This week on “Inside the Economy”, we evaluate the post-election economy, changes in the mortgage market, and the future of deficit spending. Jobless claims remain consistent year-over-year, and the personal savings rate has normalized. Regarding wages and salaries, they have been decreasing year-over-year. Are consumers concerned that inflation will outpace their wages? Meanwhile, mortgage rates have increased in October and November. What is the current volume of mortgage refinance applications? Tariffs currently account for two percent of net federal receipts, while individual income taxes and social insurance taxes make up the majority. If more tariffs are enacted, what is the projected impact on future net federal receipts. Tune in to learn more!
Key Takeaways:
- ISM Services at 56.0
- ISM Services at 56.0
- Personal Saving Rate at 4.6% in September
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
I want to get through a couple of issues now that the political wrangling is over. We do have a post election economy I want to talk about and the essence of the mortgage market, which has gone through some changes and several questions on tariffs and deficit spending.
A quick look at the numbers and I want to emphasize what we have is a strong economy. We don’t have an economy that’s recovering from a recession. We never had a recession and we’re very likely not going to have one in the foreseeable future. We have a fundamentally strong economy.
The service ISM is up at 56 and it’s probably going to be in the 60s by the first quarter next year. Manufacturing has gone through adjustments, but it’s slowly catching up. Initial claims are well down. A little more on that later. And everything else is very low and positive.
The only abnormality here is mortgage rates went up and all the interest rates went up basically the day after the Fed lowered rates. I’ll get to what that really means here in a minute or two. But for jobless claims and what’s going on in the labor market, and forget the media hype, it’s the last five years of jobless claims in the weeks of the year and there is nothing unusual about 2024 in here. It is moving along as the US job market has always moved along.
Income and spending has normalized. You take all the noise of the COVID incident out of the numbers and it has normalized back to where it was a little more prudent spending. And clearly you look at all the ages and this is age demographics, including, well, first time I’ve heard people over 78 called traditionalists.
Maybe I’ve missed it, but the whole bunch here, from millennials to traditionalists, are not overspending. They’ve cooled it. They’ve gone through their consumer demand after COVID and now have settled back down. And we’ve already talked about credit cards and debt not building up too fast.
Personal savings rate is indicative of an individual who saves money isn’t necessarily worried about their future. So they spend the money they make. Most of the nations on earth, they have very, very high savings rate because they are fundamentally worried about the future. Your basic American you can say all you want about, oh, they spend too much. Well, they spend a lot, they have a lot. And they’re not worried about not getting a lot more. I mean, that’s just the way we are.
One of the big components in inflation, which continues to abate, by the way, is wage and benefits growth. And the growth is coming down. It’ll be down below 3 here pretty soon, which is kind of where it ought to be. The rest of the wage and hour people still need to come up a little more because they are behind. And I’ve been through that before. But the growth everywhere else in the inflating side is coming back down.
The piece of post politics I do want to talk about, some people call it the Trump trade or the Trump bump. Basically, the day after the feds lowered rates, the bond market said, well, I’m looking for a lot of reasons to sell. When they sell out of the bonds, that means rates go up because prices go down. Bonds work inversely to stocks.
The bond traders, commonly known as the bond vigilantes, started selling. They started selling their tenures, they started selling everything, which drove rates up. And they moved a lot. And it wasn’t necessarily pointing the finger at Mr. Trump saying, oh, there’s gonna be serious deficit spending. We’ll get to that in a minute. It’s more that they’re looking at opportunities elsewhere. And a lot of this money went to the stock market, which we’ll talk about in a minute.
$12 billion left the gold market in about four hours and huge dollar amounts into the dollar itself. Dollar denominated assets globally. The dollar is going to continue to be strong and remain strong. This is very indicative of how sensitive this marketplace is to changes in rates. Once the bond vigilantes start selling out, rates go up. Half a million refinance applications disappear because the rates went up about that much. But I’m not going to refi. I’m going to wait for the new bottom. Okay, that’s a philosophy.
Now, where that new bottom is going to be, we’ll talk about that here in a minute. But the stock market did the same thing. Here we are doing okay. And if you look all the way to the right, that little whip, that’s the Trump bump in the stock market. All of a sudden, people started buying everything, a lot of money from the bond market, a lot of places. Enthusiasm, pro business, that kind of stuff.
The stock market’s overpriced, needs to correct. It will probably correct sometime between now and when the Fed lowers rates again, which is December 18th. It shouldn’t be dramatic. It just needs to come back down. It was at a fine place following earnings. Earnings were okay. Profit margins are okay, a little over 12. The economy’s doing fine. Industry is doing fine.
From my side of the chair, I look at things like fear of lack of liquidity, people worried about actual number basis problems in the economy. And one of the places I always like to look is what the Fed Reserve is doing with its bond holdings. Now we talked about this. Well, I probably talked about it too much because the Federal Reserve bought a lot of stuff, bought a lot of stuff from the banks and put liquidity in the market.
Well, the market doesn’t need liquidity anymore. The bond positions that the Fed holds are being sold and most of them are being just run off to give the Fed the opportunity to pull that money out of the system, which is what they’re doing. This is fundamentally good news. This is feeling that the underlying, the banks and that side of the investing market are confident of what’s going on right now.
So the bond, so the Fed’s getting rid of their bonds and the market’s not suffering. That too is very good news. A couple of questions on tariffs. And that’s fundamentally how you feel about deficit spending, which we’ve been doing.
Fiscal 24 just ended here a little while ago and we were basically about 8% of GDP. The deficit was about 8% of GDP. That’s too much. 4% of GDP. We can live with that. A 4% deficit spending budget runs about 2% inflation. And that’s okay. But historically this is how tariffs have been used by the US government. Boy, they were popular in the 1700s, 1800s. You know, you collect duties on ships that show up in port.
Tariffs are a sales tax. As an example, a Chinese product shows up on a boat in Long Beach and they, and the importer is charged a tax from customs on that stuff that’s on the boat. Well, the importer pays it.
So the importer increases the wholesale prices, which means prices increase on the shelf. And done correctly, what a tariff does is equalize that low priced or lower priced Chinese product compared to a higher or differently priced American product. So you take the buying decision based on price alone off the table. So then you pick on whatever quality, color that goes with cars, that goes with tools, it goes with shoes, it goes with everything.
Now if there were to be a huge flood of new tariffs tomorrow, it would still take 18 months to get it straight. The customs, I mean the rules and regulations on those tariffs are mind bogglingly complex. Anyway, the point is if there are tariffs coming, if you look at the little gray slot right there that says customs, that’s kind of the income we get out of customs right now, it’s about 77 billion. It’s not a lot. Majority of the money for US Government revenue is individual income taxes. That’s about two and a half trillion.
Then FICA and Social Security and Medicaid and all that kind of stuff. That’s almost 2 trillion, a little under 2 trillion. There’s the majority of the ballgame. That’s where most of the money comes from. There’ll be a lot of political wrangling on corporate income taxes. That’s the green. It’s only 10% of the whole enchilada customs. If they double the tariffs, that might go from 3% of the pie to 4 maybe. And it’s going to take a while, but that’s the only place they can really expand revenue. What they’re going to have to do is cut expenses, which I am assuming the current administration will.
And yeah, there was a question. That little black 2% that stuck out there looks kind of weird in income. That’s estate taxes. That’s probably not going anywhere in the foreseeable future either. They could make a big deal out of it and really irritate a lot of folk. But actual money, no, it’s income taxes and payroll taxes. That’s the whole ballgame.
So what we have here is we’re going to go in and wrangle a little bit about the budget and my suggestion that the Tax Cut Job act, that’s due to sunset at the end of next year. Well, it’s a safe bet right now that’s not going to sunset. That’s going to keep going the way it is. They’ll just get revenue someplace else. And you’re never going to have. I shouldn’t say never, but you’re very likely not going to have no deficit spending that doesn’t endure very long. But 4% are GDP or less. That’s okay. It’s just too high right now.
Well, I’m okay with the questions. It’s fine. Send them along at info@shjwealthadvisors.com, happy to deal with them. I appreciate you joining me!
