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Inside the Economy: The Elephant in the Room

By June 28, 2023No Comments

This week on “Inside the Economy”, we continue to look for meaningful changes in the economic data. CPI numbers continue to trend lower as energy and food continue to normalize. Student debt payments have garnered people’s attention as payments could come back online after August. How will this impact inflation? Tune in to learn about this and more!!

Key Takeaways:

      • Bond yields stable
      • Oil drops to $69 per barrel
      • Mortgage rates inch up to 6.7%

Full Transcript:
Welcome to another edition of Inside the Economy!

I’m Larry Howes. Thanks for joining me!

It’s kind of the elephant in the room right now. We’re looking for problems in the economy. We’re looking for some impact of all these increased interest rates for a year and a half. Again, given the summer of 23, there’s not a lot going on. Oil, given there have been a few political issues going on in Moscow with our friend Putin, you’d think there’d be some problems in the oil market, there’d be some dramatic increases in the price of oil supply, all that kind of stuff. Well, oil went below $70 a barrel.

CPI is still not plummeting as much as we’d hoped, but is not increasing either. It is cooling. Unemployment claims up a teeny tiny bit. Unemployment still 3.7. Most of the numbers are just not very dramatic. A year and a half or so into increasing interest rates and unemployment numbers should be a lot higher than they are around the globe. In the EU, in Japan, United States, they’re still pretty low.

There are some age categories, males between 16 and 23. The unemployment is higher, certainly in China, but everywhere else the unemployment numbers are still pretty good. In the US, we shouldn’t be at 3.7, we should be at 4.7, anyway. And going up the wage issues, I generally like to use the wage an hour end of the spectrum. The increase in wages is pretty much over.
There’s a lot of restaurants that are seeing prices already going too high and they’re starting to lose customers. So zero inflation is half, no new wages and cooling costs of everything else. And that’s where wage an hour is right now. Fundamentally, they’re still about 9% behind the inflation that’s endemic in the economy in which they live. But it’s going to take them a year to get there.

So that’s probably cooling and not going to be a big issue here for a little while. CPI, fundamentally, housing, energy, all of that stuff is cooling, coming off in little pieces. Housing you’d think, would be a lot further behind than it is now. There’d be a lot of changes in prices. There’d be a lot of drama going on. There’s not.

What is coming up, however, is the households that have student debt. There are two things coming right away. One, the Supreme Court is going to rule on whether President Biden’s debt forgiveness program is constitutional. I’m guessing it’s not. But two, at the end of August, there’s no more moratoriums on paying student loans. That was part of the debt relief negotiations.
And those people are going to have to start paying on their notes. It’s not going to have a big impact on the economy that end of the economy and the numbers aren’t that dramatic. But spending in places like Walmart and a few other lower end retail places is going to slow because they are going to make the federal’s balance sheet look better paying off their student loans. That is a big thing.

Inventories are still low. When interest rates on a mortgage are higher than the inventory, it generally has an impact on the housing market. It really has not so far. Interest rates are high. It has not slowed the market at all. Low inventory has slowed a little bit, which is keeping the prices up, which is sort of a contradiction and that is not correcting in a hurry.
Single family housing has a very low inventory. One of the reasons is there’s not a lot of new construction and a lot of people that have their single family homes have great mortgages on them and they’re not going to sell them anyway. But the new construction was going through a bad phase that nobody could afford to do it. Lumber was way up, they couldn’t get sinks. A lot of that stuff is correcting in the marketplace now.

So cost, the producer price index for construction, especially on single families, coming down and cooling even more, which will bring more online and again keep the housing market going. This is very indicative of what’s going on right now. That tan line down here at the bottom was the big housing correction starting about 2005 up until 2020.

That was the drama in 2008, which was a real bubble and a number of other things and that’s how long it took it to recover and then a big recovery. The two blues are various right after the inflation cycle, but it’s the red that’s interesting here that’s the current market. This market right now is showing signs of starting to recover very quickly.

We’ll know in the next three or four months whether there’s going to be any more drama in the housing market, and there might not. We will probably get another 25 basis point increase in July. I don’t think anybody cares. And if there’s one more after that, that will have a little bit of impact on the housing market, but nothing like it should have already.
I don’t think housing is going to continue to go down the way it did in 2005. In some of these other time periods, it could be cheering up already. So of the factions that believe, well, the Federal Reserve might actually pull off a spear shot at inflation and not damage the economy is kind of viable right now.

The LEI, the leading economic indicator, is flashing. Yeah, you’re going to have a recession for a variety of reasons. It is not getting worse, it might get a little worse. It’s not right now. It’s actually cooling. And whether we get a recession or not in the first part of 2024 today isn’t important. There are so many other things that are adjusting jobs and adjusting the new post COVID economy.

I don’t think it’s just going to have anything other than a little media conversation. Banks, they’ve decided they’re going to have tougher standards. Great! Normally that would have been very bad news. It’s not having much impact on the market at all. There’s lots of places to borrow money, not only mortgages, commercial loans, individual loans, it’s all over the place.
So banks getting back into tightening their standards. Well, the question you have to ask yourself is what is the total debt picture look like? Well this is individuals, households, non-financial companies, regular corporation, bad news in 2008 and boy did we have to correct that debt. Write off a lot of it COVID there was a lot of debt.

It’s mostly bad numbers, but fundamentally the growth of the debt has not exceeded the growth of M2, the money in the system since 1980, not a bubble here. There’s nothing that’s going to break, there’s nothing that’s going to have to slow down to bring more numbers. It’s indicative of the Federal Reserve taking rates up where they are. Let’s say we’re at five right now and we’re at five and a quarter the end of summer, they might leave them there for a year until we get more and more cooling and they get CPI down to two.

The US, compared to the rest of the world, is right up there. We are well ahead of the curve on inflation. New Zealand is the only one that’s really ahead of us and they need to be a much smaller economy and their inflation was way out of control and they jumped on it. The US is on top of it, if not ahead of it.

The UK is probably behind and everybody else is behind. The EU, the UK, all of them are behind and they need to catch up. They are going to be raising rates for a while. The EU is well technically in recession now. I think it’s going to be that way for a little while and they’re going to have to slow. So this interest rate issue isn’t going away, certainly within the next twelve months and we’ll see what Japan is going to do. They’ve been in very positive territory. So has Turkey been in very positive territory for a while and to what degree it has really harmed the economy. We don’t know yet.

Finally, the fundamentals of US manufacturing, the US job market are kind of clear here. This is all the new plants, development, manufacturing facilities going on just now. This has been going on a little bit and there’s a lot more planned. It’s all over the place.

Ford is laying off another, let’s call it another 10,000 people. It’s had no impact on initial claims. There’s lots of places to get jobs if you’re looking for them all over the place. These are batteries, these are manufacturing, this is microchips, this is pharmaceuticals. Everything you could think of. It’s very diverse.

The issues of what does it cost to fill up a cargo container? Or what are the Stevedores doing in Long Beach? Or is there a water problem in Panama Canal? So on and so forth. These people are simply taking all of that off the table. They are going to be responsible for their own inter-country transportation, that may be railroads, that may not.

Fundamentally, five years from now, American manufacturing is going to be much bigger, much more diverse, and very profitable. So keep looking for bad news. I know that’s an interesting way to look at it, but I look for bad news. I look for something that needs to be unbroken, and there’s nothing there yet.

I appreciate you joining me. That’s all for now. We’re in the middle of the doldrums of the summer. Any questions, please send them along to and I’ll jump all over it. Thanks for joining!

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