This week on “Inside the Economy”, we explore unemployment, housing, and the federal budget. Regarding employment, the JOLTS three-month moving averages are trending downward. Additionally, permanent job losers and persons completing temporary jobs increased by 1.4% in July. If this figure reaches 2%, what might it indicate for the economy? In other news, Freddie Mac’s report on home sale prices shows a decrease year-over-year. Which markets are experiencing greater reductions in home sale prices? Will the overall housing market reach 2009 lows? The Federal Reserve has not materially shrunk the stock of money despite interest-rate hikes. Given the current money supply overhang, can the government stimulate a recovery? Tune in to learn more!
Key Takeaways:
- ISM Survey at 46.8
- Unemployment at 4.3%
- 10-year bond yield at 3.99%
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
I’m going to talk about unemployment, housing, a few other things today. And basically what’s going on in the media is we’re starting to see the results of two years worth of tightening the cost of money.
The ISM survey, the manufacturing survey, came in a little low today. It’s not that manufacturing has slowed that much. They’re just sort of holding back a little bit on the future. Durable goods was way down in some respects because Boeing, who’s having their own set of problems, kind of announced that their biggest issue right now is they don’t have enough places to park the airplanes they can’t deliver yet.
A couple of 737s waiting around for plastic trim around some doors. So they have a supply chain issue, among other things. Some conversation about, oh, high initial unemployment claims, highest in a long time. Well, 249. It’s not recession numbers. It’s not drama. It’s not like the employment market has fallen apart. It just slowed a little tiny bit.
A lot of these new initial claims are from California for a variety of reasons. You know, what’s going on out there. But the GDP, first estimate for GDP in the US in the second quarter, 2.8, it’s even higher than I thought it was going to be. The US economy is not coming off the rails. It’s got some issues, and we’re just starting to see some of the evidence that’s going to support the idea of the Federal Reserve likely lowering rates here in September. I mean, we were pretty contrary to that a year ago. It’s just probably going to happen now. Even 30 year mortgages are down. It’s great.
Okay, you start with how the people living, how are they doing? How is income doing fundamentally, when you look back on it, even with the increases in federal minimum wage, state minimum wage wage, a lot of wage improvements, and the numbers look good and there’s a lot of yay, we’re doing great for you.
Given the real income in the last year, it’s hardly up over 1%. Inflation has taken its toll, especially in housing. No mystery there. Food, all of those things that have big impacts on people’s cost of living are up in the twenties. Most wage and hour income is only up 12-13%.
That’s kind of where we are. That is a political thing that we’re going to be dealing with on a very high level between now and November jolts, which is the unemployment reports have been looking good here the last couple of years. Discharge rates are down, quit rates are down. Hiring is up a little bit. They look pretty well after the, you know, COVID incident that is slowly changing. The initial claims and numbers are up a little bit, but job losers, generally when you get a layoff notice, it is a job loss. Sometimes those layoffs are not brought back to work. And that’s been happening more and more.
John Deere already announced they’re going to lay off some people, move a lot of their manufacturing to Mexico. Tesla is likely to do the same thing down to Mexico. Labor too high, they’ll move or lay people off or a combination of both. And that’s what’s going on right now.
This is for the technical types. You know, the Sahm rule has been around for a long time. It’s sort of an indicative measure of what is the likelihood of a recession. The likelihood of a recession was real high back in 20. During COVID, we didn’t have much of one, but the likelihood was high and the numbers were scattered all over the place.
Now the numbers are kind of back and it’s creeping up a little bit. So fundamentally, the odds of a recession, and we’re talking on the outside, first quarter of next year, the odds of that happening and actually turning into a recession are up to about 20%. Up from 15% to 20. I wouldn’t worry about it. All the numbers we’re getting, the manufacturing and the unemployment and so on and so forth, they’re not recession material. They’re just economy slowing material.
Freddie Mac puts out its housing numbers and here’s basically where house prices are. You know, we had a real glory days right after COVID when everybody was moving around and then kind of a correction kind of where they were. And there’s a lot of places that are not lowering prices. Denver’s being one of those. A lot of places that are, that got a little ahead of themselves. Austin places like that.
Well, that market is in the process of correcting. Single family home sales aren’t that great even when mortgages come down, and they will come down a little bit and the inventories are going to come up a little bit. The only place you’re getting good inventory numbers in single family homes, Texas and Florida, nowhere else. There aren’t that many of them available. The prices are still high and it’s not likely that those prices are going to come down.
There’s no motive, when the interest rates come down and they’re going to start coming down in September, quote me on that. Mortgages are going to come down, too. They’ve already come down a little bit. And that is not an environment where prices come down. When mortgage rates come down, prices generally go up. So housing is not going anywhere.
There’s just not going to be a lot of activity because there’s not that much available on the manufacturing side, on the industrial side, the commercial side of real estate, low income, affordable housing, that’s a boom in business. But in corporate America, it’s computers, electronic manufacturing. They’re building facilities to do that.
Now, that’s not just chips, that’s all kinds of assembly, all kinds of manufacturing. On the electronic side, computer components, car components, all that kind of stuff being repatriated. That’s where all this, the rest of what’s going on in the commercial side of real estate is just slowly growing along, and it’s not going to have a lot of impact when money starts getting cheaper. Earnings came out in the S&P 500 and they’re pretty good. They’re pretty much as expected. Four and a half, five and a half. Across all the industries, there’s only materials that was down significantly. Everybody else was up.
All the equity markets have been doing well, getting ahead of themselves. The last three months we’ve talked about this. And after this earnings report in the S&P 500, naturally they would correct back down to where they ought to be. And that’s exactly what’s happened in the last couple of days.
Unfortunately, the media said that the stocks are collapsing and global meltdown and all that stuff. No, that’s not the case. It’s just coming back down to where they ought to be taking some of the drama and the volatility out of the marketplace. The equity side of things. Know that rates are going to be coming down here in the next couple of months. They’re just giving themselves a little opportunity to move and not get ahead of themselves. That’s where we are.
The other side of the coin. Now, we talked about employment. It’s not doing great, but it’s not falling apart. Housing, those prices aren’t going to come down. Money’s going to get a little bit cheaper, but that marketplace is going to remain tight for the foreseeable future.
Now, the other side is the government side. And normally, if the economy slows and there’s more people laid off, the government is sort of in a position to make that a little easier on them. Well, what we have right now is a government that is running in a, not a significant, but a noticeable deficit right now. And neither of the people that are running for president are interested in reducing that deficit. One is likely to lower taxes, which makes it worse. The other one is simply going to spend more.
So the forecast for a deficit in the federal government is probably right and significant. Fundamentally, the US government is not in a great position to fuel a recovery. If we need a recovery because it’s already got huge deficits. It’s not like they can go out and get a lot more money. Simply a matter that they’re on the wrong side, they’re on the wrong foot to start handing out money to people that might need it in six or eight months because they’re already digging themselves in a hole. Fundamentally, it’s from here.
Now remember when we threw that bunch of money in the system, rightly during COVID. That’s all new money in the system. The inflation we’re dealing with right now basically comes from that. Well, we talked about it a lot at length. I was hoping that half of this money would be back out of the system by now. Here we are, latter half of 2024 and it’s not only not come out, it’s actually increased some more due to a little spending going on.
If we have to eat this money, it’s going to remain inflationary for the foreseeable future. And I don’t think there’s any political will anywhere that’s going to take this money out of the system and reduce a little spending.
Well, finally there’s been a couple of questions is well, are we killing ourselves with debt? I get these all the time. You’ve heard a lot. Are we killing ourselves with debt? Don’t mix up debt with deficit. Spending the debt once again. And here’s a couple of great examples. On the right hand side you’ll notice there’s about $12 trillion, that is the rest of the world’s foreign currency reserves. Those are incredibly important. They’re held in treasuries, they’re held in US assets.
Most of them are held in us banks. Those treasuries are monumentally important to the stability of these other economies. And there on the left, all that treasuries, all that debt, that’s about 1.5 trillion, whatever it is that’s held in large banks. They picked that up during the funding of the banks after the great Recession and around COVID and they are hanging onto it. That’s just simply more assets they’re hanging on available to lend. There just simply isn’t any demand at this point.
We don’t have a debt problem, you have a spending problem and it’s not much of a problem since we still have to wade through all the nuts and bolts of it until November. Okay, well, rates coming down in September, I predict they’ll be cost of money is what, three? No, cost of money is five and a quarter right now. I think it’ll probably be four by the end of the year. I think the target of where they’re going, the proverbial R star, three and a half, middle of next year. Hopefully they won’t go lower than that.
Okay. Thanks for joining me! I appreciate it. You can always send questions along to info@Shjwealthadvisors.com, and I’ll see you next time!
