This week on “Inside the Economy”, we discuss the current state of employment, housing affordability, and U.S. Markets. Hiring has slowed since the post-covid highs. Are employed individuals at risk of losing their job? Is there evidence to support potential layoffs? On the housing front, affordability remains low due to factors such as pricing, cost of insurance, and interest rates. For consumers looking to buy, which markets have the best home value index in terms of the percent change from the 2022 peak? Regarding U.S. markets, recent adjustments have been made based on weakening economic data and the prospect of interest rates coming down. Since the markets are forward-looking, what momentum can we expect for the stock market in the second half of 2024? Tune in to learn more!
Key Takeaways:
- Crude Oil at $73.55 a barrel
- 30-year Mortgage at 6.35%
- 10-year bond yield at 3.86%
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes.
Thanks for joining me!
I’m going to talk about the personal savings rate and basically what’s going on with the consumer, jobs, so on and so forth as we’re looking at Federal Reserve lowering rates here in the very near future.
Not a lot of drama in the economic data. The durable goods orders were up. That’s good! Even though Boeing has all kinds of airplanes sitting out there parked, waiting for little parts. The manufacturing survey is up a little bit, 47.2. Most of that is inventory. Well, it’s September. This is a good time for inventory to start building up before holidays, so that’s fine.
The second estimate for GDP in the second quarter, well, went up, actually went up a little more than I thought. It’s up at three right now. The estimates for third quarter GDP, I know this is a little obscure, but third quarter GDP there, it’s at least two. So anybody who was worried about the US economy slowing or going into a recession soon, not very likely.
No drama in the initial claims. Unemployment still 4.3. All the yields are down. Mortgages are down. We’re at 6.3 right now for a 30 year. Just as a reminder to everyone we’ve talked about, the whole mortgage industry is waiting for their next round of new business. Since housing is kind of slow and a little expensive. Their next round of new business is all the refi’s of people that bought two years ago waiting for the rates to come down. Well, the rates are coming down. We’re a half a percentage away of being in the high fives, and that’s definitely going to get the refinance business going in full tilt.
Now, consumers are spending. Consumers are not, you know, extravagant, but they are spending. They spent all the money that was tossed their way for COVID. Savings rate is down. And that’s not bad in the United States because we put it out in the economy. The big issue with the Federal Reserve, the PCE, which is their primary measure of inflation, regular PCE and the core without food and energy, we’re in the mid two’s. They’re probably going to come down a little lower. Their target is two. I don’t think they’re going to overshoot that. I think they’re going to do just fine. We’re looking at a couple of presidential candidates right now who are both spenders.
So it’s very likely that either one of them are going to keep about a half a percentage point of inflation going for sure. And whatever else is going on, budgets, however, you want to look at the deficit spending, so on and so forth. They’re going to hit 2% and 2%. Great! Cost of money, three and a half. Mortgages, five and a half. We’re getting there. Just following the playbook.
Hiring is slowing. Hiring needed to slow. There was a little hiccup or two in this data, which has been, well, let’s just call it corrected, absorbed, nobody cared. There were actually higher estimates than there really were for new jobs. I don’t know if that was a political motive or nothing. Our long term average unemployment is about 5.8. We’re in the low fours with very little upward pressure right now. There’s going to be upward pressure. It may take a while. And we are at the time of the business cycle where rates are going to come down. The cost of money is going to come down. So business activity should pick up. And that’s generally not when unemployment goes up. It’s when unemployment goes down or certainly stabilizes.
So the employment market is in great shape for a positive business environment. Housing affordability, boy, has that become a political issue. They’re all, both of them are jumping all over that. Oh, housing is bad. Elect me and I’ll solve it. Well, they can’t. Neither one of them have no authority or no fundamental understanding of the issue.
Housing affordability is down because on relative terms, a lot of the issues associated with a single family home, not just the cost. We’ll talk about the cost here in a minute, or the cost to buy it. Gee, even in the worst days in the last several years, people had to pay 7%, and we’re headed back to the five’s. Now, that’s nothing much of a game changer. Cost to insure it, if it’s available, is way up. Property taxes are way up. A lot of the states that have been advertising, Texas and a few others have been advertising, oh, we don’t have any income tax. Come here. So people flock there. Wait till they get their property tax bill.
Well, that’s sort of adjusting, too. But they’re not going to change the housing affordability. It’s not something you can legislate away. So this one right here is where I think the politicians are going to start. One group is going to say, we’ll have the federal government build 3 million new homes. Great! Still have to finance and insure them, pay for them and maintain them. And the maintenance of a typical home has, in about the last five years, doubled. You can’t legislate that away.
And I don’t see the home inventory thing changing very much. Typical marketplace, you look down here at the bottom is the worst markets. Well, these are the past hot markets. Vegas, Denver, Portland, Phoenix, San Francisco, and of course, Austin. Worst market in the country. Well, there’s a lot of people who figured out, yeah, it’s kind of nice and, but as easy as it is to refinance compared to what it used to be even a decade ago, I mean, it’s a breeze anymore. Well, it’s also a breeze to get up and move, which is happening. One of the best markets, Cleveland.
Well, there must be jobs there. There must be a reason there. Boston and New York. The markets are coming up for a variety of reasons. Stabilizing, overall, the United States across the board is up 3%. That’s not a housing market that’s collapsing. And it’s not a housing market that is going to have any major shifts to make it easier to buy.
Corporate profits, your basic corporate America doing pretty well. Large, medium, small companies, they are adjusting to their increased costs. They’ve adjusted their prices or bailed or altered or changed whatever it is they do. They’re staying relatively profitable.
Corporate America is not in a horrible situation where it needs to have cheaper money. It’s doing all right, but it’s going to get cheaper money. The markets, and we talked about a while ago, we had another great run up just in time. Well, it needed to correct because it got ahead of itself and we had a great correction.
And then we got clarification out of Jackson Hole saying, well, yeah, we’re probably going to lower rates, zip. Markets go back up. Markets go back up because that’s basically the arithmetic of cheaper money and the cost of stock. We’re already there. Whatever the Fed does, whatever it is, the 17th September, whatever it is, is already built into the equity markets. I’ll show you the bond market in a minute.
Don’t anticipate anything really dramatic out of any of these markets. Once the Fed starts, it’s simply going to be a matter of how fast and how long. Right now I tell you, optimistically, we might see 4% by the end of the year or the first quarter next year.
So five and a quarter to four, there are in no hurry after that. There’s a lot to adjust after that. The bond market, and really a great way to judge the bond market is not necessarily just the yields, though we talk about that and the media talks about that a lot. It’s the spread, and this is the spread of junk bonds across the board, lower quality bonds versus high quality bonds. And what that spread means is the yield, which means lower price from a similar treasury, which is a safe asset, a guaranteed asset.
So when the spread is up 4.5%, 500 basis points like it was back in 2022, people are a little worried about things. So they don’t pay as much for a junk bond as they would for a treasury. So as more confidence gets back into the bond market, more liquidity, fewer problems, less drama, so on and so forth.
The expression is the spreads tighten, which is what they’ve been doing, and they continue to tighten and stay tight, meaning they’re not worried about buyers, are not worried about junk bonds. They get about a 2.5% yield over a treasury, which is kind of a gift compared to the relative interest risk you take.
To sum it all up, there’s not a lot of drama in the marketplace. The equity markets are reasonably priced given what’s going to happen here in the next couple of weeks. The bond markets are already adjusting. Their yields are already coming down. The long end of the curve is adjusting kind of where it needs to be.
The short end will adjust when the Fed adjusts. Don’t anticipate a lot of really runaway great markets here in September. All we’re going to have is volatility. Shouldn’t be anything bad or good. Don’t anticipate it. We’ll just see what the arithmetic looks like. September, October, November. We’ll get real clarification after November.
Again, send questions along to info@shjwealthadvisors.com and I’m happy to deal with them.
Thanks for joining me!
