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Inside the Economy: Consumers and the Federal Reserve

By April 3, 2024No Comments

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This week on “Inside the Economy”, we discuss the good news for consumers and bad news for the Federal Reserve. Spending on new manufacturing construction projects has increased. Does this emulate a contracting or expanding economy? How will the Federal Reserve react to the ISM Survey and Manufacturing data? Home prices are at a stabilization point and still have a negative year-over-year percent change. Will the consumer start flooding back in the market? Tune in to learn more!


Key Takeaways:

        • ISM Survey at 50.3
        • Durable Goods increased to 1.4
        • Core PCE inflation rate slowed to 2.8% (YOY)

Full Transcript:
Welcome to another edition of Inside the Economy!

I’m Larry Howes. Thanks for joining me!

Good news, bad news, good news for the consumer, not so good news for the Federal Reserve. We’ve kind of talked about in, in the past, but mostly good news out of the economy these days, good durable goods orders. And it’s not just airplanes this time, the ISM survey, and we’ll talk more about that later. We’re past 50 now.

So manufacturing is in expansion territory after being years in contraction. Manufacturing moving along because consumers are spending. PCE numbers came out one of the inflation numbers, 2.8, which makes sense, makes Federal Reserve happy that it’s coming down. You look at CPI, basically the same numbers, core PCE and core CPI. I love those acronyms. CPI is at 3.8, PCE 2.8.

Well, which one’s really telling the story on inflation? Well, it’s somewhere in between. Initial jobless claims still low, unemployment still low, 3.9, not much changes in any of the interest rates and mortgages are still, well, not bad. 6.8. Good news. The consumer median price at a single family home, well, it’s stabilized and starting to come down. It’s holding down in some areas, not everywhere, but across the country. It’s coming down, you know, down 8% better than up 8%.

Inventory is creeping up a little bit. It has been for a while there. Again, that’s very geographically focused. Some areas you can’t find anything for sale, but that market is easing up, and it really has nothing to do with what’s going on with the National association of Realtors. Now here is PCE. This is basically the PCE number just came out, 2.8. It is a good number. Inflation is lowering at a reasonable pace, kind of a slow pace. It’s not exactly inspiring the Federal Reserve to go out in lower rates, but that’s where we are. Still kind of good news for consumers.

The other side of the consumers, they are still spending. Spending in February was pretty good. Some more use of credit cards, which have very low delinquencies. So far, they’ve crept up a little bit, but they’re still low. You look at the interest expense, which has gone up quite a bit. People are paying for interest expense on non-revolving things like credit cards and other loans. As much as they’re paying on the mortgage isn’t slowing them down yet. Corporate profits are pretty good.

Well, earnings aren’t there yet. I will say that the S&P 500, if it were really tracking earnings out of corporate America, I’d say today, it’s about 8% ahead of itself. Not a big deal, but it’s a little exuberant. It’s still $3.4 trillion out of basic corporate America. Most of the S&P 500, it’s a good number. It’s not slowing down, which is what the Federal Reserve had intended. A lot of corporate America is doing this thing. You look at that blue line, that is manufacturing, construction. Those are new facilities. Those are facilities. Not the big politically motivated job creators that you hear a lot about. These are, for the most part, much smaller, much more focused. They aren’t big job creators. They are income and profitability creators, a lot of which aren’t online yet.

A lot of corporate America is not distributing their earnings yet. They’re spending it here. Some people still worry about the commercial real estate market, recognize that there’s a lot of building going on one side, but this is the other side. This is the delinquent loan side of commercial real estate. These are CLOS, the collateralized loan obligations that trade a lot between banks, private equity, everybody swapping paper, as we say.

The 60 day delinquent numbers got up almost to 8% there a little while, which is not bad right now. It’s showing signs of stabilizing and adjustment in that side of the commercial real estate market. Don’t think for a minute that market’s going to collapse. There’s a lot of money going in and out. Some properties simply aren’t going to do well, but that market is not going to collapse.

This was about 10:00 this morning. The great number about ISM manufacturing came out at 50.2, whatever it was, yay. That means manufacturing are doing great. Bad news for the Federal Reserve. And this is what happened to the ten year Treasury. Zip. Those of you that remember in the bond market, this is the yield. The yield of the treasury went from 4.2 to 4.3. Doesn’t seem like a lot, but if you’re trading, you know, $4 billion every day or every hour, it means a lot. The yield went up because the price went down. The price went down on the ten year because they recognized that the chances of the Federal Reserve lowering rates in the near future went down more.

Again, we’re talking fourth quarter. There’s almost no way there’s going to be three interest rate cuts in 2024. But we don’t even have to talk about that. We’ve just pushed it down the road. A little more oil, and you’ve noticed gasoline prices are coming down. It’s not necessarily from lack of use. Even though there’s a little bit of lack of use, it’s that the inventories are way up the red line. Here is the inventories. Not only is the United States still far and away the largest oil producer, we’re storing a lot, we’re selling a lot.

We’ve actually started moving into a lot of markets that have been strictly OPEC or Russia in the past. It’s interesting how that comes and goes. This is kind of a boring but very important slide. This is basically the portfolio of the Federal Reserve. And we’ve talked about, well, the Fed needs to get some of that money.

Remember, we put about $4 trillion in there for the flu a couple years ago, and that’s sort of the root of the inflation we’re dealing with right now. Was still a good idea, but it’s, the Fed is in the process of taking that money out of the system. They’re letting about $95 billion a month roll off, take it out of their portfolio, take the money out of the system, which is about right. But if you look at this chart, two important components. The red right there in the middle are the reserves of the banks. And you notice banks have got a lot of reserves, best banking system on earth, reserve wise. But down here at the bottom are the reverse repos.

And I don’t want to try and explain what a repo is or worse than that, a reverse repo, but it’s a very good indicator of how much liquidity there is in the system. And at $95 billion a month, they’re taking liquidity out of the system. And if they keep at this same pace, they’re going to take a lot of liquidity out of the system and create a recession that we may not have.

It’s a philosophical difference right now. A recession would be a quick way to resolve a lot of these issues and get rid of inflation and so on and so forth. It’s not looking like we’re going to have one today. I tell you, the likelihood of having a recession is low and getting lower, and I don’t think the Federal Reserve wants to just push us over. But this is the big lever that could do it. Pull a lot of money out of the system in a hurry, and you’d trigger some problems.

Don’t count on doing that. Count on missing in a recession, Goldilocks economy, soft landing, all of that stuff. But that will drive the problem out longer. People are already seeing their property taxes. Well, let’s go with double. Homeowners insurance are definitely going to double and everything else, food, all that stuff, it will grind you down over time. Recession, take care of it in about four months. No recession, probably another year. That just may happen.

And if the Fed lowers here by the end of the year, don’t count on them going back to zero. Don’t count them going to two or three or anything like that. Rates are going to stay up for a while. A question about emerging markets. Yes, a lot of the emerging markets out in the world, which is pretty much everybody else, are doing pretty well. It’s a big list. There’s about 60 countries on there. Country most likely to default on all their debt is unfortunately the Ukraine. A country least likely to default on their debt is United Arab Emirates and the Saudis and Turkey and Egypt and Israel. And everybody else is in the middle someplace. As a group, they’re doing a little bit better.

Despite the human tragedy of the two wars that are going on right now, Ukraine and Russia and Israel in, let’s call it the Gaza Strip. These are both lose-lose situations for everybody. Infrastructure is destroyed, farmland, all of that stuff. I mean, it’s just catastrophic on a human level and an economic level. Israel’s economy is not destroyed, but close. There is no economy in the Gaza Strip anymore. It’s a pile of rubble.

The farmland in Ukraine is basically burnt. Villages, holes in the ground, ruined military equipment and about 15 million mines. Russia is out of the global financial system, probably not to return for the foreseeable future. Forget the dead, so on and so forth.

The emerging markets are still doing better outside of these horrible examples. They want the dollar to get weaker. This is the dollar getting stronger the last several years. It makes them paying their debts back harder. Most debts are denominated in the dollar. So when the dollar is strong, it takes more local currency to pay it back. They want this to come down. And this is really the only active force out there right now that would inspire the Federal Reserve to lower rates. This is it.

Finally, there’s a question about Europe and how they’re going to slow down. And the question was, they have lots of money, don’t they? Well, not really. This is basically the European Union, crescent of the European Union. You’ll notice the vast majority of their assets are in housing, inherited housing, family houses, housing, not real accessible, but it’s kind of where their wealth is. They don’t have a lot of options. Here are deposits. It’s about $8 trillion. That’s half of what the US just has in checking accounts. This is all deposits, debts and so on. And so forth. The bond market in Germany trades in an entire year what New York trades in about 4 hours. The scale is very, very different. They are going to slow. They are going to go through some immigration crises and some political problems, but buy their way out of the problem and leap forward? No, not until the little problem with Russia and Ukraine is resolved.

Okay, well, that’s enough for now. I appreciate you joining me and always send a question along and I’d be happy to deal with it.

Again, thanks for joining me!

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