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Inside the Economy: Employment, Housing, and Retail Traders

By July 10, 2024No Comments

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This week on “Inside the Economy”, we explore the broader economic indicators, such as U.S. gross domestic product (GDP), employment, and housing and vacancy rates. Overall U.S. GDP growth has slowed as a comparison of 2023 to 2024 quarter one readings. When might we see negative GDP growth? Will there be a recession? Government employment has recently stabilized and is back to its pre-covid trend. How does this compare to non-government jobs and unemployment? Lastly, home buying conditions are down. What does this mean for new home sales? Tune in to learn more!

 

Key Takeaways:

        • U.S. GDP growth rate at 1.3% in Q1
        • Unemployment at 4.1%
        • 30 yr. Mortgage at 6.95%

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

I’m Larry Howes. Thanks for joining me!

Talk about employment, housing, the usual stuff. What we have is a lot of little pieces of bad news, which isn’t bad news, it’s kind of good news if the economy is not going to have a recession, if things aren’t going to get real bad, and we’re kind of waiting for the rates to come down a little bit. Just about everything that’s going on right now is a function of that.
We’re basically three months into a slowing in a year and a half long process of raising rates. The ISM numbers, as I mentioned before, if the ISM, either manufacturing or services, drops below 50, that means they call it contraction. It’s actually just slowing or stabilizing. But both the manufacturing and the services are below 50 now. It’s not bad. It’s just a little bit of slowing.

We had some new CPI numbers right away. They’re talking about May and June, and some of the agencies are saying, well, the CPI numbers have not changed unchanged. There’s some tiny little, still 3.3 and 3.4 cores. 3.4. It’s good news. It’s also basically a message of the slowing is continuing. And I’ll tell you today, we’ll probably have the inflation numbers we want. End of the year core is slowing. That’s fine. New jobless claims up a teeny tiny bit, mostly California, a little bit in New York. Wage an hour, people, unemployment. Got a lot of press saying, boy, the job market is getting tough, so on and so forth.

Well, it went from 4% to 4.1. It isn’t bad. It’s just slowing a little, teeny tiny bit. And some corrections. We had a tried bond rally last a little while, and it corrected right away, but it corrected for bond. People like me, I love this, the bond market, the yield curve is steepening. It’s normalizing. It means it’s going from inverted or flat to a little tiny slope that you get a higher yield the further you go out and normalizing.

Basically that says in a treasury market that trades $800 billion a day, that people are adjusting to the interest rates where they are. And when they do come down, and I say there’s a 20% chance they’ll come down September, we’ll come down to five. It’s not going to keep dropping. Come down to five, maybe four and three quarters, maybe four and a half.

But by then we’ll be halfway into the next term of the next president, which will probably have a lot more impact economically and psychologically than anything else. And mortgage rates went up a little bit. That’s kind of a positive sign too.

Unemployment rate and we’ve seen this. Remember the unemployment rate just went through the roof and everything looked bad during the COVID Bad data, a lot of other things. We’ve cleaned all that stuff out and unemployment is the red there. 4.1. Not bad. Not a bad number at all. Certainly not a recession number up nine and a half or ten. And the job’s hard to get is not bad either. It has normalized.

If you have a reasonable education or experience and you want a job, the chances are it won’t take you very long to find it. You may have to move, but the market isn’t horrible, it’s just slowing. The jobs market, just slowing.

New home sales. Not bad, not horrible. They’ve certainly recovered in the last 15, 20 years. That market is not collapsing. And the red here is the buying condition. Well, the buying conditions are bad compared to what they’ve been the last 25 years because rates are up. Rates are probably normalized. Mortgages at 7%.

Again, some people think that’s horrible and some people think, you know, it’s not bad, it’s not a bargain, but it’s rational. You better get used to it because I think you’re not going to see mortgages below the high fives in the foreseeable future. Even when rates start to come down. Traditional mortgage criteria to qualify for a loan, whatever it is, 33, 35% debt, service to income, that kind of stuff.

So buying conditions are technically bad. That’s the red. Because things are moving away from the social experiments. We’ve had to have a higher percentage of people being homeowners get more than about 64% of the population. As a homeowner, it’s a great idea. Just doesn’t work.

A lot of new jobs, last couple million new jobs have been in the government. This is the government who gave up a lot of people during COVID as we know, for good reason. They sort of recovered. They let people retire, they did a lot of things. And now all those new numbers, they’re back to where their trend was. That red is the trend. I mean it’s a long term trend of federal, state and local governments. They’re pretty much back to the government. The employees that they had before, you remember the tax receipts during COVID went way up. A lot of the states were thinking things were going to fall apart. They didn’t went in the opposite direction. And that’s actually real numbers. They did great.

Unfortunately, a lot of them made their budgets based on that kind of revenue in the future, which didn’t turn out, California being one of them. And the blue here is tax receipts have kind of normalized. They certainly aren’t growing. Things have slowed. And, well, the state and local employment, they’re going to have to correct a little bit.

One, they have some homeless, low income homeless issues that they’re playing with. Denver’s playing with it and other more people playing with it, with it. After the Supreme Court ruling here the other day, that might change, but it’s consuming a lot of money. And the biggest thing a state and government can do to solve, gee, we’re spending too much money, get rid of people. The real estate market, an important part of how the economy’s doing. Well, this is apartment vacancy. Not bad. It’s up, it isn’t tragic yet. You know, five and a half, five and three quarter percent, not bad. There’s a lot of low income or affordable housing coming online. A lot.

Some of those numbers don’t reflect this system, but they fill up pretty quickly. There’s a lot of people who’ll go from a more traditional apartment complex to one of these low income because one, they don’t want to spend the money or whatever reason, but there’s a lot of multifamily coming online. So this is about right.

Again, not a market that’s falling apart. However, the office market, office vacancies, well, they have had a seasonal shift. We’ve now gone past where we were in the eighties when we had the savings and loan crisis.

Those of us that remember that, that was bad news. In the office market, we’re worse, but we’re worse for a different reason. We’re worse for ahh, what do you do with an office? And that’s a huge shift, seismic shift. Where that market’s going to go, I don’t know. But offices are going to get cheaper and there’ll probably be some adjustment. But you can’t just turn them into apartments or hovels for the homeless. I don’t know what you do with them. They’re kind of purpose built. Markets have new high. The Dow is a new high. That’s the black, the blue outland. The Nasdaq is at a new high. The Dow is just chewing along there in the red.

I keep mentioning it’s been a couple of months now. The equity markets have no reason for this rally. The earnings aren’t there. Nvidia. Yeah, there’s a lot of it. And Apple and that kind of thing. But these rallies are well ahead of where their earnings are. So if there will be some kind of a triggering event, I don’t know. But this needs to correct back. They’re about 12% ahead of themselves.

Question about retail trades. There’s a lot of retail stock trades, bond trades, currency, bitcoin, all kinds of things going on. Get a lot of media about. Boy, it’s really taken over from traditional traders. Well, no, it’s not. That has sort of corrected down. We’re about 17% of retail trades. A lot of that is in currency.

The currency markets now, regular currency markets. A lot of artificial intelligence there, except they trade about $7.5 trillion a day. Yes, the T word just in currency markets, huge, gigantic trades, computer driven. They’re looking for a basis point of profit or a piece of a basis point of profit. That kind of money. I mean, it’s kind of a reason. But the traders have to have. They have to make moves or they don’t get paid in all of these markets. So retail isn’t taking over. These small traders aren’t taking over. It’s just part of the pie.

And somebody asked, gee, is there a core manufacturing in the United States anymore? Is there really a core automobile industry in the United States? Well, sure there is. This is kind of where it is. You know, the red is domestic cars and the blue is foreign cars manufactured here. Foreign manufacturers aren’t stupid. They don’t ship everything.

Most of the stuff is manufactured here, here in central Mexico. They’re not in northern New Mexico anymore because it’s uninhabitable. It’s too hot, too dry. Detroit is still a big player in the automobile industry, certainly on the domestic side and right across the river in Canada. Huge player in assembly for the other side of the Detroit river. And their own international Toyotas, Mazdas, that kind of stuff all over the country. Northern, the red, northern part of the red Union shops. The south, non-union shops, mostly foreign. It’s a big business. It’s just not really profitable. Probably won’t be for a while.

And finally had a client ask me about is the twin deficit so bad in the United States? Those of you that aren’t familiar with that term, twin deficit is when you have a country that has a physical deficit paying more out, spending more than they take in revenue. Physical deficit. You’re familiar with that deficit spending and then a current account deficit, meaning that more money goes out of consumers buy more stuff overseas and import it than overseas, buy stuff for their own consumption, current account a little more complicated.

Well, the United States has a big twin deficit. It always has. It’s pretty much of this list and all the list up here on the left. It’s pretty bad news for a lot of them. Japan, UK, Spain, Italy, France, all have twin deficits. It’s much harder on them because they can’t afford it. They don’t have the resources to do that very long. And they’re not really, especially most of Europe, except for Germany, don’t mind having budget deficits.

The Germans won’t have one. And even when they have little ones, they always have a current account surplus. They always export more than they import. I mean, their economy requires them to export, just like Sweden, Netherlands and Switzerland. Switzerland is a different deal. But the twin deficit isn’t bad news to the United States. There’s no evidence that it’s bad news.

First of all, the current account, meaning more money going out. Yes. Well, we buy stuff from the Philippines and the Philippines used to be China. Take the dollars they earned and they buy treasuries with it, or they buy real estate with it or whatever it is. They want assets in dollars in the United States because they like it secure. No place else has that kind of exchange option. The dollar is the global currency and the assets in the United States are very attractive.

And we’ve talked about before that a lot of money comes from around the world. They want their assets in dollars and we buy stuff from them and we pay for it in dollars. So they take their dollars and buy stuff. That’s part of our twin deficit. But you’d think there’d be some adverse reaction in the bond market and there isn’t.

The bond market is normalizing. Like I mentioned before, it is normalizing. It is getting better. Is it adjusting to the interest rates and the current economic environment we have now? And before you ask, 20% chance we’re going to have a recession. No more than a 20% chance. Okay. Always send questions along to info@SHJwealthadvisors.com and I’m happy to address it.

Thanks for joining me!

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