First Signs of Deflation Appearing

Posted on January 13, 2024 by Popular Economics Weekly

The Mortgage Corner

Today’s Producer Price Index for Final Demand, a measure of the cost of wholesale prices, provides the first concrete evidence that we may be entering a period of deflation this New Year.

And, perhaps require the Fed to begin to lower interest rates as soon as in March. Though ongoing wars may cause future shortages but that isn’t happening at present.

Why? Raw material costs are declining into deflation territory, a sign of overproduction, which means prices that consumers must pay for the finished product or service will possibly decline into negative territory as well—when the excess profit margins of distributors and retail sellers that took advantage of the pandemic shortages also subsides.

Overproduction last happened in the 2007-09 Great Recession, as I’ve said, and began a period of Quantitative Easing requiring the Fed to buy massive amounts of securities to increase liquidity enough to boost the inflation rate back to the 2 percent range.

Wholesale prices this round first went into negative territory in July 2022 (-0.28%) per the FRED PPI graph, then fluctuated wildly for several months as supply chains recovered. But the PPI has been negative for the past 3 months, which is a sign that most supply chains have more than recovered.

FREDppi

The danger of overproduction has happened many times in the past and been a major cause of recessions. The Great Recession was caused by the overproduction of housing, for example; some one million excess units.

We saw signs of this in yesterday’s Consumer Price Index as well, when the so-called core index without food and energy prices declined to 3.9 percent for the first time since May 2021, mainly due to lower energy, healthcare, and used car prices.

Energy prices are declining because non-OPEC countries are now outproducing OPEC oil producing countries, for starters, and food prices have softened. The food category was up 2.7% year-over-year, with food away from home up 5.2% during the month and food at home up just 1.3%.

The FAO Food Price Index, which tracks monthly changes in the international prices of commonly traded food commodities, was 13.7% lower last year than the 2022 average, but measures of sugar and rice prices growing in that time.

The pace of inflation for food at home has now been below the Federal Reserve’s overall target rate of 2 percent for three straight months, although the overall level of food prices is still elevated compared to two and three years ago.

Another reason for the deflation concern is consumers usually cut back their spending in the spring. The holiday spending spree is over, and tax season is approaching, which makes personal savings a priority.

In fact, we are already in the Fed’s 2 percent target range. The Personal Consumption Expenditure Price (PCE) Index is already at 1.9% and Core CPI Prices at 2.0% over the past 6 months.

What Fed officials seldom admit is the 2 percent inflation target isn’t a reliable target because there is no accurate measure of inflation as economists such as former Fed Chairman Ben Bernanke have admitted.

Overproduction can become a serious problem as it was during the Great Recession, but the possibility of supply disruptions because of the ongoing Ukraine and Middle East conflicts have made financial analysts leery of even mentioning the possibility of deflation.

The possibility of deflation scared the Fed enough under former Chairman Ben Bernanke to cut the Fed Funds rate to zero percent for a prolonged period—from December 2008 to February 2016.

Can that happen again if the Fed doesn’t begin to lower interest rates sooner?

Harlan Green © 2024

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Please Get Inflation Picture Right!

Posted on January 11, 2024 by Popular Economics Weekly

Financial FAQs

Today’s news that the Consumer Price Index (CPI) was “slightly hotter than expected”, per the Wall Street Journal, caused financial markets to plunge on the assumption the Fed will reduce interest rates more slowly than markets would like to reach its 2 percent inflation target rate.

FREDcpi

Yet if we look at past history in the above FRED cpi graph dating from 1950, the only time the Fed reached its target rate of 2 percent inflation for any length of time was right after WWII into the 1960s, and after the Great Recession of 2007-2009!

So, what does that tell us about monetary policy that is the Feds playing field? It has taken great recessions or WWII (i.e., widest gray bars in graph) to bring down inflation to the Fed’s 2 percent target.

Wow, can acceptable inflation levels only be achieved via recessions? That’s a terrible way to control inflation, in my opinion.

In fact, after 1980 and the Paul Volcker Fed era of sky-high interest rates, the US economy grew very well while averaging 2.5 to 5 percent inflation, until December of 2007 and the start of the Great Recession, which was worldwide let us not forget.

We even had four years of budget surpluses from 1996 to 2000 during the Clinton administration, and the longest period of prosperity (10 years) without a recession.

Yet a few Fed Governors are proving reluctant to accept the fact that inflation is in a prolonged down swing, when today’s ‘slightly hotter’ CPI was almost solely due to sticky used car prices and rental rates.

The above  official BLS graph explains the ingredients of CPI inflation best. The biggest inflation drop was energy (black bar), along with food (blue bar), though its Core index (green bar) was above the All Items index.

“In December, the Consumer Price Index for All Urban Consumers increased 0.3 percent, seasonally adjusted, and rose 3.4 percent over the last 12 months, not seasonally adjusted.”

What is the real cause of the inflationary surge? Most economists now say it was suddenly interrupted supply-chains caused by the pandemic that returned to normal, thus increasing the supply of things and services, not excessive demand because of suddenly wealthy consumer spending too much due to all the pandemic recovery aid.

Economics Professor James Galbraith, son of New Deal Economist John Kenneth Galbraith said, “There is a wave of reporting to the effect that the Fed deserves credit [for the drop in inflation]. But the fact is that the peak in rising prices occurred in June 2022, and that was only three months after the Fed started raising interest rates.”

Average hourly private sector wages are the main driver of demand-side inflation (via consumer spending) and they peaked in March 2022 at 5.9 percent. Average earnings had already dropped to 5.4 percent in June 2022, continuing their decline to 4.1 percent in December 2023.

So why do Fed Governors keep saying that the unemployment rate must rise to lower inflation? New York Federal Reserve President John Williams, one of the most influential Governors, was cited recently at a White Plains, NY speech per MarketWatch saying U.S. interest rates will likely need to stay high “for some time” until senior central bank officials are confident the rate of inflation is returning to 2 percent. He said the labor market would need to soften a bit more, potentially bumping up the unemployment rate to 4 percent from the current level of 3.7 percent.

We have had the unemployment rate below 4 percent for two years, current 6-month inflation is hovering at 2.5 percent and still declining, and consumers continue in record numbers to travel and enjoy leisure activities, I said recently.

Why spoil the party unnecessarily with another recession?

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

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When Has Inflation Declined This Quickly?

Posted on January 9, 2024 by Popular Economics Weekly

The Mortgage Corner

When was the last time inflation rates declined this steeply? You guessed right if you said the Great Recession.

Calculated Risk’s colorful graph of various inflation indicators (gray bars are recessions) shows the history of Core CPI (red line) and Core PCE (green line) inflation from January 1990, among others. Core prices are without more volatile food and energy prices.

What does that tell us about the current drop in inflation? Maybe there’s a danger of it falling too far, too fast, fulfilling the prophecies of some that still see a looming recession. This inflation surge was worse than during the Great Recession (thickest blue bar) because of the COVID pandemic, per the graphic picture.

Calculated Risk Blog

Only the 1980-81 recessions caused a sharper inflation decline. But that was because then Fed Chair Paul Volcker raised interest rates into the double digits to combat double-digit inflation caused by the 1970’s oil crisis-fed stagflationary spiral.

In fact, we are already in the Fed’s 2 percent target range. The Personal Consumption Expenditure Price (PCE) Index is already at 1.9% and Core CPI Prices at 2.0% over the past 6 months.

And what Fed officials seldom admit is the 2 percent inflation target isn’t a dependable target. Why? Because no one really knows what the true inflation rate is! Yes, there is no measure among the vari-colored measures above that is an accurate indicator of inflation as economists such as former Fed Chairman Ben Bernanke have admitted. It could have already hit zero percent in some sectors of our economy. Hence economists consult many different indexes to arrive at a mean value.

And consumers may already believe this, since the most recent inflation assessment coming from the New York Fed says their expectations are declining fast as well.

Consumers expect the inflation rate to fall to 3 percent, according to the Federal Reserve Bank of New York. That’s the lowest anticipated one-year ahead inflation rate since January 2021, in the NY Fed’s ongoing survey of consumer expectations.

Median inflation expectations declined at all horizons, falling to 3.0 percent from 3.4 percent at the one-year ahead horizon, to 2.6 percent from 3.0 percent at the three-year ahead horizon, and to 2.5 percent from 2.7 percent at the five-year ahead horizon. 

Maybe some Fed Governors, such as Michele Bowman are beginning to believe this as well who have studied the history of inflation.

Energy and food prices are falling, for starters. The U.S. is even outproducing the OPEC countries and Russia, which may not be the best way to win the inflation war. But it could convince the Fed to begin to lower short term rates sooner and preserve this recovery.

No one really wants to cause another recession, right?.

Harlan Green © 2024

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Still Fully Employed!

Posted on January 5, 2024 by Popular Economics Weekly

Popular Economics Weekly

Ho hum. The U.S. economy was still fully employed in December. How boring! The St. Louis Fed (FRED) graph below shows the American economy has been at full employment since December 2021 when the unemployment rate first sank below 4 percent (to 3.9 percent).

And much of the hiring has been at state and local government levels because local governments are finally recovering from the COVID pandemic. That is the surest indicator of the beginning of a new uptick in the business cycle.

FREDunemployment

“Total nonfarm payroll employment increased by 216,000 in December, and the unemployment rate was unchanged at 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in government, health care, social assistance, and construction, while transportation and warehousing lost jobs.”

Average hourly wages of nonfarm private employees rose from 4.0 to 4.1 percent annually.

More good news is that factory orders have picked up, according to the Commerce Department, with new orders for U.S.-made goods increasing more than expected in November amid a surge in demand for civilian aircraft, government data showed on Friday.

Factory orders rose 2.6 percent after declining by 3.4 percent in October, the Commerce Department’s Census Bureau said. Orders climbed 0.7 percent on a year-on-year basis in November. And manufacturing, which accounts for 10.3 percent of the economy, is still being constrained by high interest rates. It should therefore pick up even more this year as interest rates decline further.

This is what is called a ‘soft landing’, I said when the unemployment rate dropped back to 3.7 percent in November. Government agencies at all levels added 52,000 new jobs in December – the biggest of any industry – to cap off a record year of hiring (i.e., total of 2.7 million new jobs in 2023), says MarketWatch’s Jeffry Bartash. “Altogether, government employment rose by 672,000 in 2023 and accounted for one-quarter of all new U.S. jobs created.”

So, what’s not to like about this jobs report? Maybe the Fed may now change its mind and not bring down interest rates so quickly, which could happen beginning this March? The evidence is becoming overwhelming that inflation is continuing to rapidly fall. Maybe Powell, et. al., may begin to worry that prices could plunge even more, which isn’t a good sign, since profits then begin to decline, a precursor to a recession.

I believe all the government hiring shows something else—a full blown recovery leading to a new business cycle and maybe what I’ve been calling a ‘Roaring Twenty-Twenties’. Such a ‘roaring’ recovery happened once before, a century ago at the end of the last pandemic that was caused by the Spanish Flu.

Then again, maybe a more boring economic recovery is in the works, with steady employment, wages continuing to rise more than inflation, and a majority of consumers admitting they are happy. Maybe a boring economy is good!

Harlan Green © 2024

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Q4 Growth Prospects Improve

Posted on January 4, 2024 by Popular Economics Weekly

The Mortgage Corner

Prospects for better fourth quarter economic growth are improving. Why? Interest rates are declining along with inflation rates.

The Atlanta Fed’s GDPNow Q4 estimate of economic growth that I like just picked up steam after several downward revisions.

AtlantaFed

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 2.5 percent on January 3, up from 2.0 percent on January 2. After this morning’s release of the ISM Manufacturing Index from the Institute for Supply Management, the nowcasts of fourth-quarter gross personal consumption expenditures growth and fourth-quarter gross private domestic investment growth increased from 2.4 percent and -0.4 percent, respectively, to 2.9 percent and 0.5 percent,” said its report.”

In fact, I mentioned last week that the rate of U.S. inflation based on the Federal Reserve’s preferred PCE index became negative in November for the first time since 2020 indicating that price pressures continue to subside. The PCE index actually dipped – 0.1 percent last month, the government said Friday, and was unchanged in October.

Boosting growth is consumer spending that has held up with robust holiday shopping, and soaring construction spending, up 11.3 percent annually.

FREDconstruction

Why? It’s mostly the Infrastructure and Inflation Reduction Acts pairing with private industry in modernizing the American economy that is creating high-paying jobs and producing more things, which also brings down inflation.

There’s more spending on highways and bridges, while private residential construction rose 1.1 percent in November, with single-family construction up 2.9 percent and multi-family construction rising 0.1 percent. These are longer term investments which should mean longer term growth prospects.

On the inflation front stocks and bonds have been rallying because Chairman Powell sounded dovish for the first time at his December press conference following their last FOMC meeting of the year.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said. The Fed is “likely at or near the peak rate for this cycle.”

Plunging interest rates are best illustrated by the 10-year benchmark fixed rate Treasury note yield that sets mortgage rates. It had dropped below 4 percent for the first time since the pandemic.

And the 30-year fixed-rate mortgage fell for the seventh week in a row, averaging 6.61 percent as of Dec. 28, according to data released by Freddie Mac on Thursday. A year ago, the 30-year fixed-rate mortgage was averaging at 6.31 percent.

What’s not to like about prospects for growth in the New Year? Would congress be so foolish as to close down government because so much is on the line? I don’t think so.

Harlan Green © 2024

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Why the Irrational Pessimism?

Posted on January 2, 2024 by Popular Economics Weekly

Financial FAQs

Public polls seem to be saying one thing, economic facts another. Real Clear Politics compendium of 11 opinion polls on whether participants approve or disapprove of President Biden’s handling of the economy show a negative -22.5 percent spread.

Yet we have had the unemployment rate below 4 percent for two years, current inflation is hovering at 2.5 percent and still declining, and consumers continue in record numbers to travel and enjoy leisure activities.

FREDunemployment

Household wealth has also increased 37 percent since 2019, per the New York Fed, the minimum wage has risen to the mid-teens in most states (except a few red states), and there is a labor shortage with nine million job vacancies that has resulted in record wage increases in multiple industries.

Why the disconnect between economic reality and public opinions? Could it be poll takers are asking the wrong questions, like are you better off today than during the pandemic?

Most of the respondents say they are personally better off, but the economy isn’t improving. How can that be?

I maintain it is what I call the Irrational Pessimism of investors, which are most Americans that respond to said polls. It is the opposite of what Nobelist Robert Shiller has called Irrational Exuberance, but for the same reasons.

Yale Professor Shiller is one of the founders of behavioral finance and author of many books that won him the Nobel Prize in 2013. His research has said that most people act irrationally when making financial decisions. Such decisions are mainly based on hearsay, rumors, and plain old irrational exuberance.

For example, the housing bubble was caused by the public’s belief that housing prices only rose but never fell since they hadn’t fallen for decades, said Shiller.

Professor Shiller has written about it in successive editions of his book, Irrational Exuberance. And former Fed Chair Greenspan first brought such behavior to the world’s attention before the 2000 Dot-com recession, as I said recently.

So why would not the public behave irrationally having just weathered the worst pandemic in 100 years—that is, being irrationally pessimistic in the face of so much financial trauma?

His research and that of other Neo-Keynesian (those who essentially believe that government is needed to maintain a healthy economy, as happened with FDR’s New Deal) show that most financial decisions aren’t based on the careful search of facts, but mental laziness, even in the housing market.

It has essentially refuted those economists who believed since the 1970s that financial markets behaved rationally—i.e., that investors carefully thought through their financial decisions, hence unregulated, free markets were the surest way to prosperity.

That didn’t prove the case, of course, as the six recessions since 1980, including the Great Recession, have proven.

So, in fact, poll respondents may not be thinking of their own personal well-being in these polls. They tend to act more rationally when the personal stakes are highest.

But understanding complex markets is another matter, and one that takes more time and effort. Perhaps by November and presidential election time rolls around, the American public will take the economic consequences of their decisions more seriously, and not leave it to hearsay, word-of-mouth and irrational pessimism. Let us hope so.

Harlan Green © 2024

Harlan Green on Twitter: https://twitter.com/HarlanGreen

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No Recession Next Year?

Posted on December 30, 2023 by Popular Economics Weekly

Financial FAQs

Fortune Magazine has come up with the most interesting reasons for a looming recession in a recent edition.

“Here are six reasons why a recession remains Bloomberg Economics’ base case. They range from the wiring of the human brain and the mechanics of monetary policy, to strikes, higher oil prices and a looming credit squeeze — not to mention the end of Taylor Swift’s concert tour.”

I’m not sure just what the wiring of the human brain has to do with recessions, other than Nobelist Robert Shiller research about human behavior; that most financial decisions are based on hearsay, rumors, and plain old irrational exuberance.

The housing bubble was caused by such behavior. Professor Shiller has written about it in successive editions of his book, Irrational Exuberance. And former Fed Chair Greenspan first brought such behavior to the world’s attention before the 2000 Dot-com recession.

Fortune Magazine should add blockbuster movies like Barbie and Oppenheimer, if they want to attribute our current economic health to happy consumers enjoying leisure activities; but their current temperament could change with bad news.

Oil prices are falling, the strikes have been settled with employees winning bigtime with better benefits, and the current credit squeeze hasn’t hurt current record employment and consumer spending to date per below graph (gray bars are recessions).

FREDunemployment

Federal Reserve Governors have also been sounding more dovish on interest rate policy of late.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said at his last press conference of this year. The Fed is “likely at or near the peak rate for this cycle.”

That leaves what Bloomberg believes is the major determinant of a possible recession; the “looming credit squeeze” due to the continuation of higher inflation and interest rates. So, we don’t yet know the full effect of the sudden hike in interest rates engineered by the Fed since March 2022, some 18 months ago that has made borrowing more expensive.

But consumers seem to act rationally when it affects their pocketbooks, especially from too high prices and interest rates. Their record spending on leisure activities could change if the Fed doesn’t begin to lower interest rates in the spring, as I said.

The so-called Fed Funds rate has been at its high point of 5.25 to 5.50 percent from August 2023, just five months, whereas Greenspan’s Fed held rates at their maximum for eight months, from August 2006 to June 2007. The Great Recession was determined to have begun in December 2007.

So there isn’t much room left to avoid a recession, is there? Watch the actual behavior of interest rates to know what consumers will do next!

Harlan Green © 2023

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It Wasn’t the Fed

Posted on December 26, 2023 by Popular Economics Weekly

Popular Economics Weekly

What more does Chairman Powell and the Federal Reserve Governors need to know to announce the inflation battle has been won? Its preferred inflation indicator has shown zero monthly increases for two months.

The rate of U.S. inflation based on the Federal Reserve’s preferred PCE index actually fell in November for the first time since 2020 and indicated that price pressures continue to subside. The PCE index dipped – 0.1 percent last month, the government said Friday. Inflation was unchanged in October.

FREDpce

This is what is called a ‘soft landing’, I said last week when the unemployment rate dropped back to 3.7 percent. More jobs are being created in November’s unemployment report, though some 50,000 of the 199,000 new nonfarm payroll jobs are strikers returning to work in Hollywood productions and auto factories.

So the Fed’s actions in raising interest rates to multi-decade highs wasn’t the proximate cause of bringing down inflation in what was an overaction to the effects of the COVID pandemic.

High inflation wasn’t the fault of rising wages, either, when job openings are still at record highs so that everyone who wants a job can find one.

Workers are getting terrific raises now that the strikes have been settled, yet inflation keeps declining. No, broken supply chains were the major culprit. It’s taken almost three years to ramp up enough production to bring down prices.

We are now seeing the results as shoppers have shown in the latest retail sales figures that they are finding more bargains during this record holiday shopping season.

Even industrial production is ramping up; so much so that Q4 projections of growth are rising again.

Orders for durable goods for products that last more than three years (cars, appliances, etc.) rose 5.4 percent in November, the U.S. government said Friday. This is the largest gain since July 2020. It is the second gain in the past three months. Transportation orders had the largest increase, rising 15.3 percent in November. This was in part because orders for motor vehicles and parts jumped 2.8 percent after the end of the UAW strike. Orders for commercial aircraft also soared but tend to fluctuate wildly month-to-month.

The Atlanta Fed raised its estimate of fourth quarter GDP growth as high as 3.0 percent and it could go higher with today’s robust durable orders release by the Commerce Department.

The U.S. Federal Reserve Board suggested that interest rates would be cut by 75 basis points in 2024 after it last FOMC meeting of 2023 in December. Can we now be in what is called a Goldilocks economy?

That is when the Fed’s interest rate isn’t so low that it ushers in inflation, yet not so high that it tips the economy into a recession. Maybe we’ve reached that point.

Once again, consumers will decide on the direction of economic growth. And holiday travel shows they haven’t slowed down much.

Auto club AAA forecasts that 115 million people in the U.S. will go 50 miles or more from home between Saturday and New Year’s Day. That’s up 2% over last year. The busiest days on the road will be Saturday and next Thursday, Dec. 28, according to transportation data provider INRIX.

And MarketWatch reports the Transportation Security Administration screened more than 2.6 million passengers on Thursday, which had been projected to be one of the busiest travel days, along with Friday and New Year’s Day. That’s short of the record 2.9 million that agents screened on the Sunday after Thanksgiving, since travel tends to be more spread over Christmas and New Year’s.

The Chorus is growing on the need to begin dropping interest rates. That’s all we need to sustain this recovery.

Harlan Green © 2023

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Consumers Much Happier This Season

Posted on December 20, 2023 by Popular Economics Weekly

Financial FAQs

Consumer confidence in December as measured by the Conference Board’s Consumer Confidence Index is rising again; it jumped 10 points to 110.7 from 101. Why should that be, with all the doom and gloom and geopolitical uncertainty bombarding us daily?

I think it’s because consumers are seeing falling prices and lower inflation, especially gasoline prices with average gas prices approaching $3 per gallon for the first time in years. And consumers continue to shop both online and in stores because they are finding more bargains, with retail sales surging.

“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months,” said Dana Peterson, Chief Economist at The Conference Board.

And the unemployment rate has fallen back to 3.7 percent with more workers than ever joining the workforce. Why shouldn’t consumers’ temperaments improve?

Conference Board

While December’s renewed optimism was seen across all ages and household income levels, the gains were largest among householders aged 35-54 and households with income levels of $125,000 and above, said the Conference Board.

This is also understandable as they comprise the largest percentage of the adult-age workforce with average hourly waging rising 4.0 percent—at least 1 percent above a falling inflation rate.

More good news is a recovery in the housing market. Single-family construction is soaring. Why? These adult-age consumers believe it’s time to own a home.

Overall housing starts increased 14.8 percent in November to a seasonally adjusted annual rate of 1.56 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

“The single-family starts figure is remarkably strong, and we would not be surprised to see this figure revised lower or fall back slightly in the next month, given the nearly 20 % rise in November,” said NAHB Chief Economist Robert Dietz. “NAHB is forecasting an approximate 4 % gain for single-family starts in 2024, as mortgage rates settle lower, economic growth slows and inflation moves lower.”

If I were the Fed Governors, I wouldn’t wait for inflation to drop further to begin to lower interest rates, I said last week. The inflation rate has been falling steadily for more than a year and we could be in a deflationary spiral. Sound impossible? It might happen if the Fed doesn’t see the writing on the wall.

Nobel Laureate Paul Krugman has been scolding certain economists of late in a NYTimes Op-ed who don’t believe what is happening.

“From an economic point of view, 2023 will go down in the record books as one of the best years ever—a year in which inflation came down amazingly fast at no visible cost, defying the predictions of many economists that disinflation would require years of high unemployment.”

The cost of living measured by the Consumer Price Index rose just 0.1 percent in November thanks to lower oil prices. Without food and gas prices, so-called core consumer prices rose a somewhat sharper 0.3 percent last month and matched the Wall Street forecast. And the annual rate of inflation slowed to 3.1 percent in November from 3.2 percent in the prior month, matching the lowest level since early 2021.

Consumers are starting to believe what they are experiencing, in other words. Gas prices are at the top of the list, but how about dining out?

There was a 11 percent increase in dining out sales, and Christmas may equal Thanksgiving as the highest travel month ever. Don’t consumers carry the most weight on which direction this economy is heading?

Harlan Green © 2023

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How Low Can Interest Rates Go?

Posted on December 18, 2023 by Popular Economics Weekly

The Mortgage Corner

Stocks and bonds are rallying after Chairman Powell sounded dovish for the first time at his December press conference following their last FOMC meeting of the year.

“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said. The Fed is “likely at or near the peak rate for this cycle.”

Plunging interest rates are best illustrated by the 10-year benchmark fixed rate Treasury note yield that sets mortgage rates. It has plunged below 4 percent for the first time since the pandemic.

And the 30-year fixed-rate mortgage fell for the seventh week in a row, averaging 6.95 percent as of Dec. 14, according to data released by Freddie Mac on Thursday. A year ago, the 30-year fixed-rate mortgage was averaging at 6.31 percent.

It remained below 5 percent from the end of the Great Recession until May 2022 when the Fed began to raise interest rates. I predict it should drop below 5 percent sometime next year as inflation continues to decline and the Fed begins its rate dropping schedule.

FRED30yrfixed

We are already seeing the results—holiday sales are booming. Retail sales are surging now, up 4.1 percent annually both online and in stores. Dining out is up 11 percent annually.

“Advance estimates of U.S. retail and food services sales for November 2023, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $705.7 billion, up 0.3 percent (±0.5 percent)* from the previous month, and up 4.1 percent (±0.7 percent) above November 2022.”

The housing market is on hold until mortgage rates fall more.

NAR Chief Economist Lawrence Yun forecasts that 4.71 million existing homes will be sold, the housing market is expected to grow, and Austin, Texas will be the top real estate market to watch in 2024 and beyond.

Yun predicts home sales will begin to rise next year – by 13.5 percent compared to 2023, and the median home price will reach $389,500 – an increase of 0.9 percent from this year.

Builder confidence in the market for newly built single-family homes is improving slightly. It rose three points to 37 in December, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today.

“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” said NAHB Chairman Alicia Huey. “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory and lower inflation.”

AtlantaFed

The Fed’s abrupt change in course has also boosted Q4 economic growth prospects. The Atlanta Fed’s GDPNow growth estimate just leaped from 1.2 percent to 2.6 percent, due to “…fourth quarter real personal consumption expenditures growth, fourth-quarter real gross private domestic investment growth, and fourth-quarter real government spending growth.”

So I don’t believe it’s too early to predict a better New Year for investors and homeowners!

Harlan Green © 2023

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