This week on “Inside the Economy”, we delve into existing home sales, the current and projected federal funds rate, and the implications of the Tax Cuts and Jobs Act. Existing home sales are trending downward – will the recent interest rate changes improve affordability for home buyers? How might these rate decreases impact the refinance market? As we look ahead, the target for the federal funds rate is projected to be 3.5% by next summer. Is this the soft landing we’ve all been hoping for? Additionally, deficit spending currently stands at -6.5% of GDP. Is this sustainable long-term? If the Tax Cuts and Jobs Act were to sunset, what would the implications be for deficit spending? Tune in to learn more!
Key Takeaways:
- Core PCE Inflation at 2.7% (YOY)
- Crude Oil at $68.22 a barrel
- Federal Funds Rate at 5%
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
Not a lot of bad news to talk about. So I’m just going to touch on a little bit of inflation, a little bit of payroll, some of the stuff that is kind of in the news. And the next issue that’s going to be in the news, you’ll hear a lot of TCJA. That’s a tax cut job act from 2017, which is due to expire at the end of 2025. It’s going to be a political issue in Congress and whoever is in the White House.
Quick look at the numbers. GDP for the second quarter is still good, 3%. Initial unemployment claims still very low. Unemployment has kind of crept back down and stayed at 4.2. There’s been some correction in the numbers and all the interest rates have adjusted down. We’re very likely to have mortgages in the fives by November. We’re just barely in the sixes now. That has started a refinance boom that we’ll talk about. It’s a fairly good environment depending upon how far the Fed goes.
Payroll has really been kind of behind, and I’ve mentioned this before, we had some big numbers in increasing payroll for a little while, then it stabilized. It came down the end of last year and has pretty much stayed the same.
If you look at the basic cost of living for certainly a wage an hour working guy, for a lot of people, their total cost fundamentally is up 25%. Whatever it was two years ago, it’s certainly 25% more than it was today. Some people have realized that. Some people’s compensation or wages or income has kept up with that. Some have not.
A lot of these union, in fact, the longshoremen are probably walking off the job as we speak. There is some arithmetic that suggests they’re right because their cost of living is up and their wages have not kept pace. They looked real good there for a while, but it hasn’t quite caught up. That’s part and parcel of one personal savings rate, which we talked about a little bit.
Interesting part here is there’s been some adjustment in the numbers. Last time we talked about this, it’s that red line. It looked like it was really going down and people were spending through their cash. But there’s been an adjustment in what’s known as the post August data numbers.
And it’s kind of, okay, that’s 5% of disposable personal income. That’s about $5 trillion. Existing home sales aren’t going to boom. They’re not going to go, wow, that bad news is over. So we’re going to start getting a lot better. No.
Existing home sales are down because affordability is out of reach for a lot of people. It’s certainly out of reach for if you’re not in the home owner’s market now, you’re going to have to have a significantly improved financial situation to get into it going forward, mortgage rates will come down a little bit. That makes it attractive for people to refinance if they’re already in the home market, which, if you look at that, there’s a little blip. There’s the refinance numbers. It’s turned around since the Federal Reserve lowered their rates up about a thousand in a couple of weeks.
There’s a lot of people that are anticipating their last home purchase is going to be affordable and make it easier on themselves when they start to refi. And they know that we’re going to be in the fives and maybe mid fives by the end of the year, they’ll refinance again. It’s okay if you’re not in the market, you’re going to have to have a significant increase in wages to get in the market because the prices of these houses aren’t coming down. There’s nothing going to drive them down.
The drama in the interest rate cycle is over. This is the PCE. The regular price index is a little above 2.3. The core is about 2.7, and that’s bouncing around. By the end of the year, this will be down in the twos where the Fed wants it. And ultimately what’s going to happen is they’re going to keep dropping their rates and they’re still targeting about 3, 3 and a quarter, 3.5. We’ve talked about this before. We’ve gone from 5.5 to 5.
Fundamentally, the first half a point, 50 basis points, we’ll get another 50 basis points before the end of the year. After that, we’ll probably be down three and a half to three and a half by, I think it’s summer next year we’ll be there and they should stay. Cost of money there. Inflation at two. Cost of money of three and a half mortgages in the fives is a, well, it’s going to be touted as a soft landing. I still don’t understand that term, but it’s really going to be bantered about, I’ll guarantee you. But you’ll be in a great environment for a $23 trillion economy.
The S&P 500 had a great day right after the Fed lowered their rates. It wasn’t that they had a new record based on earnings, they had a new record based on money being cheap, and the algorithms and all the models adjusted with cheaper money. Well, it’s going to do it again, and it’s going to adjust and it’s going to correct, so on and so forth. You can just see it bouncing along here. Pretty good numbers, but it’s bouncing along based on the cost of money, not really in earnings.
What we’re likely to see in the S&P 500 will be better earnings, better returns. It’s probably reasonable to assume that we’re going to see 9% out of the S&P next year. Okay, not great, but the arithmetic based on just the earnings alone should bring that up fairly good news.
The other side of this lowering interest rates is here. This is foreclosures, delinquencies, bad news. On the commercial real estate side of things. Down there at the very bottom, there’s, of course, multifamily and industrial, which always have good credit numbers.
The big booming one up there, well, that’s hotels. That’s a very volatile marketplace. But the red one there in the middle, that’s offices. Office buildings are just now getting to the point where the delinquencies are up about 8%.
A lot of those buildings are facing what’s known as a wall of debt here in 2025 and 26, and lower money, and a fair amount of money in the system is going to make that easier for them to recover. This is a perfect targeting environment for the commercial side of things, for adjusting either getting new tenants in their office space or modifying their office space into living space. Whatever it is they’re going to do, they’re not looking at a worse environment, they’re looking at an environment that’s probably going to be easier to correct.
This is basically the nuts and bolts of the tax cut job act. It has basically started in 2017. If you look there, 2017, that’s where the deficit spending really starts down. We got a big one because of COVID but it was headed down anyway. That act has got our deficit target spending target. The amount of money we spend over what the government earns, deficit spending at about 6.5%. That’s where we are today.
When the fiscal year closes and it’s closed now, as far as the government’s concerned, we’ll be about six and a half percent behind. That could grow more over the years if that bill remains intact, if it’s allowed to, just, for example, if it’s allowed to sunset and expire at the end of the year. It will probably have some built in revenue increasers and some spending decreasers that at this point are probably very appropriate. We cannot sustain 6.5% deficit spending. We can sustain two, six and a half or anything more than that. No, that would be bad news.
It isn’t the debt, or how you define debt that might be an economic problem to the government by any stretch of imagination. It’s not. It’s the deficit spending that builds inflation in the system, constant inflation in the system that builds a much bigger problem over time. That’s the bad part. That’s why we need to get a little better controls on the deficit. So that’s going to be a 2025, and it really doesn’t matter who comes into the White House, that’s going to be a Congress thing.
Well, I appreciate you joining me, and we have very little excitement due here in the very near future until the fourth quarter. As always, have any questions, send them along to info@SHJwealthadvisors.com. I’m happy to deal with them.
Thanks for joining me!
