This Week’s Economic Update, February 26, 2024

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Spring is in the air, even in Minnesota.  The Daytona 500 is done and Spring training baseball is starting up.  For the time being, every team, even the Athletics, are considered a contender and has a chance at post season play in October.  Hopefully your favorite team made some good choices in the off season to boost their chances. 

The mortgage industry continues to deflate.  Between higher interest rates and lack of supply of existing housing stock, new financing applications are hard to come by.   The mortgage market index for February fell from 205 down to 181.  Since the mid part of January, the index has fallen by 18%.  The refinance index alone fell from 489 to 427 in just the last week.  Since its peak on February 1st, this index has fallen 14%.  The drop in new applications is decimating the mortgage employment levels.  Virtually all financial institutions with a mortgage arm are laying off employees.  This will not be a short term problem.  Housing prices are remaining at record highs due to supply shortages.  This boxes out many prospective buyers.  The final point in purchasers minds is that historically, the largest source of wealth is the primary residence of the family. At these prices, there is little hope of any appreciation. 

The housing industry is also beset with another concerning problem.  Venture capital companies continue to soak up existing housing that comes on the market.  Sometimes they are able to catch the properties before they hit the market.  Other times they out bid buyers because they have cash and are a sure close.  The loss of the owner occupied single family dwelling in America is one of the largest threats to the middle class at this time.  Without a reliable source to grow wealth, our middle class will diminish, making it harder for many to see a comfortable retirement when the time comes.

The job market continues to hum along nicely.  New initial jobless claims have been trending down after peaking in January.  Many of the companies I talk to are struggling with hiring qualified candidates.  The U3 unemployment rate is at 3.7%, the lowest recorded rate since 1969.  The U6 unemployment rate is under 8%, well below the historical level of 10.16%.  It hit an all time low of 6.5% a little more than 12 months ago.  Companies that are competing for talent are currently bidding up wages on the best employees.  Nothing in the market is showing that the labor market will be loosening in the near term.  This is in spite of the number of layoffs that are being announced. 

US industrial productivity increased slightly in the 4th quarter last year.  However, the base number is well beneath our historical level.  Manufacturing in particular is struggling to improve productivity at this time.  Many firms are holding off on new equipment investments due to interest rates as well as having a rather soft to negative view of the future of the economy.  It is hoped that the ISM number this coming week will boost manufacturing into a small expansion range for the first time in 16 months.  However, based on the regional FED numbers in February so far, it appears we will still be under 50, another month of contraction.

All of the above, point to a very sticky level of inflation that is existing in our economy.  We appear to be entering a phase where wage price inflation is kicking in.  Companies are not able to abate price increases while paying ever higher wages to employees.  The inflation in the housing market, in spite of high interest rates, seems to be holding.  With soft productivity, companies are unable to increase output at a level where fixed costs can be spread over more products.

Looking at other areas of the economy, we are seeing inflation creeping back up.  Food prices are rising in part over the bird flu outbreak, eggs in particular are back up over $3 a dozen.  Chicken prices are rising.  Beef prices will remain high as supply is still low after the drought of the past two years in the heartland. 

The only way to get much of the increase in prices under control is to continue to slow the economy.  The FED has but one way to do this, continue to hold the interest rates where they are or raise them.  My bet, if inflation moves as I expect it to, is that we could see an interest rate increase in the third quarter. 

Have a good week.

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