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Inside the Economy: Wages, Housing, U.S. Financial Conditions

By June 12, 2024June 14th, 2024No Comments

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This week on “Inside the Economy”, we explore wages, housing prices and mortgages, and the U.S. financial conditions. The U.S. average hourly earnings report for May came in with a reading of 4%. Why are year-over-year wages still high? What would lowering rates do for wages? As for housing, renters are not experiencing an increased burden regarding their income spent on housing. How does that compare to the homeowner’s burden? In other news, U.S. financial conditions are easing with less liquidity issues. What was the U.S. financial conditions index at when the Federal Reserve started interest rate hikes? Tune in to learn more!

 

Key Takeaways:

        • ISM Services at 53.8
        • Unemployment at 4.0%
        • Aggregate delinquency rates at 3.2%

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

I’m Larry Howes. Thanks for joining me!

Well, we’re starting into June now, and with a quick look of numbers, it’s sort of indicative that there’s not a lot of problems in the economy. There’s a lot of discussion about interest rates and the political environment. But when you get right down to it, the ISM, regular service side of ISM numbers are back up over 50, and anything over 50 on any of the ISM numbers means expansion territory. So the service side is continuing to do well.

Core PCE will tell you that there’s, oh, inflation is coming down. It’s really not. It’s sort of stabilizing and becoming more persistent, and I’ll talk about that a little more. If you’re looking for great glory out of lower inflation, and, boy, they’ll lower rates as soon as you get lower inflation. That’s becoming harder and more persistent. It simply is.

We had some conversation about, well, rates are ready to come down a little while ago. So a lot of the rates went up. Well, they’ve equalized. They’re back down again. Even long term mortgages were just barely in 7% for a little while and have kind of cooled.

So really where we are is here. It’s the wage and hour side of things. They’re still making about 4% increase in their wages, and we’ve talked several times that’s still keeping them behind. And even with the advent of all the minimum wage increases in California and New York, it’s just kind of holding ground. This is the wage push in the whole inflation equation. Until this is down, significantly down. The heart of inflation is not coming down.

So we’re still talking about they might lower rates in September, maybe later, and when they do, it’s not going to be that much. The consumer is not doing bad. This is general delinquencies in all kinds of debt. I mean, revolving credit cards, all kinds of things, boats, cars, just three. It’s not bad. This is not a consumer that’s falling apart. Look back at 2008. That were, that was bad news. That is indicative of an economy that has to have a recession. Oh, everything is bad. It’s got to fall apart. We have to have a recession. I got to walk away from this debt standard stuff. That is not going to happen this time.

I think it’s very unlikely we’re going to have a recession. It’s very unlikely we’re going to have a collapse in the housing markets. We’re going to have 8% unemployment. We just made 4. We’re going to have to slow things down, and the wage and hour side is going to be hit the hardest and wait the longest. That hasn’t changed house prices. You think they’d come down? No, they’re firming. They went up 5%, as they should. There have been changes in the marketplace, even though what has really happened, if you own a home, you know this. The homeowners burden, as they call it, there’s Renter’s burden and there’s homeowner’s burden. Renter’s burden.

Well, it’s not so bad. It went up a little bit, but there’s a lot of new, especially low income housing coming online. So it’s keeping that, quote, burden down. But homeowners, no. Between property taxes, homeowners insurance, which we’ve talked about, is becoming unavailable in some places, several counties in California, you can’t even buy it anymore. Cape Hatteras, that kind of stuff. You own a home out there on the sand.

Well, don’t try to insure it because they’re just not going to. The homeowner’s burden, maintenance, all that stuff is way up. And even though all these additional costs, the market is still holding together. There was an addition in mortgage debt here just a little while ago. You look at that little tiny red bump over there on the far right hand side. Oh, that’s not a lot, but it’s still $30 billion, and it’s not indicative of the market coming apart. It is adjusting, going in the right direction.

Mortgage debt, it’s still very, very low. Delinquencies, we’re just barely above three. That’s 100 basis points lower than long term average. Well, that’s good, but it’s not suggesting we’re about to go into a recession.

As a matter of fact, all these numbers, Bloomberg put this out, but all of this data on financial conditions, this comes from the Census Bureau and they got years of this data. And what we have now, when you look at the chart like this, when the line is going up, that means that the financial conditions are easing, are getting better, money is easy to borrow.

Overall financial conditions, the last big beep, down and down is bad, was when we had the regional bank crisis. The banks in California and New York had some problems and were quickly absorbed. And before that, it was when the Fed was raising rates. That’s when financial conditions tightened. It’s not the case now. Nothing in the economy, in liquidity, the equity markets, the bond market, suggests that conditions aren’t anything but very good, not ideal. Just very good. Even the price of oil, I think we were back up at $76 a barrel this morning. It’s been going down significantly the last couple of months.

At the same time as inventories are increasing, rising. There’s lots of oil sitting around in batteries and in storage waiting to be used. Price continues to be below where OPEC needs it to make money. OPEC needs about $80-$82 a barrel to make money. Canada needs about $85-$90 a barrel to make money. But it’s still selling out at 70. Even though the airlines are all real busy and they’re flying all over the place, burning a lot of fuel, it’s had no impact on the price of oil. It’s still down.

Corporate profits look pretty good. They’re back where they should be. They’re not extraordinary. And there’s not going to be very likely not going to be a huge rally in the stock market. We’re already there. The stock market’s a tiny bit overvalued. The S&P 500 just a little. There’s only a couple of companies in there that are really doing exceptionally well, and it’s not indicative of the entire market. Until the consumer slows, until the wage push goes away and the inflation numbers get down, all of the stuff like great corporate profits are simply going to be, well, they’re filling in the current price we have. Don’t look for any glory out of there.

The European Central bank, well, they lowered rates last week. It was kind of a subtle, quiet move. I don’t think it was a very smart move. It was premature. Their inflation is a little less than us, but equally persistent. They probably jumped the gun a little tiny bit. It didn’t do them any good. All it did was bring a lot of fear that they’re going to bring inflation back or keep it persistent longer. You lower rates, you put more weight into the growth of inflation, and which is exactly what they did. We’ll see what happens. I know they’re not going to do another one here in the near future, but I don’t think the Federal Reserve is going to do that.

Finally, if you follow the Muni bond market the way I do, what really is popular these days and part of the renaissance of higher education, for those of you that have children or grandchildren going to college, the renaissance is underway. And it started with money.

This is the community bond issuance of colleges, whether it’s under their name or not. Several schools went under here just a little while ago. Those of you are familiar with Notre Dame College. Notre Dame University. There’s a small Notre Dame college, I think, in Ohio, went under, got absorbed, I think, by the University of Cleveland, the Marymount in New York. I mean, if you’re a small college and have a bunch of tenured professors in a lot of administration and your student load drops even 10%, they can’t keep the doors open.

So all this new bond issuance, and we’re at about $10 billion just by May, is by these larger institutions who absorb them, that take them in, keeping them afloat. Higher education is undergoing some changes.

Okay. No drama in the marketplace. Don’t look for drama up or down through the summer. They’re just going to look for issues to keep trading going. Other than that, things are fine. And as usual, send questions along to info@shjwealthadvisors.com and I’m happy to deal with it. And I appreciate you joining me!

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