Discussing the latest Beige Book from the Fed, there could be rough sailing for the economy ahead and what that means for housing, insights on mortgage data in June 2018 and much more!
The Fed Speaks
Highlights from the latest Federal Reserve Beige Book:
Economic activity continued to expand across the United States, with 10 of the 12 Federal Reserve Districts reporting moderate or modest growth.
Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies.
Contacts in several Districts reported slow growth in existing home sales but were not overly concerned about rising interest rates. Commercial real estate was largely unchanged.
Employment continued to rise at a modest to moderate pace in most Districts. Labor markets were described as tight, with most Districts reporting firms had difficulty finding qualified labor.
Modest or moderate growth is better than negative or no growth. Again we heard about employers having problems finding qualified workers.
And again we heard about concerns regarding tariffs and trade policies. Still, not a bad report.
Which could mean the Fed will continue to increase their benchmark rate. But we also have to wonder if the Fed will change course if the yield curve inverts.
An inversion of the yield curve is a signal of an impending economic slowdown. According to Investopedia:
The yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.
Consider this snippet from FT.com:
This week Fed chair Jay Powell found himself quizzed on Capitol Hill on the same subject because short-dated rates are close to exceeding longer-dated ones in what would be an inversion of the yield curve for the first time since 2006. It is a prospect that some investors once again believe is an early warning of an economic slowdown.
The narrowing gap between yields on two-year and 10-year Treasuries is one of the hottest subjects on Wall Street, with its effects rippling out beyond the $14tn US government bond market. Shares of US banks, which benefit when they can borrow cheaply over a short horizon and lend at more expensive rates over a longer period, have lagged the broader stock market this year.
First, don’t panic. Just be aware that some Fed officials have mentioned the yield curve lately and may be concerned about this being a signal of bad things to come…
Rough Sailing Ahead?
It isn’t just the yield curve that is concerning me. The economy runs in cycles and it has been growing for almost a decade.
Plus, it isn’t just me that is worried about the next time the economy slows down. A recent survey of experts by Zillow showed that half think the next recession will hit in 2020.
Plus there was another survey of economists by the Wall Street Journal that said the current economic expansion will end in 2020. Check out this chart showing the opinions from both of these surveys:
Wow that sure isn’t what we want to hear! But DO NOT PANIC!
Just because we see the economy slow down does NOT mean the housing market or home prices will crash. It also does NOT mean they will not but hear me out on this…
The Great Recession was caused by the housing market crashing. BUT during the previous five recessions home prices actually increased!
We need to be cautious or aware of the potential negatives but we also must be aware that there is a silver lining to every gray cloud. Check out what happened to home prices during the last 6 recessions:
The experts in the Pulsenomics said 3 things will be be the likely cause of the next recession:
- Monetary policy
- Trade policy
- A stock market correction
Hmmm… trade policy could cause the next recession? Somebody get me the White House on the phone…
These same experts also said that the housing market hitting the skids was the 9th most likely cause of the next recession. While that is a possibility, it does NOT appear to be much of a probability since they said that home prices will keep increasing thru 2022!
Again, Do Not Panic! First American’s chief economist Mark Fleming said:
If a recession is to occur, it is unlikely to be caused by housing-related activity, and therefore the housing sector should be one of the leading sources to come out of the recession.
In the same article, Aaron Terrazas, senior economist at Zillow said:
When you look back in history, it’s actually quite rare that housing plays a central role in economic downturns.
No one has a crystal ball and can predict if we will see a recession in 2020. We CAN only look at what happened in the past 6 recessions and use that to make intelligent decisions.
Insights in Mortgage Data for June 2018
Highlights from Ellie Mae’s June 2018 Mortgage Originations Insight Report:
- The average time to close for all mortgages increased to 42 days
- The time to close a purchase mortgage increased to 44 days
- The time to close a refinance was 37 days
- The average 30-year rate for all mortgages increased to 4.90%
- 70.5% of all loans closed in June 2018
- Closing rates on purchases held steady at 75% for the 2nd consecutive month
- 73% of purchase loans had FICO scores over 700
- Just over 27% of all closed loans had a FICO score below 700
- The average FHA purchase FICO score was 677
- Just over 65% of closed FHA mortgages had a FICO score below 700
- The average FICO score on all closed loans was 726
Interesting stuff! Some people that could buy a home could be thinking that their credit score is too low when the data from Ellie Mae shows something entirely different…
IMF Economic Outlook July 2018
Highlights from the press conference for the IMF’s July 2018 World Economic Outlook Update:
Amid rising tensions over international trade, the broad global expansion that began roughly two years ago has plateaued and become less balanced.
GDP continues to grow faster than potential and job creation is still robust, in the United States, driven in large part by recent tax cuts and increased government spending.
Even U.S. growth is projected to decelerate over the next few years, however, as the long cyclical recovery runs its course and the effects of temporary fiscal stimulus wane.
For the advanced economies, we project 2018 growth of 2.4 percent, down 0.1 percentage point from our April World Economic Outlook projection. We maintain an unchanged forecast of 2.2 percent growth in those economies for 2019.
As always, Federal Reserve policy is central to global financial developments. Given strong U.S. employment and firming inflation, the Fed is on track to continue raising interest rates over the next two years, tightening its monetary policy compared with other advanced economies and strengthening the U.S. dollar.
The United States has initiated trade actions affecting a broad group of countries, and faces retaliation or retaliatory threats from China, the European Union, its NAFTA partners, and Japan, among others. Our modeling suggests that if current trade policy threats are realized and business confidence falls as a result, global output could be about 0.5 percent below current projections by 2020, that’s half of a percentage point.
As the focus of global retaliation, the United States finds a relatively high share of its exports taxed in global markets in such a broader trade conflict, and it is therefore especially vulnerable.
Governments must also pay more attention to economic equity among citizens, and especially protecting the poorest. The widespread political malaise driving many current policy risks, including on the trade front, has roots in several countries’ experiences of non-inclusive growth and structural transformation, heightened by the financial crisis of 2007 to 2009 and the difficulties that followed.
It is urgent to address the underlying trends through equity and growth-friendly policies while assuring that macroeconomic tools are available to fight the next economic slowdown. Otherwise, the political future will only darken.
I know many will ignore or discount this because it is from the IMF. While I can understand that but sometimes we need to look at things from the outside…
Pay particular attention to the last 2 paragraphs. United we stand and divided we fall…
Why the Lack of Substantial Wage Growth?
During the past few years, I have written that I expected wages would begin to rise. They have, at least on a nominal basis, or before accounting for inflation.
With unemployment at or near four-decade lows, I have argued that the only solution for employers is to raise wages to attract and retain employees. There is certainly anecdotal evidence of companies raising pay, but across the board the signs are mixed.
I thought the tax reform was going to mean that employers started increasing wages…
Well, no company is going to increase wages unless they have. It is a business decision and nothing personal…
Ritholtz goes on to discuss reasons why wages should be increasing and why they have not increased yet. I have been saying for years that we need income growth for ALL Americans for a healthy economy.
As with most things that Ritholtz writes, this is a must read so check it out.
Architecture Billings Index Decreases
Architecture firm billings slowed in June but remained positive for the ninth consecutive month. AIA’s Architecture Billings Index (ABI) score for June was 51.3 compared to 52.8 in May, which is positive since any score over 50 represents billings growth. As a result, June’s ABI shows that demand for architecture firm services continues to improve across all sectors.
AIA Chief Economist Kermit Baker said:
Architects continue to see increases in demand for their services this summer, with new project work coming in at a healthy pace. However, business conditions are beginning to vary across the country. While essentially remaining flat in the Northeast and Midwest, billings jumped in the South while dropping in the West.
Good news despite the small decrease from the previous month. While still in positive territory, this small decrease stopped the long streak of increases for the Architectural Billings Index.
The Architectural Billings Index tracks nonresidential construction activity. While it does not track residential construction, it is still an important economic indicator.
Election Meddling? You Ain’t Seen Nothing Yet!
From the US Treasury:
The Treasury Department and IRS announced today that the IRS will no longer require certain tax-exempt organizations to file personally-identifiable information about their donors as part of their annual return. The revenue procedure released today does not affect the statutory reporting requirements that apply to tax-exempt groups organized under section 501(c)(3) or section 527, but it relieves other tax-exempt organizations of an unnecessary reporting requirement that was previously added by the IRS.
You may be wondering how this change is going to lead to more election meddling? Well “dark money” groups will no longer have to disclose where their money is coming from.
It could be from one super rich donor or a company wanting paybacks for helping someone to get elected. It could even be used by other countries wanting to influence elections by making huge donations to certain issue advocacy groups, unions and non-profits.
You may have read that a Russian was just arrested after being accused of infiltrating American political organizations including the National Rifle Association. It is a shame this didn’t happen before Trump meet with Putin in Helsinki…
Trump could have asked Putin about this situation during their “private meeting”. Then Trump could repeat whatever Putin told him to say about the accused Russian spy at the press conference…
I hate to get political on you but this really got my blood pressure up!