This week on “Inside the Economy”, we look at the lending market, housing, the Federal Reserve, and other economic data. Lending data is showing delinquencies at record lows, as we prepare for student loan payments to start back up in September. Industrial production in the US has remained high, and with a potential Fed increase of 0.25% in rates and federal outlays outpacing revenues, what does that mean for the economy as we move further into the third quarter? Tune in to learn about this and more!
Key Takeaways:
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- Headline inflation hits 3
- Oil moves above $75
- Unemployment rate hovers around 3.6
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Full Transcript:
Welcome to another edition of Inside the Economy!
Thanks for joining me. We’re in the middle of the summer doldrums, so there’s really not a lot going on. There’s not a lot of drama. There’s not good news or bad news. But I think it’s kind of important we get a feel for where we are today. Quick look at the numbers. Inflation is coming down. Headline inflation coming down. We’re at three. Core inflation kind of the important one. Core meaning you take food and energy out it’s still kind of high. There are some forces moving that along, which is one of the reasons that the Federal Reserve is going to use to give us another quarter point rate increase, well very soon, a couple of days and they will.
So that’ll put the cost of money at five and a quarter. They’re probably done, initial claims down. They’re not going up, they’re coming down. The 3.6 unemployment rate wasn’t a fluke in the data. It’s pretty strong numbers. It’s down. It’s kind of stable at 3.6, not 4 ½ where it ought to be. We had 7% mortgages for almost two days. They’re down in the sixes again. Here we are year and a half into raising rates. Supposed to be a lot of bad news. There isn’t any. Consumers have a little expense coming in September. The deferral of student loans is over September 1. The dichotomy here is a lot of these student loans have defaulted already even before they got forgiveness from the President for COVID.
Well since that forgiveness is going away, according to the Supreme Court, they’re not going to make these loans good. They’re simply going to walk away from them. And a lot of the money that the President was saying, well we’ll forgive that and it’ll add up to this. Those loans are already in default and they’re not going to be salvaged anyway. The other side of the student loans are generally from households that have a fair amount of money and they’re simply going to pay it because they pay their bills and don’t want angry letters from Sally Mae or the IRS. Whatever the reason, the political side of that was one thing, but the drama is already in the books and everything else on the debt side, if you take a look, loans are being paid, the defaults are down, bankruptcies are down.
The fundamentals of the consumer haven’t changed. They’re doing pretty well. What has changed a little bit is the nature of the auto loan market. There’s been a lot more rejections from banks to do auto loans. Some respects that’s from the nature of the consumer that’s coming in now kind of late in the game, but it also reflects what’s going on in the private equity side of things. There are a number of companies out there that want you to download their app, put the VIN of the car in that you want to buy or whatever their process is how much you want to put down BAM, ZIP. Give us your name and here’s your loan. We’ll wire the money to the dealer kind of thing. That’s where the auto loan business is going and that’s where the tough end of that business is already there. And banks aren’t particularly interested in that business anyway. It is kind of lucrative, but it’s a clunky consumer loan that they don’t want and they’re losing the market.
Mortgage rates have been up. You would think, and we’ve talked how this has slowed existing home sales. Yeah, it has. Existing home sales have slowed. Interest rates are up. We all know that. Fundamentally, the sales have slowed because there’s no inventory. Inventory has not improved. There aren’t a lot of homes on the market other than the normal turnover of death or move away and leaving a house in the market. But active selling and putting a house in the market because they want to make money? No.
The new home market is also way down. Commercial loans for these kind of development products are getting harder and harder to get. So there’s not so much of the new single family home stuff out there. It’s all multifamily everywhere. Even in Denver, it’s all multifamily. The prices. This is Black Knight. Well, we had a tiny little spot in here when rates started going up, that prices went down a little bit, tried to adjust a little bit, tried to slow that market. Well, they’re showing as much strength, staying firm and creeping up as they ever were going down. This is probably as bad as the real estate market is going to get at another 25 basis points.
Another quarter of a point out of the Fed is not going to have any impact on this. People have already adjusted to the prices in the mortgage market. The industrial side of the US is doing great. The production numbers are back up. What’s probably indicative of unemployment and initial claims that Taiwan semiconductor manufacturer I’m not sure what the initials stand for built that big plant down in Arizona and they’re delaying opening the plant. It’s a big plant because they can’t get workers. It’s not engineers or sophisticated maintenance people. It’s workers that will pick up a bag of chips and put them in a box.
I think in a lot of ways, those people are enjoying their gig jobs and DoorDash and a few other things. And there’s not much more money working for picking up a bag of chips and putting it in a box than there is for doing DoorDash. And they’re not stuck in a particular place all day. So until they automate that or AI has some influence or wherever it is that end of manufacturing is going, those jobs are going to be hard to fill. Simple!
As much as I regret having to sit through another presidential campaign and it’s going to be tedious, there are some things that have changed in how the government is spending its money in its current deficit that are going to be part of the nature of this widely disparate campaign. The expenses that the government has, even with the interest on the debt and regular ordinary expenses are up. This isn’t continuing to be stimulus money for COVID or whatever it is they are up. Some of that’s inflation, some of that’s a lot of things.
But revenues after their very productive year of 2022 have normalized. They have reduced and this gap is clearly not sustainable. It’s wider than it’s been in a long time and it’s not just a fluke in the data at this point. This is going to have to be a fundamental shift one way or another. I suspect what’s going to happen is revenue is going to have to go up. It’s hard to imagine that the relatively thin discretionary money that the federal government has is enough to bring this gap down. There just isn’t enough money in there to fool with that would be anything politically acceptable really on either side.
So it’s going to be lower government spending and cut out some services or raise revenue and who you going to stick it to. The issue with the Fed is not necessarily raising rates because they’re just about done with that. We all know it. It is what they’re going to do with their balance sheet. Now the gold here is what percentage of the entire treasury market is really owned by the Fed? As you can tell, it’s a big number. They own a lot of the treasury markets because that’s bank reserves, that’s bank assets. That’s a lot of things. But it’s been coming down recently kind of dramatically because the Fed has got to take all this excess liquidity out of the system that got there due to COVID.
Fundamentally, what they’re doing is letting the stuff roll off. They are letting bonds mature. They’re letting tranches of bond issues mature. And this mature when they mature. What the Fed does $50 million bond issue, it matures great Zip. The Fed pulls that money out of the system, pulls it out of M2, takes the liquidity out of the system, makes less money available to banks because almost guaranteed that that asset is a bank asset, otherwise the Fed wouldn’t have it and the bank loses the asset too.
So the available pool to lend is going to shrink. They’ve done about 800 billion so far. They got about three and a half trillion to go. And it’s not going to be in the next three years. It’s probably going to be in the next five. That is the headwind that the bond and the stock market are looking at. It’s not rising interest rates. It’s not this. It’s not even who’s running for office, it’s what the Fed’s going to do and how much money they need to pull out of the system. The function of the liquidity was great. For COVID really did a good job and I have no problem with it.
Well, now we’re simply at the point where we have to take it back and get back to some more normalcy. So don’t expect the bond market to go off on a double digit rally free for all. They’re not going to do that. They’re perfectly aware of this. And the stock market has been very wisely. It’s been doing okay, creeping up, it’s following earnings. Unless you’re making money, they’re not going to reward with any glory. They’re a little tired of that. Well, that’s all there is for now. I’m always happy to deal with questions. Send them along to info@shjwealthadvisors.com. Happy to deal with them!
