The year began with the market expecting the Federal Open Market Committee to cut rates six times this year. The number of projected reductions has dropped as the year went on: Recent economic data have shown inflation stubbornly above the Fed's 2% target, putting rate cuts in jeopardy. Join us on May 2 at 3 p.m., as Lauren Saidel-Baker, an economist with ITR Economics, parses the FOMC meeting, Chair Powell's press conference and takes a look at future policy.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Gary Siegel (00:10):
Hi, and welcome to another Bond Buyer Leaders Forum event. I'm your host bond buyer, managing editor Gary Siegel. My guest is Lauren Saidel-Baker, an economist with ITR Economics. Today we're going to discuss monetary policy including yesterday's federal open market committee meeting. Lauren, welcome and thank you for joining us.
Lauren Saidel-Baker (00:36):
Thank you. I'm so thrilled to be here.
Gary Siegel (00:40):
So was there anything in the post-meeting statement or chair Jerome Powell's press conference that either surprised you or grabbed your attention?
Lauren Saidel-Baker (00:52):
Yes. The big surprise for me and I think also for many market participants was that Sheriff Powell essentially ruled out a rate hike. He said he did not see the next move being a hike. As likely he said it would be not likely, which is I think the exact quote. So for Powell, who usually is much more taciturn usually does not give away too much directionally, I thought that was a very bold statement. I think we can take rate cuts off the table absent a market change in inflation policy, excuse me, the inflationary environment. The other thing I was a little bit surprised at was that they'll slow the pace of balance sheet reductions. I'm sure we'll talk about this a little bit more at the margin. That is a slightly dovish move and again, Powell was very clear to say he does not mean for this to be a less restrictive policy stance. He just wants to avoid financial market turmoil as happened last time they tried this. So really slowing down those balance sheet reductions, he intends as a way to smooth out the pace of shrinking the balance sheet. But again, overall that will be a dovish policy.
Gary Siegel (02:11):
But Warren wasn't the market expecting a slowdown in the balance sheet reduction?
Lauren Saidel-Baker (02:19):
I think the market was again, and he even got some questions on if there was a disconnect between holding rates steady and taking the stubbish step. He seemed to negate that, right. He said that the policy tool is the rate. So I don't disagree, but again, at the margin this was not a purely balanced meeting. That was one step in the doubles direction that coupled with taking rate hikes off the table altogether. I think it gives us a clear point as far as the analogy goes. We can kind of set the compass toward less restrictive policy going forward at a time when consensus had been shifting. We'd even seen some forecasts start to price in a hike rather than a rate cut or no rate cuts this year.
Gary Siegel (03:13):
You said you were surprised that Chair Powell spoke about the fact that he doesn't expect rate cut, excuse me, a rate hike. That a rate hike is not likely. But when asked about whether it was discussed, he kind of evaded that question. Don't you agree?
Lauren Saidel-Baker (03:31):
Yes. Back to the evasive Powell who we all have gotten used to that we all know and love, he did not answer that question. Whether that was intentional or just by now habit to not reveal too much, I think remains to be seen. Clearly there are some members of that committee who I imagine would at least have broached the issue given what they've said and public before. However, I really think he is the one. If he says rate hikes are not likely, I am willing to take him at his word at this point.
Gary Siegel (04:11):
So then with rate hikes off the board, when do you expect the Fed to cut rates this year? And if so, how many times?
Lauren Saidel-Baker (04:21):
Yes, so I'm still firmly in the camp that we will see rate cuts very likely in the second half of this year. I know market consensus is shifting to fewer and fewer cuts. I've even heard some say no cuts this year. I believe it is still a matter of when, not of if in 2024. So two cuts, one to two I think is probably our majority case. I don't think three cuts or let me put it another way, 75 basis points of cuts is fully off the table. Much more than that though is rapidly losing probability. Coming into this meeting consensus was about a 50 50 on whether we would say see a rate cut. I still think September cuts are more likely than not. I think we're rapidly losing ground on second quarter cuts. So if we do wait until September, again two cuts, maybe even one being the more likely case, but I don't think a June cut is fully off the table. We are. However, pushing the timing of that first cut later,
Gary Siegel (05:31):
What would we have to see for the Fed to decide that June is appropriate for a rate cut?
Lauren Saidel-Baker (05:39):
I think that still is absolutely a possibility. We would need to see market decline in inflation. Again, I don't think we have to reach that 2% level. Again, the words Thatcher Powell continues to use is gain greater confidence that we are moving consistently in that direction. So gaining confidence that we are getting toward 2% is a much different beast than hitting 2% inflation. So I don't think that is the test case. However, we've seen inflation, especially consumer price inflation move largely sideways for so long that it would take a departure from that sideways trend. We would have to see if not a linear a return to that linear disinflationary trend, something a bit more significant. So I don't have a number in mind, I don't have a make or break test piece, but we would need to see especially a decline in wage inflation. Even though in the statement and in the questioning he was very clear, they don't look at wage inflation.
(06:43):
That is not their dual mandate. That is what they're paying attention to because that wage component is driving so much of this other consumer price inflation. So if we do see a closer move toward 2%, if we do see the labor market loosen in the next couple of months and we have some data releases, not too many remaining before June, but we do have enough, I think we could potentially get to that point. I would not put that in the majority range though. I think we're below a 50% chance that we see a June move. I think September looks much more likely at this point.
Gary Siegel (07:21):
And Lauren, just to add on to your point chair, Powell has said in the past that the Fed will not wait till it's down to 2% because if they waited until inflation was 2%, then they'd be late.
Lauren Saidel-Baker (07:35):
Yes, and they do like to be late, but in this case you're absolutely correct. That would be much too late.
Gary Siegel (07:43):
So there's a presidential election in November and the Fed tries to maintain an apolitical status and refrain from moves around an election. But when asked at the press conference yesterday, chair Powell said that politics never enters their discussions and that if they decide that it's time to be a times appropriate to make a cut, they will make a cut. Do you think that this will play any role that they will try to move a little sooner or a little later depending on the timing or do you take palate as word that they will not worry about the election at all?
Lauren Saidel-Baker (08:25):
So here's where I wish I had a background in psychology more than just economics because we are trying to parse his words, say that they have not discussed politics. They will not, as he put it, go down that road. What chair Powell said in the q and a was that if you go down that road, where do you stop? Right? If there are so many other factors that we're considering on top of the economic fundamentals, it's just much harder to get the economic fundamentals right. I do agree with him fully in that case, however, does that timing of the election come into your mind even subconsciously? It's very, very hard to say no. That they can just speak completely rational beings. I know we economists, we're not fully human, right? We're part robots, so maybe they're more robot than the rest of us. But I do wonder if there's just that question, right?
(09:20):
If we are right on the edge, right at the margin, if that's something to push us one way or the other at this point, I think the logic goes both ways, both in terms of waiting if the evidence otherwise would justify it. I think that is as big a risk to appear political one way as the other. So to keep rates higher for longer when the inflation numbers, the labor market result would otherwise all else equals suggest what the Fed has been hinting they want to see. I think we would have to be just on that knife's edge and if the data does come so perfectly balanced in the September meeting, who's to say that it was politics that was the thing that pushed over. So to your question, I know I sound naive when I say this, but I am taking palate's word that he's going to be data dependent, that the committee is focused on the data first and foremost almost because they have to be. I think this will keep them honest in a way. So no, I don't expect the election to materially move us one way or the other. And Fed in the past has been pretty good about being apolitical. I mean they've been through multiple administrations, red and blue, so I don't know. I sounds like a naive economist, I realize, but I trust you.
Gary Siegel (10:49):
No, you don't sound naive at all. And again, if they do move in September before the election, how big a deal is a quarter point cut? How much of a difference would that make?
Lauren Saidel-Baker (11:03):
That's the question to the average consumer, very little. So to say that that would sway voters one way or the other. I think really it's us in a group like this who are so focused on every word in the statement that get the highlights right of what changed from last meeting to this meeting. That is not the average consumer. We are not the average voter. And so I think we as economists as market watchers, as Fed watchers to put a little bit too much weight on decisions like this affecting the election results. So again, it sounds a little bit idealist I realize, but I do think if we step back, take ourselves out of the equation, a quarter point is not worth anyone doing anything over.
Gary Siegel (11:52):
So what are your expectations, Lauren, do you see a soft landing? Do you expect a recession if you expect a recession? When and how long and how severe?
Lauren Saidel-Baker (12:04):
Yes. I'm going to split hairs a little bit because I do not expect a GDP recession. Again, Powell talked a lot about the numbers they see. I prefer to calculate not based on annual rates, but if we just look at the sequential quarter to quarter growth rate in the most recent GDP result, it came in at about 0.4%. That is almost identical to the average four Q to one Q rise over the past 25 years. So to see this pace of growth, yes, growth is slowing. I had largely expected that. So the recent GDP result, a lot of the headlines said it disappointed market consensus. I personally, my estimate had been a bit lower than the results. So this was a pleasant surprise to me. But GDP growth is slowing. That is the answer. At the end of the day, I expect to see GDP growth continue to slow through the rest of this year before we pick back up in 2025.
(13:05):
Looser monetary policy is certainly going to help that. Recovery in 2025, that is largely built into my and many other expectations, but slower growth even in the 1% growth range that is very different than an outright contraption, very different than a recession. Partially on all of this wage strength, all of this strongly labor market that is giving the Fed so many headaches Now in certain sectors there will be a bit more downside. We're already seeing contraction in the manufacturing sector. Our industrial sector has been trending largely flat since last summer. We could see, I expect that one to really scrape by the zero line. So I don't expect a significant industrial sector recession, but certain industries will feel a bit more downside. So this question, how deep of a recession, it really depends on where you're sitting. If you're in the more consumer focused side of the economy, the service sector is faring very well compared to the good side of things. Again, compared to manufacturing, a little bit of a steeper bite over there. So sentiment is everything. It just depends which side of the table you'll be on.
Gary Siegel (14:18):
Lauren consumers are still spending, which has been propelling GDP at faster rates that have been expected. Do you see consumer spending slowing and if not, what would cause an economic slowdown later this year?
Lauren Saidel-Baker (14:33):
Yes, consumer spending, the growth rate in consumer spending is slowing and it largely has been slowing since we got that stimulus money. And so when that money hit everyone's bank account, we saw retail sales spike to growth rates that we have never seen in the data history. So I first want to be absolutely clear that growth is slowing from an incredibly high and an unsustainable high starting point. So to see this growth continue to slow is largely normal. It's largely to be expected, but this pace of slowing I think has been, we've kind of added a bit more with these higher interest rates with the higher inflation. So nominal spending still positive. If we deflate retail spending, that's where we're closer to the zero line. We have had a couple months of negativity even. So the consumer, while we we're generally doing all right, we have very full, a very tight labor market.
(15:32):
So a lot more people working, a lot more employees making more money with these higher wages. That means there is more dry powder, more availability to go out and spend. But we're also seeing our consumers slip back into some old habits that had been trending better during the pandemic. So by that I mean our savings level is coming down. We have spent down some of our accumulated savings that again really spiked during the pandemic. We're also starting to see more money, more spending go on the credit cards rather than coming from those higher incomes or from the savings. So credit card totals as a share of our earnings that has risen to roughly the pre pandemic level after we spend down a lot of our high interest rate credit card debt. So we see a little bit of back slipping, but again, I really want to stress this back slipping is coming from an incredibly high, a historic high strong starting point. That means we have more room to slip back before I would really be concerned. So I'm not worried about the consumer. This is not 2006 where we have bad debt, unsustainable debt levels where we should be watching for the other shoe to drop, but it is a different position than we were in in 2021 and 2022.
Gary Siegel (16:53):
Are you seeing any signs of stagflation? That's become a word that's been used recently after having not been used for a while.
Lauren Saidel-Baker (17:05):
The stag completion. Such a fun word. And Powell got this question during the Q&A and he actually got a laugh line, which is I think an incredibly impressive thing for a chairman of the Federal Reserve to do is get a shackle. But he said he's not seeing either the stag or deflation, and I agree with him here, inflation is positive, yes, but we are in a very firm disinflationary position on the consumer price side. Producer prices are trending even flatter. I don't think we'll see outright deflation, but largely a plateau in price levels on the producer price side. So I know we all think of how high inflation has been that consumer price inflation peaked around 9%. So to see us in the 3% range now it's actually a much better position. We are not still on the upward trajectory. So I don't see deflation and the stag, yes, growth is slower, but growth is still positive. This is not a stagnant economy again, especially if you're focused on the service side, the consumer side of things. There is good news. There is certainly much slower growth, yes, but positive growth nonetheless.
Gary Siegel (18:17):
Okay, the Fed has been criticized for being slow to start this hiking cycle. The market at the beginning of the year was expecting six or seven cuts this year, but they've gotten none and they've cut their projections to one or none. What are the chances the Fed will be late making the first cut?
Lauren Saidel-Baker (18:43):
I hope I didn't overspeak earlier, but yes, the Fed tends to be reactionary. They tend to be late more than they tend to be early at the balance. So the market did expect much more movement. In fact, I looked at consensus at the beginning of the year in January, nine out of 10 economists predicted that this meeting in May, we would've already seen a rate cut. Clearly that hasn't happened. So I think the market was a little bit too anxious to see these cuts. I also think with regard to the last cycle, the beginning of the hiking cycle, that the Fed had a reason to delay and that was that if you look at the past decade of inflation, so call it since the recovery from the 2008 recession, we actually saw inflation much lower than the Fed's target range. We barely broached the two or 3% level over the entirety of those 10 years.
(19:40):
So there was an argument to be made that inflation needed to catch up or that, excuse me, price levels needed to catch up to where they would have been if we had been trending in that magic target range the entire time the fed was slower to start the hiking cycle to head off inflation. I think they were intentionally slower. Now clearly inflation got away from them. In hindsight being 2020, they did not move quick enough to head off where inflation peaked, which was much, much too high even for that catch up argument. But I do think we, looking back at the time, there was an argument it was made, some folks disagreed with it. They can say, I told you so at this point, I guess they'll be proven right. But yes, on the other side of things, the PCE data core pce, excuse me, which is the Fed's preferred measure of inflation, that's in the 3% ballpark now to say is that low enough despite the trajectory of inflation not being so linear that we're going a little bit more sideways. That's where the art comes into this discussion. So to say, should we start to see cuts a little bit sooner before the Fed has their full amount of confidence? I think that's something that we'll be debating three or five years from now. Again,
Gary Siegel (20:59):
You mentioned 3% target, well, I'm sorry, not 3% target. You mentioned that inflation is around 3%. Some people have said that given what Powell said yesterday, the Fed might be comfortable with a 3% target, although Chair Powell denied that at the press conference. Do you think the Fed, do you think the Fed is going to be comfortable with 3% at this point?
Lauren Saidel-Baker (21:28):
They will never be able to admit it, but yes, I think they're moving in that direction. Again, all of this talk that we've seen more and more about confidence moving to 2%, as you pointed out earlier, that we do not have to reach 2% before we start to cut. I personally, my firm's outlook for consumer price inflation doesn't get below 2% at the low in our current view. So to say that we can hold inflation at 2% for any amount of time, that is a huge ask from the Fed. I think getting closer will make them more comfortable, but I do think there's a little bit more wiggle room there now than there has been in the past. Yes,
Gary Siegel (22:13):
It's funny how for a decade they were trying to get inflation up to 2% and they couldn't do it and now they're trying to get it down to 2% and they're finding it quite difficult.
Lauren Saidel-Baker (22:24):
Yes. Jousting at windmills, it seems both ways.
Gary Siegel (22:30):
So did the pandemic make predicting the economy harder, and if so, is it getting any easier to forecast at this point since we're a little further away from the pandemic?
Lauren Saidel-Baker (22:43):
To the second question, yes. I think we are getting better visibility as we move farther away from 2020, and a lot of those echoes are still reverberating through the economy. So echoes of the stimulus, echoes of the pandemic, even the shutdown are still kind of rippling through the economy. And I really hesitate here because I recognize the human reaction to say that my point in history is the hardest to ever predict that there's something going on now that we've never seen in the past, and I'm sure someone 10 or 20 years from now will say, oh, pandemic, you had it easy. But there is an argument, and I've heard this from many market participants, that the data collection is even a little bit different. We're not getting such a clear sight at especially seasonal data and how that has changed post pandemic. So I believe we've seen more severe revisions in a lot of data.
(23:41):
So I think back to the first quarter of 2023, GDP release, the first number came in at 1.1% that was later revised to 2.2%. That's a pretty big jump. So to not get the best and most accurate data out of the gate. Again, I think part of that is due to just the world being a little bit different now and all of us scrambling to figure out in exactly which ways it's different and exactly which ways we're getting back more to the historic norm. The other really hard thing for someone like me, a business cycle economist, I study the business cycle. So anytime we have a change in regime that we don't follow the same kind of peaks and valleys, the same ebbs and flows that we've correlated to historically, we'll just need more time and more distance from that event to get better correlations, more kind of compelling relationships built up.
Gary Siegel (24:39):
So Chair Powell yesterday that rates he believes rates are still restrictive and restrictive enough to get inflation down to 2%. My question is, has the full impact of the 500 basis points of hikes worked through the economy yet?
Lauren Saidel-Baker (24:58):
No, it absolutely has not. And Powell himself even said that rates are appropriate, they just need more time to work now. It would take a very long time for the full effect of those rates to be felt longer than we would ever expect to see the Fed pause their rate moves. By that I mean something like a mortgage in the United States. I think we forget just how unusual we are in our mortgage product. Nowhere else in the world is there a product for a 30-year fixed-rate mortgage that just simply doesn't exist. There's much more frequent resets even in Canada. They're a great proxy, so similar to us in so many ways, but their mortgage product resets on an average every five years. So their average consumer feels the impact of these rate hikes much sooner versus our average homeowner. If you refinanced back in 2022, well it's going to be a very long time before you feel that affordability hit of higher interest rates up, higher mortgage rates unless you need to move for some reason.
(26:05):
So the restrictive policy, it will always trickle through more and more. Some markets will feel it much quicker, others will take much more time for that whole reset to be felt. And Powell again seem to think this is appropriate, just needs a little bit more time to work. He's talking more in matters of months and quarters than years clearly, but the longer we see this pause at higher rates, given that he signaled the next move will be down, not up the longer that restrictive kind of wet blanket, that depressive effect will affect the more interest rate sensitive markets.
Gary Siegel (26:46):
Well, since you mentioned mortgage rates, Lauren, we had a question from the audience that I'll throw in here. So one of our listeners wants to know if this is a good time to buy a house and if not when would be
Lauren Saidel-Baker (27:02):
Okay. So the best time to buy a house to be perfectly honest, is you first get in your time machine and go back two or three years, prices were lower rates, you could lock in much lower again for that 30 year term. If you don't happen to have a time machine handy, then yes, I would say this is still a good time to buy, if that makes sense. For you personally, I don't know your life, I don't know your portfolio, your situation, so please talk to a financial advisor and not some face you're seeing on your computer screen. But if you are looking to make that move, many markets have seen prices correct a bit from that. I call it the frenzied era of Covid when everyone suddenly could work from home and they could move and we saw certain markets absolutely explode. I know you've all heard the headlines of houses selling the day they're listed selling for cash, selling for however much silver asking. We've cooled off a bit from that. So prices have come down, mortgage rates are higher than they were. There's no getting around that and that has a actually a much stronger impact on your monthly mortgage payment than the Albright price of the home does. So I think around year end is when I personally would expect to see the lowest interest rate point of this cycle. Maybe it's early 2025, but some time around that year end timeframe. But I don't expect mortgage rates to be so much lower than they are today that if you find the house you want, if it makes sense, otherwise that it would be worth waiting. You might get again 50, 75 basis points. That's good. But there are just so many other factors happening and we have seen a pause in rates in mortgage rates that I think they've even come down a bit. I was looking at the 30 year and I don't have the number in front of me, but if that's what makes sense to you, don't wait for rates to get back to where they had been in 2021 and 2022. You'll be waiting a very, very long time,
Gary Siegel (29:07):
Even if it's three cuts are still probably hundred basis points higher than they were.
Lauren Saidel-Baker (29:14):
Yes, yes.
Gary Siegel (29:17):
So the yield curve has been inverted for more than a year, which many economists suggest signals a recession. Yet we haven't had a recession and we're not even really seriously talked about a recession. So why does the economy continue to surprise forecasters and defy the doomsayers,
Lauren Saidel-Baker (29:40):
The yields, curve inversion. It's one of the most, I think, fun ventures of what's coming. I love that predictive power. However, this is not the first time that the yield curve has inverted that we have avoided a recession. There is a higher probability, I think I calculated when the yield curve burst and converted what last two Octobers ago, it was about an 88% likelihood of a recession to follow. Clearly something different is happening this time and again, I know how that sounds. This time is different, but to me it's all down to the labor market. It's all down to the consumer. Because we have such an imbalance in the job market, we have many more job openings than we have job seekers, many more folks looking to hire than to fill these jobs. We as consumers have seen our incomes rise even on a real basis.
(30:33):
So nominal income rising at a quicker case than inflation, that means our purchasing power is still improving. And GDP, that ultimate measure of our economy is about two thirds based on consumer spending. So we've seen this in past cycles. The one that comes to mind for me is the 20 15 16 commodity price cycle when we saw the industrial economy contract, but consumers essentially spent their way out of a GDP recession. Again, manufacturing activities, contracting industrial activities, roughly flat right now. So it's the consumer that's treading water the most, and if you're just following that headline GDP reading, it really is the consumer that tight labor market, that amount of money and again, echoes of the stimulus that we have to thank for spending our way through this cycle.
Gary Siegel (31:23):
We have
Lauren Saidel-Baker (31:24):
Actually, and actually if I can add just one more thing to that, I would be remiss not to mention we in the US are also in a unique position that we are still benefiting from a lot of onshoring, a lot of foreign direct investment coming to our shores. So this is a good place to do business. Again, I know not all of those markets, even with the foreign direct investment, are above the zero line, but it is helping. Its mitigating downside in some markets and in others, electronic semiconductors for example. It's causing a lot of opportunity.
Gary Siegel (31:56):
Thanks. We're getting a lot of questions from the audience, so I'm going to switch over to them for a while. First question, is it still a good time to buy munis? I'll answer that one. It's always a good time to buy munis.
Lauren Saidel-Baker (32:11):
Absolutely. No, go ahead.
(32:14):
No, I agree. Again, it depends on your portfolio. It depends on exactly which municipality. That's where you will see a lot of variation. I've done some work on just population flows across the us. I would advise you to start there. I'm very surprised at some of the markets that have been hot for a while that are remaining hot that are just a really good place to be. It's where people want to be. So it's causing a lot of growth in those localities. If you're able to find those real opportunities, then yes, I would say munis are never too bad of a place to be.
Gary Siegel (32:51):
The next question is Chair Powell mentioned that recent inflation data came in higher than expected. Are the fed's expectations based on some modeling or analytics, or are they completely subjective?
Lauren Saidel-Baker (33:08):
Oh goodness, I took that statement as his comparison to what the market had expected. I'll have to go back and read it again and be sure I understood 'em correctly there. But yes, the Fed, certainly most of those individuals have been doing this for quite some time. They have a very good read on the market. So they are incorporating many different fundamental aspects into their view of the economy. There's no rule, right? There's no just algorithm that they're using. It is like, I like to say, more of an art than a science.
Gary Siegel (33:49):
So the next question is, is it a good time to buy tips?
Lauren Saidel-Baker (33:56):
Good times by tips? I would say in the environment of interest rate cuts, but a higher than At this point, inflation has been higher than expected. It would just depend on your personal view. I am not sure I would be overweight tips right now personally based on my read of where inflation is trending. But I will say the remainder of this decade, there are a lot of fundamental forces for higher inflation than we have seen. So I think a good time to buy tips, it depends on your timeframe. I'm not sure I would be immediately moving on tips, but for the rest of the 2020s, our demographic profile is such that I would expect largely higher inflation. Again, keep in mind almost any normal period of historic inflation would be higher than the past decade that I was talking about where we couldn't get into that 2% range. So look at your timeframe and that could be a very valid portfolio position.
Gary Siegel (35:02):
Next question from the audience, what do you see in the forecast for Reg D security holders? Is there a real need for private equity holders in the market? At the moment,
Lauren Saidel-Baker (35:14):
That is not my area of expertise, so I might defer that question.
Gary Siegel (35:20):
Okay, fair enough. Given the historically high consumer credit debt, what is your opinion on the effects of the Fed decision to have on consumer spending and credit? We went into this a little bit, but
Lauren Saidel-Baker (35:36):
I would add one caveat that yes, consumer debt is at a record high. I know I've read some just absolutely terrifying headlines recently about how high credit card debt is on a historic basis. Keep in mind if you're just looking at those dollar value totals, credit card debt is almost always at a record high because we have positive population growth and we have inflation. So there are more account holders that are typically a higher dollar value each. So what I prefer to look at is consumer debt on a really a percentage of income. If we look at that both on total consumer debt, it's running just above a hundred percent of average household income. Again, that includes things like mortgages. So that's actually quite a healthy level that's significantly lower than we saw our consumer in 2006. For example, credit card debt is about 14, I want to say.
(36:32):
I'd have to get the exact numbers, but 14% of household income, which I know it sounds a bit high, but on a historic basis, that's actually very healthy. We've seen credit card debt rise from the post pandemic low when again, a lot of folks got that stimulus check. They paid down that very high interest rate credit card debt first. Now we're seeing that line tend to creep up where we're certainly getting, like I like to say, we're slipping back into the old habits, but the level of credit card debt compared to incomes that is in the same ballpark as we were immediately pre pandemic, that was not an unhealthy time. That was actually a relatively stable time for consumer finances.
Gary Siegel (37:16):
Lauren, the next question is how will the large infrastructure bills affect this business cycle, if any, and which industries, locations and when will benefits be most felt?
Lauren Saidel-Baker (37:30):
I think many of the benefits have already been felt, so I wish I could give you just this rainbow on the horizon, but a lot of the infrastructure, the IRA, that infrastructure spending bill, many of those funds have already been, if not fully dispersed, at least kind of divided up. So I've seen a lot of advantage here in again, general infrastructure of the electrical sector has benefited a lot. Water, sewer, that's again very regional, very localized. If you're in that type of construction that has supported, I mean we've run the numbers and pulled the government component, the government support out of GDP. It has until very recently, until this most recent quarter been one of the outperformers and surprising to the upside one Q numbers came in and government was a bit flat or a bit slower in growth. So we're not seeing quite such a lift here anymore, and I would expect that to decrease going forward. But I believe electrical is where I've seen and just general construction, most of that benefit come through some of those net effects still to trickle down across industries.
Gary Siegel (38:51):
Someone's asking, do you see supply construction costs coming down over the next 12 months and about how much in terms of percentage?
Lauren Saidel-Baker (39:02):
So overall construction input crisis, we have been seeing a lot of raw materials decline and trend. At least more recently, there's been a rebound in a lot of non-ferrous metals. So copper prices are one that I follow very closely and we're seeing a spike there. I think demand globally, especially from Asia, has come back a bit sooner maybe than many expected. So the balance of supply pull on those prices is causing a bit of inflation. Again, that's a pretty nascent trend. I want to watch and be sure it is consistent that this isn't just a blip in the most recent month of data, but it does seem to be an upward pressure going forward. That said, nowhere near the rates of change that we've seen in past years. So I think the Ukraine war timeframe was a good peak that we will not reach again, but seeing many construction input costs, trend, I'll call 'em generally sideways, maybe sideways with an upward bias. Others like copper, a little bit more overtly positive, but where you're really seeing the higher rates are still in wages. So any construction inputs that have that wage basis to cost, that's where you'll see some stickiness. Construction wages, still mid single digit range. I don't have the number in front of me right now, but it just depends if you're looking at more of a raw material input versus a labor input.
Gary Siegel (40:32):
And the last question I'm going to take from the audience tax season just concluded, do we know how many households have passed income tax and current income taxes do, and is there a trend that economists follow
Lauren Saidel-Baker (40:50):
That would be an interesting trend to follow? It's not one that I follow personally, so I would have to do some research there. Thanks for the question though.
Gary Siegel (40:59):
So Lauren, what are the biggest risks to the economy?
Lauren Saidel-Baker (41:04):
The biggest risks today are the ones that we don't see coming. I do believe the fed is a risk. I think the risk of a hike has been taken off the table. That would've been a significant downside risk, but the risk that they cut sooner, maybe in June, that could be a good bit of upside of stimulative support to the economy. More broadly though of the known unknowns, I would say I'm watching the supply chain very closely. We've seen global geopolitical tensions heating up. Again, if the scope and scale of those tensions expands, that's where we could start to see supply chain styles that would of course have an inflation effect. It would also have just delays as we saw back during the pandemic. So any businesses, I would really encourage to watch your supply chain, know where those risk factors are and have plans: B, C, D, maybe even a couple more letters.
Gary Siegel (42:00):
Actually, we got another question from the audience that I'll go to. Sure. If a rate cut happens in September, there will be a massive amount of refinances homeowners looking to sell to move up or downsize more buyers looking to own. What do you think would be the impact then? Will they hike rates again?
Lauren Saidel-Baker (42:22):
Oh no, they will not hike rates again if there is that massive impact. I think again, if we get a cut in September, majority likelihood, that's 25 basis points given the amount of closing costs and other fees associated. I don't think too many households are refinancing their mortgage for a 25 basis point benefit. So I don't think there would be a huge influx once we get in even 50, even 75 basis points. I don't think that's going to cause a rush to this end result. But eventually we could see some households who have been facing the mortgage lock that is, I bought my house, say in 2021, I have a three 4% mortgage. If I sold now I'd have to buy my new house with a 7% mortgage. That's a huge, huge hit to my monthly payment. So we're seeing a lot more folks stay put.
(43:16):
I think before we see refinances, we'd start to see those folks moving. Yes, that would have clearly the same impact monetarily as refinances. Those are new loans at that new rate. However, that's going to have a very stimulative effect on housing construction. Anytime the number of existing home sales rises, that really stimulates a lot of new construction demand. So net benefits in that sense from the construction side of things. But again, is the average consumer that aware, are they doing those calculations for their own affordability with a 50 basis point change? I'm really not sure they are. So I do not see these cuts as anything that would cause that tidal wave that the Fed would need to reign back in.
Gary Siegel (44:04):
We're running short on time, Lauren. So final question. What questions are you getting from clients? What are they worried about?
Lauren Saidel-Baker (44:13):
Most of my clients, they're really worried about consumer demand. I think there still is a little lack of alignment from sentiment to real outcomes. As an economist, that makes sense to me. We do not see consumer sentiment trend very well with real consumer outcomes. Business leaders, I'll trust a CEO sentiment survey. I will not trust a consumer survey because consumers tell us one thing on the survey. They turn around, they do the exact opposite thing. So I think the headlines are really having this chilling effect on businesses and business leaders are worried. I don't think that worry is well founded. And again, we're in an election year, so many of these headlines are going to be pushing either a political party or a political point of view, and I just see a lot more nervousness out there. I think that's very normal for this point of the election cycle and the economic cycle, but I don't think all of that fear is very well founded.
Gary Siegel (45:16):
Well, that concludes our event. I'd like to thank my guest, Lauren Saidel-Baker, an economist with ITR Economics, and I'd like to thank everyone who tuned in today. Have a good afternoon everyone.
