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Inside the Economy: Debt, Housing, and Federal Government

By May 1, 2024May 2nd, 2024No Comments

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This week on “Inside the Economy”, we discuss personal interest expense and changes in household debt. What category has the highest percent change from 2023? New home sales have slowed due to higher interest rates, but what does this mean for delinquency rates? Federal net interest outlays are climbing higher in amount as compared to historical data. However, how does the near 3% share of GDP compare to the past and is it necessarily bad for the overall economy? Tune in to learn more!


Key Takeaways:

        • U.S. GDP growth slowed to a 1.6% rate in Q1
        • Personal interest expense is approximately $500B
        • 30-year mortgage at 7.17%

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

I’m Larry Howes. This time I want to talk about personal government debt. It’s a big issue, what’s going on in the housing market and a little bit of what’s happening or not happening in the federal government.

But the numbers fundamentally is we had our first estimate of GDP for the first quarter came in at 1.6, a lot higher than a lot of people thought it was going to be. It’s a very robust number and it will very likely be adjusted up over the next couple of months.

The US economy is slowing very slowly. You can slow slowly, you can slow quicker. We are not doing quicker. $26 trillion economy. The old boat takes a little while to slow down and that’s kind of what we’re doing. I don’t think it’s going to slow very far, but it’s going to get to the point, middle of the summer, where things are going to start being a little more grim. A bunch of CPI numbers. We’ll talk about them a little later.

All the rates went up. All the rates went up. Mortgages went up, all the treasuries went up. There was a lot of disappointment or a nice way of saying whining in the bond market that the Fed didn’t lower their rates and they’re not going to lower rates until at least September. Yes, it’s going to be a presidential election issue, bounced back and forth a lot.

This is the personal interest expense. You notice that the blue line here, personal expense has gone way up. That’s up about 8% of disposable personal income. That’s something that the IRS as well as the Department of Commerce tracks. It got real low there for a while because there wasn’t a lot of personal interest, there wasn’t a lot of loans and money was free ten years ago. Yeah, a little more realistic. And that’s kind of where we are. We’ve returned to a little more normalcy.

By the way, that number is $500 billion a year. That’s what consumers are paying to mostly credit cards, finance companies, that kind of thing. Not a particularly bad number, but it’s going to start to help slow consumer spending down. It’s not that consumer debt has gotten particularly weird or out of hand. This is basically the last 20 years. A little more money in cars, not so much in housing. Some have gone down credit cards, so on and so forth. The big anomaly here is student loans.

Well, it’s been bantered about in the media for the last decade or so. It was an interesting social experiment, not unlike what President Clinton tried to do way back when to get everybody to be a homeowner. No documents, make mortgages free, get them in a house, they’ll do better. It was a good idea. It didn’t work. Pretty much ended in the readjustment in 2008.

The student loan thing was a similar kind of, let’s call it an experiment. Get them educated, send them to welding school, cooking school, whatever it is, we’ll lend them the money. And it didn’t really work. But it’s just a little piece of deficit spending, probably efficient deficit spending. If Social Security is efficient, and it is, this is efficient too. It just goes straight back into the economy. It’s just going to take a little while to adjust this new home sales. They’re doing okay. They’re coming back to where they were. Inventory is adjusting a little bit, and people are getting used to the new housing prices or they’re moving. And there’s a lot of moving, especially out of California.

Naturally, when rates go up, and that’s the line here, when rates go up, applications for loans go down. But I will say, and I’ve mentioned before, that this doesn’t represent the entire market. This doesn’t represent the market of private real estate deals that were all cash. They never appear in these numbers. And the real estate transactions that are in private equity, that are still basically private deals, don’t appear here, that they don’t care what the mortgage rates are, they just go in and buy the property.

One very important indicator, if the market is in fact slowing, is there be a lot more delinquencies. And we talked about this, about credit cards last time, which are not bad. They’re up about 2.5%. Not bad. Delinquencies on mortgages are down near historic levels. This is not indicative of an economy where people are not paying their mortgages and going delinquent or running from their homes. They’re doing quite the opposite and they don’t have the pressure just yet to do that. If they ever get the pressure, there’s nothing that suggests right now the US economy is going to slow to the point where it really gets bad.

Here are the inflation numbers, CPI, PCE, producer prices, all that stuff. The green one up there at the top, well, that’s average hourly. You’d think that the average hourly wages would be in a great spot above where the CPI is and everything targets down there. That little white dotted line. We’re ways above that.

Unfortunately, the psychology here is that there are a lot of people that think when the Fed, when and if the Fed starts lowering rates that prices are going to come down. They’re not. The prices you see right now are still inflating at about 3%. The wage and hour division is about nine months behind in their calculations. They think that average hourly wages are keeping up. They’re not even the big boost.

The big fanfare of minimum wage in California didn’t make it. Well it just sort of made them less behind. That is going to go on for another year until inflation really gets back down around two which is where their target is. Deficit spending has been in the media. Yeah, we had a little COVID we’ve had the Ukraine, little problems in Israel, some stimulus programs, some debt forgiveness so on and so forth. That’s all part of the deficit spending. It’s just money in the system. It is a political arena, ping pong more than anything else. It is going to be another one here in the upcoming presidential campaign.

But we’re going to continue to have deficit spending for the foreseeable future assuming there’s any changes going on in the military or you break a bridge in Baltimore and so on and so forth. It isn’t particularly bad. It’s just that we very rarely don’t spend more than what we take in. Revenues get a good result but it’s still going to be a problem and there’s no end of it in sight.

Federal government has its own issues. Just like interest expense on an individual it has net interest outlays. It’s up there about 3% of GDP. Not a bad number. Going back to its norms. It’s a trillion dollars a year. Those trillion dollars goes into your interest at your bank, that goes into the treasury you own it goes into all kinds of places. It’s a trillion dollars a year but it’s not an anomaly. It’s being viewed right now in a lot of places as horrible catastrophic news. It’s not. It’s returning to normalcy after ten years of free money. I don’t think we’re going to go back to having free money.

Truly, you want to look at the contribution that is made to GDP. There’s the government, there’s the foreign then there’s the consumer. The consumer is back making positive contributions, larger contributions to GDP which is good. It’s very positive. That’s what the US economy is built on. The government is not making larger contributions. In fact it’s backing off.

Good news, foreign side, the exchange. All this stuff has never really been a significant factor and it’s not getting any better. What we have right now as we start looking at spring is the US economy is still moving along. All of the work and effort and bad press about raising all those rates is having a slow impact. Frankly nothing significant yet. I think it’s going to be worse middle of the summer. It’s going to be bad for the presidential run.

And when the Fed does decide to lower rates, let’s say it’s September, it’s going to have a very short term glory reaction in the stock market because it’ll trigger a lot of buy algorithms. It’s not going to mean anything. It’s not going to be substantively meaningful because I don’t think they’re going to go down very far and they’re certainly not going from five and a quarter to a quarter.

Okay. Well that’s all for now. As always. Send questions along to and I’d be happy to deal with it.

Thanks for joining me!

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