This week on “Inside the Economy”, we discuss some economic hurdles in the system, as well as the budget deficit. Savings rates and new mortgage applications have dropped below pre-pandemic levels, along with an increasing office vacancy rate. What does this mean for the economy as we move into the 4th quarter? The budget deficit has been a main theme this year, but what are the specifics of where the government collects its revenue, current federal spending, and the US budget as a share of GDP? Tune in to learn about this and more!
Key Takeaways:
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- Core CPI inflation at 4.1
- Oil below $90
- Unemployment rate hovering at 3.8
- 30-year mortgages above 7.5%
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Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
I want to talk about some disappointments in the plan as we go through this increasing interest rate environment and a little bit about a lot of the discussions going on about the federal government budget deficit. Granted, we really don’t have a great political environment right now for a lot of reasons. And unfortunately for all of us, it’s going to get worse between now and this time next year. But I want to touch on the numbers of the deficit.
Fundamentally, it’s a mystery why initial jobless claims are still low. They’re still in the low 200,000. And as you know, the strikers, the United Auto Workers, aren’t considered unemployed, so they’re not in these numbers. But they continue to be low in an environment that has very expensive, relatively expensive cost of money. We’re at five and a quarter now, but anybody who wants a job has got one. It has not slowed manufacturing. They are looking at a significant wage increase, most of which is probably due because they’re technically wage an hour people. But you think unemployment would be much worse than 3.8? It’s not. It’s just not correcting the way the Fed wanted that to happen.
Savings was fine when everyone got that big check, when we had COVID, went in the bank, stayed in the bank, slowly got spent. People paid their rent, bought groceries. It was fine. Got another round of stimulus. Great. Now that’s pretty much gone. Didn’t have to pay the student loans for a while. That’s pretty much gone. So the cash has been used. It isn’t bad news that the savings rate is dropped, because you’ll hear that in the media. The savings rate has really dropped so much, the ratio and the percentage has dropped.
But like we talked about last time, there’s $18 trillion in cash owned by individuals in the banks savings and checking accounts. It’s 18 trillion creeping up again. It’s not like there’s lack of money. It’s just that they’re not saving as much of it as they had before. That’s what you get when you get a lot of stimulus money in an economy. It goes into the bank. It transfers around a lot. $100 goes in the bank, and if it goes through five hands during the day, there’s still $100 left in the bank. That’s kind of what we have.
We just don’t have a lot of new money coming out that make the savings rate go up. It’s not a disappointment. It’s just the nature of the Federal Reserve and the banking system have a lot of money in the system, our money and the federal government debt. And you hear a lot about the spiraling debt. That’s a terrible term, but you hear a lot about the debt. $18 trillion of that debt, of the $28 trillion or whatever it is now, is our money in the bank.
And their balance sheet would look much better. It’d just be great if they just didn’t give it back. As silly as that sounds, I mean, that is a viable option. I don’t think anybody running the US Government would not give you your money back out of the bank, but technically they could do it and clear up a whole bunch of debt. That’s the nature of that, you’d think. And this is mortgages and buying homes. Red over there, that’s effective interest rate right now in most mortgages is kind of where it should be in this kind of environment eight. Houses aren’t moving a lot because the price hasn’t dropped.
Generally in higher interest rate environments, the price comes down because the market adjusts, because they want to keep selling. Well, there’s not that much inventory. The prices did not adjust down. They’ve stayed pretty firm in any of the reasonable markets. What has happened is housing is becoming more and more unaffordable. Not only it’s the cost of money, but the price of the homes that has not adjusted. And I don’t think it’s going to adjust.
The Fed is very likely done, okay, you can quote me on that. It’s likely that the Fed is done raising rates. But the timeframe they’re going to keep these rates here, we could be looking at a year. And when they do lower, and it’s simply a matter of time, when they do lower, it’s not going to be by very much. We’ve talked about the math. Inflation at two, money markets at three, mortgages at five or six. I mean, that’s what you do with a $28 trillion economy.
We’ll get there. But if you look at the numbers at the beginning, CPI is still at 3.7 cores, 4.1. It’s not really coming apart like it was a bubble that would pop and then deflate. So we can go back to cheap money anymore. It’s not going to happen. Money was too cheap for too long. We know that this and I’ve mentioned before, I think this Federal Reserve Board is doing a great job of bringing money back where it ought to be.
And it’s just going to come up here and it’s going to be very disappointing. It continues to be disappointing for people thinking it’s not going to go back to cheap, we’re not going back to free money. This is fundamentally you didn’t think that the mortgages or I didn’t think the mortgages would turn around like this, but this is the outstanding balances down here at the blue are those with threes and fours. They did so much refinancing when rates were going to go up. There they are.
And then the reds are the six and above. Well, I didn’t think they’d come into the system so quickly, but they are. Threes and fours are going away and replaced by sixes and sevens because people have to move or they have to sell, whatever the reason. I mean, the maturity of a typical mortgage in America is still only seven years. Look back ten years, 2013. That’s a little more representative of what the yields ought to be in the mortgage market. The reds up there should have a much higher percentage of 6% and above and threes, which is a ridiculously cheap price for a long term asset. Like a home need to be small, not like this.
So ultimately they’re going to try and go back to the way we were 2013. And the process has started all the way over here, 2023. The commercial real estate market is not going to collapse. The fact that their Vacancies are up there, those of you who remember the savings and loan debacle a long time ago, this kind of percentage of Vacancies lasted for a long time. These guys are used to it. They are familiar with it. The commercial real estate market is known for its ability to adjust and adapt and come back. Give renters a break for a while, get them in the building. Get them used to the building. On it goes. There’s not going to be huge disasters in the commercial real estate market. I think they’re adapting to the new environment very well.
Quick reminder, about 80% of all the government’s revenue comes from individuals through individual income tax and payroll taxes. That has always been the case. In fact, that’s been growing over the years, all of the time and press that you hear about, oh, corporate taxes are everything, and all the rest of this stuff is much more important. No, it’s not. It’s individuals. The only economy in the world that really understands that what you need is a wealthy, prosperous consumer and you have an economy. Well, that’s the United States.
Everything is consumer oriented one way or another services. It doesn’t have to be buying stuff. It could be all kinds of things, but there has to be wealth in the hands of the individual. That’s how you move a big economy along. And that’s kind of the way the government gets their money. But they are in fact a little shy. You’d think the stock market would be in much worse shape than it is. Well, it’s not.
There’s not a lot of bad things going on. There’s not a lot of excessive debt in corporate America. Earnings are pretty good. All of that stuff that’s reflected in these prices recently, even year to date, that kind of stuff. The market doesn’t look so good. In fact, it looks down. I think six months is a very silly timeframe to look at the stock market. Even a year is a little short. But the market is really adjusting to when we’re going to get earnings back. Two quarters away, we’ll start to get much better earnings back.
The S&P 500 has put in some reasonable numbers in the last year, but it’s really only about the top twelve companies in the S&P 500 that have done so well. The rest of them are waiting. They’re rebuilding, they’re restructuring, they are buying computers, they’re buying robots, whatever it is and they will start coming online here soon because the fundamentals in corporate America are very good, especially in manufacturing.
The government is going to have to readjust its spending in a politically favorable way. We had a huge piece of stimulus like in this for COVID and that’s fine, that’s over. Well look at the two administration, the Trump administration, they cut taxes, the Biden administration. Well they tried to do stimulus, they tried a lot of things circuit boards, cutting back on student loans, whatever it is. But the government spending is going to have to adjust depending upon what sort of results we get in the next election. They are about 7% shy and it’s going to have to be made up someplace. They simply can’t cut spending.
It is down to the point where the biggest part of government spending is, well very personal and I say very efficient money, Social Security, Medicare, interest paid on its debt, please let me use that term debt. That’s interest paid to your bank, that’s interest paid to those that own Treasuries, that’s interest paid to the money markets, that own Treasuries. I mean it goes on and on and on. We’ve been through that. That’s the graciousness of treasury paying interest rates when it doesn’t really have to but it does. That spending is not going to change.
So it’s simply going to have to be corrected and that will be on the backs of the consumer which will slow consumerism down a little bit. But we have to do something about the way the deficits are going. The deficits well the first one you see over here, the big drop that was Tarp 2008, 2009, trying to bail out the real estate market and then this big one was the money for COVID, understandable but it really hasn’t gone back to a reasonable level yet. It will do that probably with an increase of revenue. So it’s simply coming.
Finally, the Federal Reserve has made a great to do about getting rid of all its assets. It’s over the past decade or so accumulated. A lot of assets are coming up on a lot of trillions now. But they are selling them. They are letting them roll off. They’re selling them. We’ve talked about this before, all kinds of things. It’s not just Treasuries, mortgage backs, everything. Those are pretty attractive assets and they’re being absorbed in the marketplace and treasury just found out here a little while ago that the billions of dollars, at times hundreds of billions of dollars, that there’s been money back in the treasury from the Federal Reserve, from all of these really great high yielding assets they have.
Well, that payment into the government that they normally spend has just basically dropped to nothing. And the more they get rid of those assets the more that payment is going to go away. It’s functionally gone away already. It’ll be taxes. Just count on. It’s not bad. It’s just going to have to be that way.
The rest of the economy is waiting for confidence that there won’t be more rate increases, because there’s bad psychology on that. Otherwise, everybody’s adapting to the fact that you’re going to get better rates in your interest rate. Mortgages are going to be, well, eight for a while. I don’t think they’re going to stay there very long. And stock market, and specifically the S&P 500, they’re going to wait for earnings to come back two quarters. Okay, well, that’s enough. As always, I’ll happy to deal with a question. Just send it along to info@shjwealthadvisors.com. I’m happy to deal with it. Thanks for joining me!
