This week on “Inside the Economy”, we look at unemployment and personal savings. Unemployment has continued to be a driver for the Fed decisions and after recently ticking back up, the unemployment rate has begun to slide down. What is causing such a robust employment market? With inflation on its slow decline, we are starting to see personal savings begin to move upward. How does the housing and rental market play a role in this going forward? Tune in to learn about this and more!
- Q1 GDP revised up to 2
- 2-year bond approaches 5%
- Oil moves back above $70
- Mortgage rates cross over 6.8%
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Just going to talk about a couple of things this time – unemployment, personal savings, kind of big, but they’re all part of what’s going on with hopefully will be the end of this inflation cycle. Almost everything in the numbers is good news for people, bad news for the Federal Reserve. The last estimate for GDP in the first quarters up to two. The ISM – The Institute of Supply Management’s estimate of activity in the non-manufacturing side, the ISM non-manufacturing is up. The manufacturing one is still below 50, which means it’s not contracting, but it’s not expanding.
So manufacturing, okay, services pick it up. Initial claims, down. Unemployment down. Interest rates, everything is up. All the yields are up. Mortgages are up. We might actually get sevens by the third quarter. The point is, the Fed is looking for, you know, we’re a year and a half into this right now, and unemployment ought to be 4.3, not 3.6, 4.5, 4.8, something like that. Mortgage rates should be in the eights, not trying to creep into the sevens, goes on and on and on.
So it’s very likely we’re going to get another rate increase. We’ll go from five to five and a quarter sometime here in July. It’s just inevitable. The unemployment, there we are. I mean, it should be worse than that. It’s not.
Personal savings rate, which is kind of important and interesting at this stage of the game. We all remember that there was great personal savings numbers during COVID because people were getting a lot of money and stimulus and so on and so forth. And they spent that and they paid their rent and they did a few other things. It wasn’t on trips. It was on practical matter. When you dig into it, the excess savings rate that’s the blue line up there was really great, and then they started spending it down. But when you really look into the details of the numbers over there on the right, the red on the bottom is the COVID numbers. And that’s being slowly spent. And I mean slowly. It’s been a couple of years now, but the natural native savings rate has still been creeping up.
People are hanging on to their money. They are not spending it. They’re not out running out buying stuff. They’ve mellowed. And the savings rate is starting to get to being positive. In fact, spending is down. All of the X and the Y and the millennials, those guys, all of them are back down in negative numbers. Their spending has slowed. It’s only older people like me that are outspending, and that has come down a little bit. There’s been a little dip. There’s been some data errors. A singular most important impactful thing in the US economy is developing a new household.
Actually building a highway is right up there too. They both have tremendous impact on all of the pieces of the economy. The young people are slowing. They’re hanging on their money. Some of them are staying home, whatever it is. Either way, they’re looking at expensive homes if they’re going out on their own. The only thing so far that is keeping inflation persistent is the impact of the cost of these new homes.
A lot of people out there, these Generation X’s and Millennials, so on and so forth, they didn’t sell their home, they’ve already got it, and they’ve got a real low interest rate and they’re showing no signs of wanting to trade that. If they do have to move, for the most part, they’re taking a lot of cash with them. So this is a number, it’s not necessarily reflective of the cost of living and the cost of housing for these Generation X and Y and Millennials. Very indicative of the rental market. And this is the single family home rental market. And in the single family home market you get very upper tier houses, very expensive homes all over the place. More moderate, but generally more upscale than the apartments.
The apartment market has clearly stabilized. Vacancies are up to like 7% where they should be up from four where they were two years ago. Rents are stabilized. Rents are back in the normal flow of how they have been change. And all of that single family home rentals, all of the fantastic growth in those rentals is over. It hasn’t retreated, grew, stayed, but it’s not growing anymore. That’s not inflationary, but it’s going to be persistent in the cost of living going forward, because there’s going to be a very active single family home rental market.
In fact, that’s getting more lucrative all the time. That’s the only option for people that are doing a career move, that the careers may only be five years. They’re very likely to rent for that amount of time.
The yields are up. The yields are up more than they have been. When a yield on a bond is up, that means the price has gone down. And that’s exactly what’s happened. When the Fed raises rate, when the Fed raises the cost of money, when very short term money, which is at five right now, very likely to be five and a quarter by the end of this month, the price goes down.
And we had a tiny little rally there for a while. We had about a week and a half where the bond market was doing great because people were sort of anticipating/taking a bet that the Fed was done. The fed is not done. The Fed has got probably a half a point in its future. I think they won’t be done doing all of this until the cost of money is five and a half. That could be August, could be September, then it’ll be over. Well, don’t quote me on that.
Stock market has been doing fine in the last twelve months. S&P 500 is up about 14. It’s the same. It’s been year to date, up about 14. That really isn’t anticipating that the Fed is done. More earnings are going to come back. We look for some bubbles. We couldn’t find any. The stock market liquidity is very good, comes in and out, and as long as the bond market doesn’t have a huge collapse, which it’s not going to, they’re just sort of motoring forward, adjusting as they go.
Now, a lot of this is the big technology companies. Apple’s, what, they’re 3 trillion. A few of the big ones drive the S&P 500 up. But it’s not just them. A lot of the small companies and even pieces of the Dow are starting to move along. Tiny bit more on that later.
Despite what’s going on in the energy market, in this case, Russia and the Saudis saying, oh, we’re going to cut our production back because we don’t like the price. Well, the price stayed at $68 a barrel for a couple of days and then a few traders decided there should be more drama in the crude oil market. So we’re up to about 73 as of this morning. I don’t see that really skyrocketing, famous last words, because people are drilling. The drilling and the exploration are back up nearly to full speed. It is picking up momentum. The Norwegians just found a whole bunch more oil in the North Sea and none of this stuff reflects all that’s going on in the Arctic and northern Alaska, which is near Arctic, known as drilling for oil on the moon.
There are a lot of hydrocarbons up there. Some of it frozen, some of the gas, but there’s a lot of everything up there and people are trying to decide, even at $73 a barrel, maybe it’s worth going after, maybe it isn’t. It isn’t a question that we’re running out of hydrocarbons. That isn’t the case. The popularity of hydrocarbons is still short term there, long term probably not. So everybody’s getting back in the exploration business.
States have been and you’re going to see a lot of press on, gee, the revenues in all these states, in this case, the blue ones, especially California and New York, revenues are way down. Well, there’s a lot of reasons for that, but it isn’t dramatic. There were a lot of capital gains and increases made in 2022 and that’s kind of over. So the revenues are down. California is looking at a budget deficit, I don’t know, 30, 34 billion, whatever it is.
New York’s looking at a budget deficit. Well, they’ll work it out. What isn’t mentioned here is in my entire career, I have never seen all the states en masse have as much cash and reserves as they do now. California alone is got about 39 billion in uncommitted cash. New York a bunch. Everybody, even Colorado, has got a fair amount of cash stashed away in the bank. And I think, well, they intend to keep it there. Two part of the liquidity in COVID went directly into the states. That was its intent because there was a reasonable assumption that the states were really going to get hit on taxes due to COVID.
Well, that didn’t happen, and spending didn’t collapse because of the other stimulus. The point is, states, they’re in pretty good shape where they go tax wise. I don’t know if they’re going to win the argument that they should have tax increases. Even Colorado, a lot of them are saying, well, we’re going to lower our taxes because we’ve got plenty of money. Anyway, fundamentally, the issue here is when the states start getting in the infrastructure business more than they are now, their municipal bonds, which is how they’re going to finance it, are going to look good, because the states look good. Doesn’t matter what the budget looks like. It matters what assets they have to cover the bonds, and it’s good.
Several questions on gee, what’s going on in corporate America? Well, last time we talked about all of the projects that are going on that were over a billion dollars, and there’s 500, 600 of them all over the country. Yeah, it’s huge. The underlying growth in what’s going to be domestic manufacturing is huge. This is just computers, electronics, and the electronic industry, they’re at about 190,000,000,000. This is not car batteries or windmills or car parts or sewing machines or dryers. This is just electronics.
They are spending huge amounts of money. This is going to keep state revenues down for a little while, too, because they’re building them roads. They’re not collecting taxes yet. Okay? But the manufacturing will be deep and thorough. It’s not going to be a lot for the wage an hour. It’s going to be a lot for hydraulic engineers and electric engineers and upper end maintenance people because so much of this stuff is very automated, like I’ve mentioned before, where you see these new auto plants, especially Fords, nothing but robots.
Finally, another question about China and most of you know, we haven’t had really any substantive money in China for a decade, and I don’t see that changing. A lot of things going on there. A lot of politics, don’t care. The fundamentals haven’t changed. Their number one customers look elsewhere and has started to buy and manufacture their own or elsewhere. So when your number one customer starts looking around, things change. And things have changed in China. What they are looking at right now is deflation, if not true disinflation, meaning their prices have to come down.
They are bringing their prices down because they can do it with a phone call. One, to generate local demand, their local consumer demand is bad. There are a very small percentage of the people in China that have money to spend, and they’re driving the prices down. So they’ll go out and spend a little more. Hence the price war with Tesla and electric cars. But deflation is not good for an economy. It is indicative of you need to get people out to spend and they’re not having a lot of luck.
The other side of the coin is China no longer has the cheapest labor on earth, which has really brought them a lot of business over time, because they could do that cheap manufacturing. Right now India has got that. China needs to get it back, or their long term manufacturing looks bad because they can’t compete. They don’t have resources. They have a whole bunch of other problems. And this disinflation and deflation is simply going to make it worse.
Okay. There we are. The fight for inflation is just about over. Give them a couple more rates increase, it’ll be over. Then we’ll start seeing how fast and how long. Any questions? Please send them along to Info@shjwealthadvisor.com and I’ll jump all over it. I appreciate you joining me. And I’ll see you next time!