This week on Inside the Economy, we address the Consumer Price Index mainly looking at primary shelter, core goods, and U.S. retail sales. In the latest core consumer price index report, both primary shelter costs and core good prices continue to decline. Meanwhile, the potential impact of new tariffs is continuing to spark debate. How might they shape the inflation outlook moving forward? Real house prices are finally easing after years of steady increases. Could the 30-year fixed mortgage follow suit? On the earnings front, second quarter earnings are projected to grow just 2.8%, marking the lowest expected increase in the past two years. At the same time, expected volatility in the S&P 500 has dropped to its lowest level since February. Curious about how much interest the U.S. government is paying on its debt? Tune in to learn more!
Key Takeaways:
- U.S. Federal Government interest payments surpass $1 trillion
- Japan’s GDP per capita has declined over the last decade
- Chinese exports at record high
Full Transcript:
Welcome to another edition of Inside the Economy! I’m Larry Howes.
This time I want to talk what the CPI did, the Consumer Price Index, real house prices, profits in the stock market, and a little bit of China and Japan. On some questions. Quick look at the numbers. What we have here is some anticipation that we were going to really have CPI numbers come out and scare everybody. Well, they came out and they didn’t scare anybody. They were kind of unexciting, which is good considering all the fear about tariffs, which we’ll get to that here in a minute.
We had a slight increase in initial jobless claims and that was corrected. It was a number problem. And the interest rates have adjusted. They have adjusted up. If you look at what they were a year ago, they’ve almost flipped again, which means the yield curve, those of you that care about the yield curve is getting better. Mortgage rates, yeah, we’ll get to that in a minute too.
Here’s CPI. Things like core shelter, they’re creeping down. They’re not plummeting, they’re just creeping down, which we anticipated they were going to do anyway. There isn’t any drama here and there isn’t any impetus to lower rates. And we’ve talked about that before, and we will again here in just a minute. But as long as we have inflation up here, remember the Fed’s target is 2, as long as we’re in the upper 2’s you don’t want to lower rates because you’ll stimulate and you’ll push those numbers back up again, which is sort of a conundrum. We’ll talk about it a little bit.
Retail sales, you think the consumer’s slowing down? No, they’re not. The retail consumer side of the entire S&P 500, which is the yellow there is not slowing down. It’s doing very well. Retail earnings are doing very well. It’s not an economy that’s slowing. In fact, it’s picking up.
Well, some people that do sound bites in Wall Street says the US economy is getting its swagger back. Don’t quote me on that. The housing market is a great indicator, always is. There’s not a slowdown. This is single families up there in blue and multifamily permits, starting permits. They’re not slowing, they’re seasonally adjusting. Single family units are moving right along. And the big problem with, oh, multi-families are going to have trouble financing because interest rates are high. No, they’re moving along just fine.
In fact, there’s about nine new big projects just in Denver alone. Prices are not accommodating, not correcting, not saying, oh, the price has got to come down because the cost of money is up. We’ll get to the cost of money here and interest rates in a second. But no, these prices are actually stabilizing. It’s great history in here, the time frame for price corrections, but there’s nothing suggesting we have a price correction in the near future.
Even if rates come down, let’s say rates do come down and mortgages come down. Prices don’t go down. Prices go up. In a situation like that and the current environment, we’re late sixes in the interest rates for mortgages. Yeah, that’s kind of what it is. That’s where interest rates were back in 16, 17, 18, relatively free. That’s what everybody got used to. Mortgages in the 3s. Then it dropped basically to free. Now it’s been up in the sixes for a while and nothing suggests that’s going to change. So if you’re really betting the farm on doing a refinance, don’t count on that.
The S&P 500, this has been a great chart the last three months. Everything has been great after the correction. What we are now is a little overpriced. Even though earnings have been coming out and most of the earnings look good, they really do.
We are a little bit overpriced. This is what’s known as price to perfection, meaning every possible penny in earnings is really generously in market. We’re at 22 times forward earnings. So it’s a little bit steep. It should correct a little bit in August. It’ll be a great time to buy on the dip, as they say.
The economy is moving in such a way. When the first quarter estimates for the first quarter of GDP came out, remember there was a negative half a point, negative 0.5. Well, the second estimate is going to be in the positive twos, low twos. It’s not slowing down, it’s picking up. There were great expectations that earnings were going to drop off a little bit and correct this market. This was anticipation.
The earnings are better than they thought volatility has dropped. We’ve gone like 11 weeks, 12 weeks without a change up or down more than 1%. That’s very low volatility. That’s fat, dumb and happy in the market. And the earnings have supported that. We just don’t have any reason to think that there’s any drama coming either way. Certainly not up or down. If there is a little down, it won’t last long.
So on the tariff side of things, where they pull in $26 billion in tariffs, okay, great for the government, it’s dropping the bucket for what the government needs, but it’s stepping in the right direction. Some of that and most of that has already fit into the inflation numbers. This isn’t over, but what we’re going to have, this is the end basically the end of July, close to the end of July.
These tariff deals are going to be done by the end of summer. I originally predicted the end of June. There’s been a little extra chit chat. It’ll be the end of summer, the tariff deals will come around and the pressure out of that will ease, bring the CPI down, which will put more activity in the business, so on and so forth.
The line item I talked about a couple of weeks ago, the cost of federal interest payments, basically the interest paid on money that’s out in the system. The $37 trillion that’s out in the system right now. Yes, that is an expensive line item. It’s over a trillion dollars a year.
And again, that’s the reason why the administration is encouraging the Federal Reserve to lower rates. You lower rates, you make this line item smaller. Yes, it’s a big deal. $28 billion in tariff income is a drop in the bucket compared to this – big little.
The Japanese had a political revelation this weekend. They got rid of the party that’s basically been running the country since the 50s. They might be going down a populist route. They might be tired, they might be bored. I don’t know what it is, but fundamentally the Japanese as a group have not done well compared to everybody else. The gray line there in the middle are Germans and of course the top line is the US that’s GDP per capita. They’re going to have to change some things. They are losing population rapidly, faster than anybody, even faster than Russia. But I don’t think they want to waste the next 80 years.
So there’s going to be some changes. I don’t know if Japan is going to start trading more with other people or get in the defense business or whatever it is. They need to get active again because the passive just get along with everybody version of Abenomics, which is why it’s in here, is not working for them.
And a couple of questions on the Chinese has their international trading, their exporting collapse? No, it hasn’t. It has slowed a lot with the US, it has picked up with other Asian nations. So the other Asian nations can trade with the US – China has to export. They don’t have anything else. And they have to export because they got a lot of mouths to feed. We don’t want them to collapse. That will just make the current problems, the floods and the disappearing dams worse.
It will help Vietnam and Indonesia and a bunch of other close, we’ll call them competitors. But China’s not going to collapse. They can’t. They’ve got too much on the backside that is hurting them a lot. They’ve got two years now of deflation in their lowering prices in their system.
And if you’re a low end manufacturing service like China is, you can’t have this much lowering prices because your prices were already the lowest on earth and very thin margins to begin with. So this is bad news and it really isn’t had an impact yet.
And finally, the most costly and damaging part is how the direct foreign investment and money from around the world is not going to China anymore. It’s not a particularly attractive place to invest. I don’t see it changing in the foreseeable future or ever.
As always, if you have a question, send it along to info@shjwealthadvisors.com. I’ll be happy to deal with it. And thanks for joining me!
