This week on “Inside the Economy”, we discuss some key data pieces. From a year ago, inflation has trended lower, unemployment has stayed the same, and treasury yields continue to climb. The Fed is continuing to raise rates as they receive traditionally conflicting data. Is inflation under control and how high do they need to go with the cost of money? Tune in to learn about this and more!
- Bond yields continue to rise
- Oil is around $80 per barrel
- Mortgage rates inched up to 6.9%
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Theme this time is everything’s slowing down. Everything in the economy is slowing down. The Fed has got cost of money at five and a quarter and the chances are we’re going to get another quarter point in September next month. I know you’ve heard this before maybe that’s the last, it’s probably the last but there’s still so much resilience in this economy they’ve got to give us another quarter point.
Quick look at the numbers: it says 6.9 for a 30 year mortgage. Now, everything’s in the sevens low eights. I think it’s going to be there for a while. Those that have heard buy whatever it is you want now and you’re going to pay a little more and you can refinance in three years. The three years is probably ticking now. I think mortgages will stay around the sevens for a little while and that’s plus a point or two points down.
Yields are up. Yields are up because there was a bond sell off last week. When you sell the bonds, price goes down, yield goes up. We’ll talk about that at the end of the program. It has to do with the governance issues, with treasury, everything else. Oil is up a little tiny bit, we’ll talk about that. The PCE, which is kind of a better gauge than the CPI is slowing, headline is slowing, core is slowing, core is about 4.1, headline is down to three.
If you take a peek at the way the numbers were sitting a year ago, unemployment is the same, yields are down. There’s very little that’s going on in this economy right now other than it’s slowing. It’s very resilient and the numbers are demonstrating this. What we have here, this is the PCE. PCE is kind of a better measure than CPI for inflation. Core is about 4.1, headline the big number down about three now, you know the Fed has a target rate of two for this.
It’s kind of a long way off but the Fed is just going to have to be patient and hang on to where they are right now until they get an opportunity to start lowering rates which is the next thing they’ll do after the September meeting, we’ve already seen lots of signs of it slowing. This is an important one. This is employment cost index. This really hit everybody hard right around COVID some of that was wage and hour people but it really hit due to bad numbers and a few other things and the fact that a lot of wage and hour people really hadn’t had anything resembling an increase, some of them in a decade.
As a matter of fact, Los Angeles is looking at most of their municipal workers today who were about to go out on strike, some 12,000 of them. They’re kind of saying the same thing about their wages and hours but the momentum of wage cost is slowed. It is actually coming down. The change is coming down. It’s getting easier to deal with. Quits aren’t quite as popular as they used to be. This used to be the height of fashion, and you notice the blue line. They’re coming down. And a lot of the well announced layoffs, large layoffs, a lot of them didn’t come to fruition, or they were a lot smaller than they thought.
Unemployment numbers are still way down. Initial jobless claims numbers are way down. Unemployment is still three and a half. A lot of these employers finally figured out that it was cheaper to hang on to these people, even if they’re staring out the window. I don’t think that’s exactly what they’re doing. But the layoffs didn’t impact the economy like they normally do at all, and there’s no sign that that’s going to happen in the foreseeable future. Delinquency rate, we’ve talked about this before.
Yeah, it continues to creep down. This is delinquency on first liens at all. It’s a very good number. 90-day delinquencies. Bad news. You look over here on the left, it’s below a percent over on the right. This is multifamily, you’d think, boy, there’s really some problems over there. These are generally small apartment buildings, 8 to 150 unit apartment buildings. That market is doing very well, even in light of you see, you look at this and you go, boy, rents are really down, aren’t they?
Well, no, this is not rents are down. That growth of rents has got back down to zero. So even after the abatement, they had in their rent for a little while, renters are paying more. And we’ve discussed just a little while ago that everybody are using their credit cards less. Charges on the cards are way down. Outstanding balances are way down. The only thing that’s really going on with a lot of these consumers are the renters. They are paying more. And those rents just likely are not coming down. That’s simply going to be a cost of that part of living going forward.
Some complaints about, gee, profit margins of the S&P 500 aren’t doing really great. Well, yeah, they’re still over 11%. That is a very good profit margin. Interestingly enough, the S&P 500 and the Dow and everybody else are very reflective of exactly where these earnings are. There’s no speculation about where they’re going to be in this market yet.
And given a reason, like, well, when Fitch downgraded the government a little bit, not that that was an economic issue. It was much more of a political issue. It was a reason to have a little sell off, and that’s exactly what they did. Bond market sold off, stock market sold off. Brought it right back down to where earnings are. No speculation in the markets yet. This is actually an ongoing issue, certainly with me, and kind of important.
Again, this is onshoring and what’s going on around the world. Interestingly enough, China just amazed me. They actually disclosed some things last week that I’ve never heard out of an official announcement out of the People’s Bank of China. One, they’re a very prime demographic. 16 to 25. Unemployment in that demographic is over 20% now, that’s like Puerto Rico or Turkey. Most of those are university graduates. That’s an unhappy group. That very important part of their social fabric.
And two, they finally figured out that a lot of the growth that a lot of the factories that were used to yay went away when their number one customer went away. And their number one customer. The US. Through any third party, is making very positive moves to not go back to China. And we’re probably willing to pay a little more for these very low end consumer items that have been their main stay over the years.
Hence, the capital spending, intellectual spending is protecting contract rights and privacy and the secrets of our chip, or whatever it is. And a lot of structures. Little additions, big additions. We talked about the multibillion dollar projects going around the country, 300 of them. These are much smaller. These are 10 to 50 million projects, but they’re everywhere. It is indicative of what’s going on in US manufacturing. The only issue here is these are probably two years away from really being online and profitable.
Oil is up a little bit. $80 not too bad. It’s not so much that the Saudis and the Russians are trying to punish the oil market. Everybody’s getting in the production business. We used up a lot of stuff that had been in inventory. Some of it was used up during the maintenance of a lot of refineries. A lot of those guys are coming back online now. And oil at 80 is not too bad. It has no reason to be at 30 or 130. 80 is all right.
On the other side of the energy issue, first new reactor to come online in a long time, Georgia. There are several more in the works. A lot smaller, more compact, kind of following the French/US Navy model of smaller, more concise. Throw the whole thing away in 20 years. Fundamentally, our requirements for and dependence on hydrocarbons. We’ve got several decades in front of us before we can get away from that. It was Texas that led that charge.
Finally. Yes. Fitch, the last of the three big reporting agencies downgraded the US government from AAA, the best to AAA plus and stable. Yes, it’s put out in the media as, oh, gee, the United States can’t pay its debt, so on and so forth. If you read the report, all eleven pages of it, and it is just mind-numbing reading. It’s all about governance. It’s sending a very subtle message to a group of angry teenagers who are doing whatever it is they do. Congress, just as a message that the issue has been these shutdowns and these threats, so on and so forth don’t look well to anybody else. So you got downgraded. The S&P has been AA plus for certainly a decade. It’s just a political thing. There’s no conceivable way that there’s any actual risk in the government and its debt.
And I’ll remind you when I say debt that most of that money is our money. Most of that money is money that individuals, all of us have in pension plans, 401Ks, money markets. You can’t have one money market without government debt. Assets in insurance companies, state farm life insurance companies, Treasuries are everywhere. That is the mainstay of the global economy and it’s not a question of them with their ability to give you your money back. In fact this was a big thing. Gee the interest rate we’re paying to everybody is coming up on a trillion dollars. Isn’t that tragic? We’re just throwing that money away. No we’re not throwing that money away. It’s paying it to us.
The government treasury in many ways is gracious enough to pay us interest on our money. Remember we give them our money then they pay a little interest on it. You can get it back anytime you want. It’s just sort of interesting. There’s a lot of cash. We’ve talked about how much cash there is in the system. Some $12 trillion. It’s getting interest here. A lot of the assets and extra assets in the banks are getting this interest. It’s here.
This number is probably not going to weigh because there’s a lot of money in the system. There’s a lot of cash in the US system. A lot of individuals have a lot of cash. Corporate America has got billions of dollars in cash. It’s all reflective here. This isn’t bad news. It’s just indicative when you live in an economy, a very important economy that’s got a lot of money. So, well we’re going to get another quarter point September. Don’t give it another thought. Nobody else does. Bond market’s fine. The mortgage market is really stabilized and they are already moving forward. No drama.
Well thanks for joining me as always. Send your questions along email@example.com and I’ll be happy to deal with it! And thanks for joining me!