This week on “Inside the Economy”, we evaluate consumer spending, the upcoming Federal Reserve meeting, and household income and mortgages. Consumer spending has slowed compared to the post-COVID highs, and we’ve observed a recent deceleration in student loan repayments. Is this a sign of consumer concern? Regarding income, U.S. households have seen an increase as of 2023 numbers. How does this compare to other countries worldwide? Have unions been a contributor to the increase in income? On the other hand, mortgages are a full point lower than they were a year ago. Is this decline due to economic factors or just anticipation? Tune in to learn more!
Key Takeaways:
- U.S. Head CPI is 2.5 (YOY)
- 30-year Mortgage at 6.20%
- 10-year bond yield at 3.68%
Full Transcript:
Welcome to another edition of Inside the Economy!
I am Larry Howes. Thanks for joining me!
I’m going to talk about the consumer, the all important component of the US economic system, what might be going on in the Fed, probably Wednesday. This is Monday, Wednesday and some other parts of the world that might be relevant to what’s going on right now.
Numbers out there, latest piece of inflation headline CPI is down to two and a half. Core has not changed. We’ll talk about that a little more later. At 3.2, we didn’t expect it to change. Headline is down. Core is up because cost of shelter continues to be up. And if you’ve seen your homeowners insurance or the rest of those parts of owning a home have doubled in the last 18 months. That’s kind of why nothing else has changed in initial claims, so on and so forth.
If you take a look at the interest rates, all the interest rates are down. The market, the bond market has adjusted to what might be happening here in a couple of days. The three month, which is very reflective of the actual fed funds rate is down half a point, 50 basis points from a year for no particular reason. That’s one of the reasons some people are saying we might get a 50 point cut here on Wednesday as opposed to a 25. We’ll speculate on that a little bit later.
But the entire bond market is already adjusted so it doesn’t matter whether they do a quarter of a point or a half a point here in a couple of days. People just adjust back 30 year mortgages. Yeah. Down a full point in a year. So US consumer, are they out spending their money? No, they’re not. They’re growth in their credit cards. It’s just fine. Continues to be fine.
Since the moratorium on student loan payments was lifted, people went right back to paying those like they should. Those that are already gone or, or were bad money in the first place have already been written off. So a lot of people are back to paying on their student loans.
Employment is okay. The days of you can go anywhere you want, quit what you want and find another job in a couple of days that’s over. But the growth is down. But it has filled in a lot of manufacturing and service slots that needed to be filled in. It’s just not a glorious market like it used to be.
So you look at what does it look like for average person, regular person, median household income? We’re at about 82,000 right now. Very good compared to the rest of the world. It is not reflective of the little inflation cycle we went through, this three or four year inflation cycle we went through. It needs to be a little higher in that. That’s not been lost on some of the unions and a number of other people that are trying to get up there.
What we had is $4 trillion put out in the system very wisely because the system got shut down for COVID. Whole bunch of money put out. You could say that was serious deficit spending. So there’s a lot more money in the system.
Now, it’s a question of how it gets sorted out. A lot of it has concentrated as usual in those that are a little better at making money or a little better at spending their money. They’re simply better at it. So this income number needs to keep coming up a little bit. This income number shouldn’t be at 82, it should be about 88, 89. And it would reflect the actual costs of people on the wage and hour side. What they have to pay to like eat.
Compared to the rest of the world, US worker is not paid the most. Certainly not paid the most. That’s Norway, Sweden, New Zealand, the UK. They paythem a lot more. A little socialism in there, but they pay them a lot more. Even the euro area gets a lot more than a typical worker in the US that’s not been lost on some of these labor negotiations. And those that pay a lot less, well that’s neither here nor there.
The difference is the US worker produces more wealth, more product, more productivity. Measure it any way you want, we’ll do it in GDP here than anybody. There’s not even a number two, China and most of Asia wouldn’t even be on this list. New Zealand is bad enough. They actually do negative GDP. United States and Japan, those guys that get a little bit of compensation produce a lot.
Well, so do the US workers. It’s frequently forgotten and it shouldn’t be. Rent, people are paying more of in the brighter the color here, the more they’re paying. Where it was really bad up there around the Great Lakes. All the states around the Great Lakes, their rents are coming up a little bit because they were so low. Maine and so on and so forth. Rents are coming up because they were so low. And a lot of the midwest and the west out here they’re coming up.
Frankly, it’s not because they were so low. They never did get low. They’re low because more people are moving here while the real estate markets like the market in Texas is adjusting down it has to. California and the rest of the Pacific coast really haven’t changed much. And it just hasn’t changed much. We don’t have a problem with people pulling too much money out of their equity.
We don’t have a problem with foreclosure. We don’t have a problem with people owning homes they can’t afford. Foreclosures are way down and this hasn’t changed. In fact, you look at a lot of these cities and I’ll put Denver up here. This is a percentage of mortgages that are in negative equity. That used to be the run of the mill in 2008.
Now you look at these numbers in Denver, it’s about 1.3% of the mortgages are in negative equity. That was definitely ten times that around 2008. And you have to remember that only 60% of the houses out there have mortgages on them in the first place. And that’s all over the board and has nothing to do with the value of the house.
But people are hanging on to value their equity. Teeny tiny number, even Washington, Alexandria, about 1% in negative equity. It’s not bad. That’s not a stressed consumer. That’s not a market that needs to correct.
Fed rates, you look at the, I always look at the real fed rates. I know it bugs some people. You take where the Federal Reserve is now, call it five and a quarter. You subtract the core PCE deflator, it’s at 3.2. You come up with a real fed funds rate. We’re about two and a half, 2.6, something like that, 2.8. That’s the number that is the issue right now.
The Fed should probably move that down a full percentage point. Let’s call it the end of the year, maybe the first quarter next year. There’s no hurry. There’s nothing that has to be saved. There isn’t and you’ll find some places in the media all saying that the US economy is shackled and people are held back and no, they’re not. Cost of money has had very little impact on the economy in this inflation cycle.
We had an inflation cycle because we had a whole bunch of money thrown in there. That’s what deficit spending does. It puts more money in the system. Don’t think that whoever’s running for president right now is going to ruin the country because of the deficit spending.
One, that’s Congress in the first place. And two, all it does is build a little inflation in the system. You just have to adjust to it. Let’s not get started on that S&P 500, the Dow, all those guys, you know, we had a kind of a correction a month ago.
And then we had a quick bounce back because of a little glory on how much the interest rates were going to come down and then a little correction, then it’s come back. What we’re doing right now is the markets, the equity markets have kind of convinced themselves, oh, we’re going to get a 50 point point decrease. Half a percentage point doesn’t mean anything. They just need a reason to go up and down. Right now we’re back to being a little overvalued.
The bond market, they’re looking at 25 or 50. It doesn’t matter. Their market is a lot more geared around arithmetic than the equity market is. US manufacturing, business status, productivity, all that stuff has been, let’s call it sluggish for a while.
This PMI numbers, it’s not going to change. Manufacturing is not going to take off because of cheaper money. We don’t have an issue with money in the US manufacturing, they have more money than they need. It’s simply a matter of how it’s getting allocated.
Don’t anticipate the equity market shooting off at another glorious new numbers. I don’t think that’s very likely. We’ll probably have a correction here after a discount or two. What we have is a pretty good market that is slow growth oriented, not glory oriented. We don’t have anything to correct from. We don’t have any holes to dig out of. We have kind of Dullsville. And what
we’ll get is growth based on earnings going forward. This little interest rate cycle is going to turn out to be not very relevant.
So a question about Gee, when is the Chinese real estate market back? Isn’t it important to have a number two economy that’s doing well? No, it’s not. The 15 years of China’s economic boom are over. They are not coming back. And the real estate market is certainly not coming back for a variety of reasons, not the least of which is this one.
Their population is declining significantly. They are in a race just like the Japanese are, to see how long their population will last. They are dropping a bunch. And when your population is dropping, like the Japanese learned when their market bubble popped, they found there were a lot fewer people looking for homes. And Chinese are learning that now. So anyway, good question.
So here we are. We’ll get a rate drop soon. It’ll be fine. Anticipate a full basis point now. Anticipate 100 basis points, a full percentage point, certainly by the first quarter next year. Doesn’t matter who wins the White House. What matters is the layout of Congress.
Well have any questions, send them along to info@shjwealthadvisors.com. I’d be happy to deal with them. And thanks for joining me!
