This week on “Inside the Economy”, we look at consumer savings & globalization. Despite strong consumer demand and student loan payments starting back up, household savings remain at pre-pandemic highs. With an everchanging global economy, the US has diversified imports away from China and continues to increase industrial robots when it comes to domestic manufacturing. What does this mean as we look to the future? Tune in to learn about this and more!
- Core PCE inflation comes in at 3.9
- Oil stays above $90
- Unemployment rate hovering at 3.8
- 30-year mortgages above 7.3%
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Talk about personal savings and the student loan payments start up again, kind of an issue, and the Federal Reserve got the rates up without raising the rates. They took a little different avenue. We’ll just touch on and sort of a globalization. There’s been a fair amount of questions on globalization, what’s going on in that marketplace? Try and update that.
So a quick catch up in the numbers. There is nothing exciting in the numbers other than where all the yields are. 30 year mortgage is at about 7.3. Well, they’re practically in the eight. Hasn’t had much effect on the housing market yet. Prices have not adjusted dramatically. It’s not what the Fed wants. What we say in the office is not good news because the Fed isn’t happy.
The rest of the rates are up. They didn’t raise rates when they were supposed to. Whenever that was 20, September, whatever the date was, they just said, we’re going to keep them higher longer. That’s all it took. Everything went zit. And they still have room to play around with the rates if they choose to, later this year or even early next year.
The message was, we’re not happy. The Federal Reserve. We’re not happy. We may raise the rates, we may not, because nothing bad is happening. Housing is not down. Wages are up. Goes on and on and on and on. There’s not bubbles. There’s not all kinds of things. Things aren’t slowing. The consumer isn’t slowing. The consumer isn’t piling on. Debt goes on and on and on. And the Fed likes that kind of stuff because everything slows down now.
The term recession is bantered around like they’re waving a flag. And it really doesn’t mean anything other than it’s a mechanism that deflates bubbles, deflates housing bubbles, debt bubbles, whatever it is, whether we have one or not is irrelevant. But there’s no indication that the economy is going to slow substantially in the near future.
GDP latest, well, iteration of GDP in the second quarter stayed at 2.1. The numbers I’ve seen so far for the third quarter are higher than that. It’s not what the Fed wanted. Unemployment barely up 3.8. Initial claims down. Even though there’s kind of a strike, strikes don’t have any impact on initial unemployment claims, just so you know.
So bank of America that keep track of credit cards very closely was following a big announcement that the Federal Reserve Board said, well, savings are down. They’ve moved $4 trillion out of banks, so they must be spending that money. This is sort of indicative, and this is done by income level wage an hour. People technically under 50,000 have lowered their savings a teeny tiny bit, but they’re not overspending. They’re not living on their credit cards.
The money that moved out of the banking system was generally from the three little mini bank runs we had when those banks fell apart, whatever that was seven, eight months ago. And that money went elsewhere. Fundamentally, it went into, quote, higher yielding investments that are out there right now, more aggressive short term bond funds, so on and so forth. They’re just not leaving them in banks. And banks really haven’t increased a lot of their interest rates yet because they don’t have to. They got plenty of money.
So savings are down a little bit, little money pulled out. That still leaves about, what is it? $17.3 trillion in bank deposits. Mortgages are getting up where they should. We talked a year and a half ago about mortgages really ought to be in the eights for a while to slow the market down. Well, we’re kind of there. But what no one anticipated is this there is a huge impact on an existing housing marketplace that has a totally unique thing on the globe. They have a 30 year fixed mortgage.
Those of you that have looked at real estate around the world, especially in Europe and England, there’s no such thing as a 30 year fixed mortgage there. If you’re really a great borrower, you might be able to get a five year variable. Most mortgages vary every year, so it’s killing a lot of people that were just affording what they’d bought three years ago because the rates have doubled.
And those rates and those payments, if you don’t have a fixed mortgage, hit you right away. Germany is very likely in, quote, recession right now, not just because of the cost of houses, for a number of reasons, and we’ll get to that. But the housing market isn’t being impacted so much by the increase of rates because everybody’s got a low rate. Doesn’t make the Fed happy.
Student loans are starting again after the Supreme Court turned Mr. Biden’s proposed forgiveness plan down in anticipation of that, it turns out there’s a fair amount of student loan obligations that have been hanging on to their payments or have money elsewhere that have prepaid their loans. This last month, it was $6.8 billion went into the system prepaying their loans because there isn’t an interest charge. They can pay their loans down fairly efficiently.
That’s not an economy and that’s not a consumer that’s lacking for money. That’s simply a decision they make with a little bit of efficiency moved into it. And people are amazed that there were people that have student loans that they hung onto the payments to be used more efficiently later. And that’s exactly what happened.
The student loan payments, I think the average payment is somewhere in the mid 200s, 230s, something like that are not going to have a big impact. This is more of a political thing than anything else, and it is not going to drive all the spending out of consumers because they’re paying their student loans, as been discussed in the media. No, this is not going to have much of an impact at all. It’s just starting again.
All the inflation gauges are down. They’re easing down. They are not dropping. They are not dropping as fast as the Fed would like. Here, again, that’s something that doesn’t make the Fed happy. But the PCE and all the rest of the gauges are working their way down without dropping, like there was a bubble. It wasn’t a bubble.
What hasn’t happened in this whole inflation cycle yet is the consumer adjusting to the increase in all costs of services, mostly wage and hour types. California did their big thing here a little while ago, state law about big minimum wage for fast food workers. It’s great political maneuver, but a drop in the bucket and trivia.
But inflation numbers are down. They aren’t down to 2%. Where the Fed wants doesn’t make the Fed happy, but they will get there. It could take two years, but they will get there because the arithmetic and I’ve discussed this before the arithmetic on 2% inflation, 3% cost of money, 5% mortgages really works on a $27 trillion economy.
Here’s kind of where we are with these high yields right now. High yield means the price of a bond is down. This is the US ten year and the German bunds ten year. They are up in what for a bond investor is an attractive arena. You can get short term treasuries in the fives, in the mid fives and people are buying them. Even though they’re buying them, the price is still down because that’s pretty much where the rates are.
There is some media coverage that what the German bond does is important. It isn’t, but we’ll put it in here anyway. The entire German bond market is, I’m guessing about $10 billion. That’s about what treasury trades in 2 hours.
So the fact that their yields are up just suggests that they are feeling the pinch too. And that is driving the cost of their money up dramatically. Here the bond market is simply going to adjust to these new yields, lower price, high yields, and go from there. Give them six months and that bond market will start to recover from, let’s call it three years’ worth of relatively flat, if not bad, performance.
The globe is rapidly learning that the United States is the number one customer for everybody. China is learning this the hard way. Germany is learning it kind of subtly because all of these markets, when they slow, they have an impact on economies that are pure exporters. Germany, China, even Canada, Mexico. They’re basically exporters.
And when their market slows, it has a huge impact everywhere. And their markets are slowing because the United States is buying stuff elsewhere. Vietnam wants to be a big factor in that and I think that might be a reason President Biden went there. But right now they’re still viewed as kind of a conduit for the Chinese and we’ll see how that works out. But everybody else Ireland, Canada, so on and so forth, they value that relationship, and they’re going to do everything they can to keep that healthy.
Specifically, during my last travels, one of the stops was in Detroit, and those of you that have been there have seen the Ambassador Bridge. Well, the Ambassador Bridge goes from Detroit into Windsor, Ontario. That conduit carries 20% of the GDP of Canada. It supports the manufacturing in Canada. It supports a lot of consumers, a lot of jobs. It’s 20%. It’s monumentally important. It’s four lanes, and it’s always stacked up with trucks and traffic. It’s horrible.
Well, it’s also privately owned. Back in the 20s, people of Detroit decided they didn’t want to spend government money to build a bridge over into Canada, which was a wilderness back in those days. So some investors got it together and built the bridge themselves. It’s been privately held since.
Make a long story short, Canada has now figured out, as that bridge is aging and packed, and a lot of other things, Canada has finally figured out, we better do something about our conduit because it is 20% of our GDP. So they’re building another one half a mile down the Detroit River. It’s pretty, it’s sort of coming together. Named after a hockey player or something. He told me what it was. It’s still four lanes. It’s going to be clogged soon, especially if something happens to the Ambassador Bridge.
Amazingly enough, they’ve taken 40 years to figure out, we better do something. There’s a tunnel there, by the way, which you can’t get through. They finally figured out that we better do something about this conduit because it is so important to us. Just the connection to Detroit is so important to us. That’s kind of globalization.
The other side of the coin. If you’re waging hour, you worry about robots. Well, you shouldn’t worry about robots, but they worry about robots anyway. This is basically the numbers of new robots in the United States, and that’s all across the board. That’s complex metal building and welding and assembly and all kinds of things. It’s not just car manufacturers, which, after the UAW thing, car manufacturers are going to think about adding more robots, but it’s everywhere. It’s going to be in fast foods. It’s going to be a lot of ways for the wage an hour faction to be kind of replaced.
Fundamentally, that is kind of an issue with United Auto Workers strike right now. And basically what you have is about 18,000 auto workers out on strike. That’s half of what the GM had to deal with in about 2019. There’s 18,000 of them out. That means nine out of ten of the UAW are still working. They want to work.
The UAW is paying these striking workers $500 a week, and they’ve got $825,000,000 in their strike fund. So they got about eleven weeks’ worth of benefits. And then that comes down. So they got to get this done pretty quickly or things aren’t going to go well. It is clearly, and I think even the people I talked to in Detroit and Cleveland, it was about the health of the union, not necessarily the best benefits of the workers.
The union needs new members because they’ve dropped half their members in the last several years. They need new members. So they got to show they can get vague, you know how it goes. This is not significant. This is not going to be a huge deal in the US Economy, very unlikely. It just needs to be resolved for the benefit of the union.
And Ford decided, well, we’re not going to build our new battery plant in Michigan, or it’s not going to be union, either one. It is clearly a big things, little things. What you want is new manufacturing and work in a new manufacturing plant and not stand there and argue about, we want our old pensions back. So the UAW is going to resolve some issues and really going to be popular in the media, but it isn’t particularly important.
Back to robots. Big things, little things. What you have to have are consumers that are well paid in an economy to have a strong economy. It’s amazing how it seems the United States are the only people that have figured that out. Little bit of Canada, but nobody else. You get paid, you’re a consumer, you buy things.
Interestingly enough, China, which is far and away installing more new robots than anybody else, they have the biggest problem of low end workers of anyone on Earth. They’re worse than India. What we would consider homeless here is a standard worker in China, considering what they’re paid, and they seem to be trying to replace them with robots. It’s an amazing contradiction, trying to build strength and consistency in your economy. You need paid workers, not robots, but they’re moving ahead on it.
There’ll be more about globalization here later. But fundamentally, the US economy is adapting to new expenses, mostly on the lower end airline pilots. That’s not the lower end, but the UAW, the airline pilots.
A number of groups like this are bringing their wages up to where they should be, and then we’ll simply adjust to them. Three more months, most of that will be done. The bond market will probably make a great recovery here, certainly in the next six, because they’ll buy into these new yields. And it doesn’t matter whether they declare there’s a recession at some point is simply no evidence that we’re going to have one spending and everything else is looking great into the third quarter.
Well, as always, questions? Send them along to Info@shjwealthadvisors.com and I’m happy to deal with it. Thanks for joining me!