgage delinquencies are at record lows, and new mortgages are around 6.7%. Has the worst in the housing market passed? Tune in to learn about this and more!
Key Takeaways:
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- Unemployment increases to 3.7%
- 2-year bond over 4.5%
- Oil hovers around $70 a barrel
- • Mortgage rates above 6.7%
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Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Well, it really is about the mysteries of the economy and waiting. Right now the economy is kind of waiting. Federal Reserve is meeting in a couple of days. They are probably going to go on hold. They’re going to raise their rates, they’re going to wait until July. The rest of the economy, well, quick look at the numbers.
Oil is back down where it was. If you look where it was a year ago, it’s almost half the price. Despite what the Saudis say and all the drama they’re trying to generate on the oil market, nobody’s caring. Rates are still down. Mortgage have come up a little tiny bit, not much. They track the ten year as usual, slightly more initial claims. It’s kind of good news.
Unemployment up to 3.7 compared to where it’s been. That’s almost bad news technically. After all of the interest rate hikes we’ve had, that should be four and a half, not 3.7. Labor market has slowed a little bit. Here’s where we are. Go back to 2019. Fed funds is higher than inflation. The cost of money should be higher than the erosion of money. That’s basically the way it works.
Then they lower rates a little bit, inflation sort of comes down, interest rates come down, it’s okay. Inflation starts to pick up and then bam, we get COVID. Then low rates, free money. Inflation picks up a little bit, as it should, and then really picks up with housing and labor and people catching up on the cost of living.
So the Fed has to go from zero to basically five or five and a quarter, which is where we are now. CPI and the core CPI are down in the fives. They’re down, meeting the cost of money. And all it really has to happen is the cost of money. Fed funds needs to be a little higher than CPI just a little bit, not a lot. So the slope of CPI is important right now. It’s trending to about the middle of 2024. Should be back where the Fed wants it, let’s call it two.
So the Fed between now and then has to go from five and a quarter to about three. That’s their job. We don’t know how that’s going to happen. We don’t know how quickly CPI is going to decrease. But that’s sort of the position right now. They’ve done their thing. Whether they raise another quarter a point or not really doesn’t matter. It’s simply a question of how CPI performs here in the next four or five months. Consumers, and we always look to the consumer and consumer spending.
When you’re looking at maybe a recession, maybe not, or maybe slowing the economy down. Well, consumers have been behaving very well. We’ve gone through this before. Revolving debt, credit cards has come down. The growth is down at a good number. Non revolving regular term loans, that kind of thing is fine and healthy.
Mortgages, well there we go, way back. Mortgages have fluctuated at a good pace, at a good number, 2% above the ten year. And then we’ll get this big boost because the Fed is raising rates. So we’re up about seven. Well what you get out of that is the dark color here is affordability, which is very high. It’s sort of expensive.
The cost of the mortgage is very high. It’s pretty expensive. The theme in the real estate industry is go ahead and buy this house. I know it’s a little expensive, a little steep, but you’ll be able to refinance in a couple of years. Well, in an ideal environment, they’re probably right. If the Fed has got to go from 5% to, let’s say three inside of the next twelve months, mortgages come down. They’re about 6.8 right now. They might be back in the low fours.
Okay, that’s sort of where we are in that arena. If the affordability is so bad, you’d think there’d be a lot of delinquencies and foreclosures. No there’s not. Delinquencies are way down. Foreclosures are way down. In fact the foreclosure industry is sort of going, yeah, we’re back to making money. We’re above where we were during COVID which was kind of low, but at least we were making a buck.
The Conference Board, another government organization. They always run leading Economic Indicators. There are varying degrees of accurate, but you look historically and they’ve been okay. Right now the LEI as it’s affectionately known, has dropped down and you need to, quote, worry about a recession unquote standard. They might be right. We might have to have a recession to inspire the Fed to lower rates, which is their usual tool.
Well they’re perfectly aware of what’s going on and they’re watching the CPI every day. They will very likely lower before they get a bad economy. And they quote, have to I think they’re kind of on top of it. That isn’t very dramatic either. But whether we get a recession or not, it doesn’t matter anymore whether we get a 25 basis point increase in July because I don’t think it’s going to be Wednesday.
The markets, the S&P 500, the Nasdaq especially, are doing fine. Not great, not spectacular. We don’t want spectacular. We don’t have the earnings yet that would justify spectacular. S&P 500 is up, I’m guessing about 20% in the last year. It’s up, whatever it is, eight and a half on the year. Nasdaq is doing better than that. They’re doing fine. They’re growing and doing better on lack of drama. It’s lack of bad news, it’s lack of worry, it’s lack of gee, we don’t know what’s going to happen.
Well we don’t really know what’s going to happen. We just know what’s most likely going to happen. The Fed will lowers rates, CPI is under control. The rest of the economy doing fine. Very, very resilient. Internationally, global manufacturing has slowed all around the world, especially Europe, China. They finally noticed that the world’s number one customer, the United States, isn’t buying as much.
There isn’t much of a frenzy, and the slow on-shoring of manufacturing is starting to fill into the blanks. The fast on-shoring of manufacturing is in Mexico, and they’re just blazing along. Mexico is outperforming everybody in Latin America, because we’re bringing a lot of stuff there. On the right hand side, you notice our total deficit, meaning buying more than we’re selling, which is okay. The United States has always done that. It’s not dramatic. It’s okay.
Not exporting as much oil, but buying more stuff slowly, but at the top, we’re buying less and less from China. That trend is very clear. It’s probably very positive. It’s going to hold Their manufacturing back. They manufacture even if they’re going to start manufacturing for the second tier manufacturers who we still buy stuff from, it’s still slowed. We’re going to be doing more and more of that stuff domestically. That’s just the nature of the beast. And there’s been a lot of and a couple of questions.
Gee, aren’t we worried about the dollar dropping because this and because that, and because we have a lot of debt or because our trading partners are working against us, all that stuff. Don’t worry about the dollar. There’s a lot of media pieces out there to try and get a little activity in the currency market.
Now, remind you, there are about 200 people in the entire globe that control the currency market. They’re always interested in a little bit of activity, small, little activity. Typical trade in the currency markets, minimum of $50 million. So it’s not a point of concern or it’s not a point of opportunity for somebody. The dollar is still the fiat currency. It is the global reserve currency.
There isn’t a number two. The room NIMBY really never had a chance, and the Euro had a chance. It’s probably slipping away. Europe is likely in recession already. Finally, the West Coast is seeing fewer and fewer destination cargo drops, container drops. Some of that is we’re buying less. A lot of that is they’ve been going through the canal and going to Houston.
They’re going to a lot of rebuilt ports, deeper ports, Charleston, all kinds all over the East Coast. They’ve been doing well and avoiding Long Beach for whatever reasons, probably tired of sitting out in the ocean for three and a half weeks waiting to be unloaded. Well, they don’t have a volume problem anymore, and there are fewer and fewer ships showing up there.
However, my old stomping grounds, Panama, they’re definitely having a drought. The Chagres River, which supports the Gatun locks, Lake Gatun, all of the locks on way down. It’s about half the flow it normally does. So they’re reducing the ships that are going through. They’re not doing 35 each way a day. They’re doing more like 20 each way a day and reducing the draft even in the new rebuilt canal.
Well, that isn’t very dramatic. It would have been very catastrophic five years ago because of all the activity in global trade. Not so much now. And I don’t think this is going to be the salvation of the Stevedores in Long Beach and their contract negotiations because they’ll either wait to go through, they’ll go around the other way and not deal with Long Beach. That’s kind of the way the market is right now.
Well, we don’t know what’s going to happen. The economy there certainly doesn’t justify any drama. That’s clearly where we are. No bubbles, nothing like that. So thanks for joining me. We’ll keep everybody updated naturally. And if you have a question, send it along to me at info@shjwealthadvisors.com and I’d be happy to deal with it.
I will see you next time!
