Populareconomicsblog

Financial FAQs

The best indicator of a looming recession is to watch how consumers behave. And this will be a record year for travel on the ground and in the air. So, would consumers continue travelling if they saw financial trouble ahead? Of course not.

Gas Buddy, for one, says gas prices are down. For the ninth consecutive week, the nation’s average price of gasoline has declined, falling 6.2 cents from a week ago to $3.27 per gallon according to GasBuddy data compiled from more than 12 million individual price reports covering over 150,000 gas stations across the country.

And AAA is predicting a record number of cars on the road. the third highest since 2000. AAA projects 55.4 million travelers will head 50 miles or more from home over the Thanksgiving holiday travel period.

Housing construction and Pending Home sales numbers were also up in October. This may be an indication that the housing market slowdown may have bottomed, another sign of a resurgence.

That’s in part because mortgage rates have dropped suddenly to the low 7 percent range, 15-year fixed to mid-6 percent, and homebuyers will know this. The bond market has been rallying of late, in line with optimism that the Fed may be done with its rate hikes and even begin to ease rates early next year.

The National Association of Realtors Pending Home Sales Index (PHSI)* – a forward-looking indicator of home sales based on contract signings – rose 1.1 percent to 72.6 in September. Pending transactions had declined 11% in a year.

The NAR forecasts that the 30-year fixed mortgage rate will average 6.9 percent for 2023 and decrease to an average of 6.3 percent in 2024, as markets unwind from the Fed’s rate hikes.

I can see blue skies ahead for housing as interest rates continue to decline. More existing homes for sale are needed, which are at historic lows because of the interest rate disparities from the COVID pandemic (see red line in below Calculated Risk graph).

Calculated Risk

Overall housing starts (new construction) increased 1.9 percent in October as well to a seasonally adjusted annual rate of 1.37 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The October reading of 1.37 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts increased 0.2 percent to a 970,000 seasonally adjusted annual rate.

However, single-family starts are down 10.6 percent year-to-date. The multifamily sector, where demand is greatest and includes apartment buildings and condos, increased 6.3 percent to an annualized 402,000 pace.

“The construction data in October continue to reflect that despite multidecade lows for housing affordability, the market continues to lack attainable inventory that only the home building industry can provide,” said NAHB Chief Economist Robert Dietz. “And with the 10-year Treasury rate now back in the 4.5% range, we are forecasting gains for single-family home building in the months ahead and an outright gain for construction in 2024.”

What are consumers thinking at the moment? Many have been discouraged from even looking for homes because of such high interest rates.

Overall, lower-income consumers and younger consumers exhibited the strongest declines in sentiment, said Joanne Hsu, Director of the University of Michigan sentiment survey. In contrast, sentiment of the top tercile of property owners improved 10 percent, reflecting the recent strengthening in equity markets.

It’s a reflection of the 37 percent increase in wealth of mostly homeowners from 2019 to 2022, according to a new survey from the Federal Reserve. The average family’s net worth jumped 37 percent between 2019 and 2022. That’s the largest three-year increase since the Fed began conducting the survey more than three decades ago.

The bottom line is with so much pent up demand brought on by the Fed’s inflation fight, consumers still want to spend, especially with interest rates on the decline.

Harlan Green © 2023

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

Popular Economics Weekly

We can also look at the behavior of wholesale prices to see if inflation has been conquered. The Producer Price Index has been at or below the Fed’s target 2 percent since May 2023. It’s the cost of raw materials that go into finished products, so it should have told Fed officials that retail inflation will soon follow that is now rising at 3.2 percent.

What is holding up retail CPI prices? Market scarcities that have enabled producers to temporarily boost their profit margins. But the PPI tells us that scarcities are quickly disappearing; in autos and gas, for instance, where prices had the largest drop in the PPI.

FREDppifinaldemand

“The Producer Price Index for final demand fell 0.5 percent in October, seasonally adjusted, after advancing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. The October decline is the largest decrease in final demand prices since a 1.2-percent drop in April 2020.”

What more proof does the Fed need to begin thinking about dropping interest rates? Corporations are reporting record profits in the third quarter due to those pandemic-induced scarcities and 98 percent reporting in the third quarter say they are increasing their dividends, a sure sign of increased profits.

The PPI is slightly higher without volatile foods, energy, and trade services, advancing +0.1 percent in October, the fifth consecutive rise. For the 12 months ended in October, prices for final demand less foods, energy, and trade services moved up 2.9 percent.

This may be the ‘head fake’ that Chairman Powell was talking about at a recent conference. What if food and energy scarcities surface again with all the geopolitical uncertainty?

If it wasn’t for the huge 4.9 percent Q3 GDP growth, economists will begin to worry that falling inflation shows a drop in the demand for goods and services, which does signal a slowdown.

Slowing retain sales can be the first sign of any slowdown in activity. Are shoppers already shopped out for the holidays? Retail sales have declined, falling 0.1 percent in October for the first time in seven months, but the decline is unlikely to last as Americans enter the holiday-shopping season, especially if prices are no longer rising.

There was better news with housing. The 30-year fixed-rate mortgage dropped a quarter of a percent to 7.50%, the largest one-week decrease since last November, according to Freddie Mac, the guarantor of mortgages.

It should kick start more housing sales, according to Lawrence Yun, the NAR’s chief economist. Yun forecasts that interest rates will drop to between 6-7% by the spring buying season and anticipates that more sellers will enter the market.

“Builders are back on their feet, up 5% in newly constructed home sales year to date,” said Yun. “Builders can simply create inventory. In a housing shortage environment, builders are really benefiting.”

What happens next year may depend on the housing market, which traditionally takes up approximately 7 percent of GDP activity, but is also a leading indicator of market direction.

The overall decline in interest rates we are already seeing will give a boost to almost every sector of economic activity going into next year.

Harlan Green © 2023

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

Financial FAQs

What if there’s too little inflation? That’s actually the definition of a recession. It seems unlikely at the moment and inflation is still a major upset for consumers. But it could happen if the Fed doesn’t ease up on its hawkish position that inflation has yet to be tamed.

It hasn’t happened yet, but if inflation should drop below the 2 percent Fed target, it has generally meant recession. The CPI plunged to -1.96 percent annually in July 2009 at the end of the Great Recession and dropped to +0.22 percent in May 2020 (gray bar in graph) at the end of the short-lived COVID recession.

Economists are becoming alarmed that the Fed has boosted interest rates too high and too fast. The Fed has raised short-term rates a record 11 times since early 2022, from effectively 0 percent to around 5.25 percent.

Another Nobel Laureate, Joseph Stiglitz, is now added to the list of major economists giving warning. In a study co-authored by Ira Regmi, he believes the Fed is in danger of precipitating another recession if it holds its interest rates too high for too long.

“The pandemic-induced inflation was exacerbated further by Russia’s invasion of Ukraine, which caused a spike in energy and food prices,” said Stiglitz. “But, again, it was clear that prices could not continue to rise at such a rate, and many of us predicted that there would be disinflation — or even deflation (a decline in prices) in the case of oil.”

FREDcpi

And that is happening. The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis, after increasing 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. It dropped to 3.2 percent from 3.7 percent in August. It was as high as 8.9 percent in June 2022.

In fact, the consensus of 34 economists surveyed by the Philadelphia Fed and released Monday is that there may not be any soft landing of the economy at all, but economic growth continuing into next year.

The Survey of Professional Forecasters is the oldest quarterly survey of macroeconomic forecasts in the U.S., having started in 1968.

“The outlook for the U.S. economy looks somewhat better now than it did three months ago,” the survey found, according to a MarketWatch article.

On an annual-average over annual average basis, the forecasters expect real GDP to increase at a 2.4 percent rate this year and slow only marginally to a 1.7 percent rate in 2024.

So the din is growing for the Fed to begin to cut rates early next year, though we wouldn’t know it from Fed Chair Powell’s remarks that the falling inflation numbers might be a ‘head fake’.

Why would Powell want to spoil the party celebrating continued growth? He must still have the 1970’s wage-price inflationary spiral in mind. It was a time of the Arab oil embargo and long lines at American gas stations, with unions attempting to keep up with the wildly fluctuating energy prices.

But Siglitz and Regmi addressed that as well in their study.

“We conclude that with nominal wages already tempered, this does not seem likely. Moreover, declining real wages are typically not a sign of a tight labor market. Weak unions, globalization, and changes in the structure of the economy provide part of the explanation for why wage-price dynamics today may be markedly different from 50 years ago.”

Stocks and bonds are rallying because of today’s good news on inflation, especially REITs (Real Estate Investment Trusts). This is a sign that the real estate market and housing in particular may be on the mend as well.

It also says there is growing optimism among investors that the Fed is done and will not want to obstruct future growth

Harlan Green © 2023

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

Popular Economics Weekly

Is waiting for the next recession becoming a useless guessing game? Maybe even the event itself has less meaning these days when conditions can change so quickly.

We have declining existing home sales yet surging new-home sales in September. And the first ‘advance’ estimate of third quarter economic growth made a huge jump to 4.9 percent, up from 2.1 percent in Q2.

BEA.gov

Economists and pundits have been calling for a recession since the beginning of this year. Yet the Fed’s rate hikes haven’t dampened consumer spending, which grew 4 percent in Q3. It highlights the fact that American consumers power more than 60 percent of economic activity.

And inflation continued to decline, contrary to the Fed’s expectations, which is a growth booster. The personal consumption expenditures (PCE) price index increased 2.9 percent, compared with an increase of 2.5 percent in Q2, per the GDP report. Yet excluding more volatile food and energy prices, the PCE price index increased 2.4 percent, compared with an increase of 3.7 percent.

So where is the recession? It doesn’t have to be two consecutive quarters of negative GDP growth. The US economy began to expand again in the third quarter of 2022 after two quarters of negative growth per the above BEA graph.

The technical definition of a recession is when basic growth indicators such as nonfarm payrolls, retail sales, and industrial production have peaked and begin a prolonged decline.

That could still happen next year if long-term interest rates remain high. Yet who does that really affect? Companies like to plan ahead so corporations can cut back investing in future growth. but our federal government is spending $trillions on modernizing the economy as well as fighting both hot and cold wars.

And retail sales keep expanding. Seasonally adjusted sales came off ground zero (+0.4 percent) in June 2023 and expanded 3.0 percent in September.

Now is a good time for Fed Chairman Powell to announce that inflation has been conquered, as so many economists are doing. For instance, Nobel Laureate Paul Krugman said recently:

“Growth, both in gross domestic product and in jobs, has remained solid. But standard measures of underlying inflation are now under 3 percent and falling. Fancier statistical models maintained by the New York Fed tell the same story, and say that underlying inflation has fallen by half since its peak last year.”

The reason? The Fed’s anti-inflation policies are working. But there is a time lag for higher interest rates to fully affect consumers and investors. Household wealth as well as incomes continue to stay ahead of inflation.

The Federal Reserve recently announced that the average family’s net worth jumped 37 percent between 2019 and 2022. That’s the largest three-year increase since the Fed began conducting the survey more than three decades ago, according to its latest Survey of Consumer Finances.

It’s not only due to consumers being fully employed but a massive increase in housing values during the pandemic when mortgage rates bottomed.

Both the Great Depression and Great Recession were catastrophic times but how often do such events happen? It doesn’t look like we have as much to fear given the current economic recovery.

Harlan Green © 2023

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

The Mortgage Corner

Realtors are loudly crying that holding interest rates at the current high level for a prolonged period is destroying the housing market., I said recently. Existing-home sales are now at the lowest level since the Great Recession, and the danger is a serious housing downturn could lead to another recession.

It has prompted NAR chief economist Lawrence Yun to say, “As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales. The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”

Why is he so concerned? The 10-year benchmark Treasury yield that determines fixed mortgage rates has just breached 5 percent for the first time since July 2007, causing mortgage rates to soar.

This last happened in the lead up to the busted housing bubble and Great Recession of 2007-2009.

Alan Greenspan’s Federal Reserve at the time had raised their Fed Funds rate to 5.25 percent on August 2006 and held it to June 2007 before easing credit conditions. The Great Recession was determined to have begun in December 2007. There is not as much danger of it happening today because bank reforms have made financial markets more wary, yet past housing market downturns have been predictive of past recessions.

The same confluence of high mortgage rates with the Fed Funds rate is in danger of happening again today, only much more quickly as the real estate market has shrunk drastically during the Fed’s current tightening cycle.

FRED30yr

According to Freddie Mac, the 30-year fixed rate mortgage averaged 7.57 percent as of October 12 (see above FRED graph). That’s up from 7.49 percent the previous week and 6.92 percent one year ago.

Existing-home sales fell even lower in September, according to the National Association of REALTORS®. Among the four major U.S. regions, sales rose in the Northeast but receded in the Midwest, South and West. All four regions registered year-over-year sales declines.

Total existing-home sales¹ – completed transactions that include single-family homes, townhomes, condominiums and co-ops – waned 2.0% from August to a seasonally adjusted annual rate of 3.96 million in September. Year-over-year, sales dropped 15.4% (down from 4.68 million in September 2022), said the NAR.

Single-family home sales slipped to a seasonally adjusted annual rate of 3.53 million in September, down 1.9% from 3.6 million in August and 15.8% from the prior year. The median existing single-family home price was $399,200 in September, up 2.5% from September 2022, said the National Association of Realtors (NAR).

Such  a mortgage rate has made housing even less affordable for first-time home buyers. First-time buyers were responsible for 27% of sales in September, down from 29% in August 2023 and September 2022, and pre-pandemic levels closer to 40 percent.

NAR’s 2022 Profile of Home Buyers and Sellers – released in November 2022 – found that the annual share of first-time buyers was 26%, the lowest since NAR began tracking the data.

A record number of multi-family units (apartments) are under construction, as there are now a record number of Americans needing some kind of housing, and more apartments might create more affordable rents.

But it won’t satisfy those still holding the American dream of owning their own home, I said last week. “For the third straight month, home prices are up from a year ago, confirming the pressing need for more housing supply,” Yun said.

Have the Fed Governors learned from their actions leading to the Great Recession? They again reached the 5.25 percent rate recently after raising their interest rate for more than one year. The question will be how long they dare to keep it so high without causing another recession.

Long-term interest rates may stay high because of the unusual flood of Treasury securities on the market that is financing a new industrial resurgence and the need for higher military spending.

But there’s no need for the Fed to continue to restrict credit with inflation in decline. We need higher economic growth more than ever with so much geopolitical uncertainty, and a poor housing market.

Harlan Green © 2023

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