This Week’s Economic Update, January 16, 2023

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In a mere 6 months we will be enjoying the dog days of summer.  Relaxing in the sun, moving through the heart of vacation season, and spending time outdoors doing our favorite summer activities.  I find it interesting we do not have a corresponding term, like the dog days of Summer, for mid-January.  There are many of us who enjoy the outdoors during winter.  Snowshoeing, skiing, sledding, shoveling snow, removing ice dams from our roofs, losing mittens and gloves, slipping, falling, jumping car batteries as well as dressing in layers, even indoors.  What a wonderful time of year we are in.  It really should have a name, something of course without swear words.

The inflation numbers for December were released last week.  I do not like looking at the year over year numbers for a couple of reasons.  The primary reason is the timing of increases in inflation will skew this number to be over or understated, not giving a very accurate number for what is going on right now.  The levels of inflation really took off about a year ago with peaks of inflation hitting in March of last year as well as September.  These peaks skew the numbers we are experiencing right now. 

Core inflation, with energy and food removed, saw an increase of .3% in December.  That would equate to a 3.6% annual rate, not the 5.7% year over year.  What might surprise many was that the US inflation rate in total declined by .1% in December.  We all saw food prices increase, scrambled eggs for breakfast are pretty much out of reach price wise right now.  However, the drop in energy prices across the board provided an oversized impact on prices overall.

Prices on many goods, including clothing and other manufactured items have declined as supplies become prevalent.  This includes automotive prices, both new and used.  However, the price of many service sector areas is increasing and will likely continue.  The primary cost within the service sector are wages, which continue to rise.  This is an issue related to the growth in the money supply that created the inflation we are now seeing, as well as the continued tight labor market which I addressed last week.  We have still not tamed the inflation lion.  Interest rates still need to climb, demand in many areas will have to abate, while the job market also has to adjust.  Still too early to say whether the economic landing will be soft or hard.

Supplies for oil, gas and distillates continue to climb.  What is interesting is that the US has boosted oil imports from foreign sources rapidly over the last few months.  Our domestic production seems to have plateaued with refinery runs keeping pace with demand.  We would anticipate energy prices to continue to moderate.

There was a major announcement in the banking industry this past week which is going to have significant consequences particularly in the mortgage industry.  Wells Fargo is going to cease their correspondent mortgage operations.  42% of the mortgage activity that WF has been doing is purchasing mortgages from sources outside of WF.  This move will significantly impact the mortgage funding ability for mortgage bankers throughout the nation.  Without a reliable, affordable source of funds to originate real estate financing, many home buyers will be limited to actually getting the financing for purchasing new houses.  Further, when the economy turns around and interest rates drop, the finance industry may not be able to handle the increased demand, curtailing the housing industry. 

Based on the current market dynamics where rate increases have depressed the refinance market, increased sales prices boxing out buyers as well as the tight labor market limiting production in mortgages, there may be time to build a replacement for WF pulling out of the market.  Volumes will be down, but eventually new sources of funds for the independent mortgage bankers will need to be located.  The likely outcome will be a rapid consolidation in the mortgage banking market over the next year or so.

Have a great week.



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