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Bad Economic Data are Coming
And you should be thrilled about it
You’re going to see some “bad” economic data over the next few weeks and months. It started on Tuesday when we learned that just 591,000 new homes were sold in April (seasonally adjusted, annualized basis), 150,000 fewer than were expected and 16.6% fewer than in March. To put this into context, we sold fewer new homes in April 2022 than during any month in 2019.
In other words, the nation’s housing market is cooling fast and will increasingly be a drag on the economy. On what planet could that be considered good news? One populated by masochists or economists (if there’s a difference between the two).
Look, we know an economic slowdown—or worse—is coming. Might as well get it over with and rip off the band-aid. The Federal Reserve is purposefully slowing economic growth to choke off inflation, and they’ll choke off expansion while they’re at it. That deflating process begins with interest rate sensitive segments like, you guessed it, housing. We were addicted to low interest rates and massive stimulus, and now we’re about to go through withdrawal. The sweating and cramping has begun. The sooner it starts, the sooner it ends.
Zack, my coauthor of this newsletter, likes anatomical examples. Here’s his version. Think of the Fed raising interest rates as a chemotherapy drug. It’s meant to eradicate inflation—which is extraordinarily damaging to the economy—but it’s not a precise tool, so the damage is widespread, and that will lead to some economic suffering in the short term. Thanks, Zack. Very uplifting.
Back to housing. When the Fed started raising interest rates in March, the average 30-year fixed rate mortgage was at about 3.8%. As of May 19, it’s up to about 5.3%. For an average priced home with a 20% down payment, that represents a 19% increase in the monthly payment (or about $4,900 per year). Over the life of the 30-year mortgage, that home now costs about $147,000 more.
Here’s some more things you’re addicted to: crab cakes, the Baltimore Ravens, cars, Megan Thee Stallion and/or Harry Styles, and 2% inflation. Okay, those are my addictions, but let’s focus on the final item. 2% inflation is a lovely thing for financial market performance, economic growth, and policy stability. We want to get back there, but that’s going to take some sacrifice as the Fed re-anchors inflation expectations to that target. Basically, the Fed does what it does by moving interest rates around. That’s what’s in its toolkit, so housing got hit first. Consumer spending on goods already appears to be softening (see Walmart, Target).
When interest rates rise, the quantity demanded of homes goes down. That also drags down sales prices. But let’s keep things in perspective. The average price of a new home is up 48% since February 2020 (they increased just 35% over the preceding decade).
Feel free to bemoan the fact that the Fed waited too long to withdraw monetary accommodation and now has to go into monetary tightening overdrive, but such caterwauling won’t do you any good, and it’s not a good look in any case.
This same dynamic will impact other segments, whether mortgage banking (mortgage applications are way down), auto loans, home remodeling, commercial building, fulfillment center construction, etc. The weakness in interest-rate sensitive sectors will spread through the balance of the economy as confidence dips and layoffs increase. This process is just now beginning, and since it’s inevitable, we might as well get to it and through it.
So don’t panic when the bad data arrive. You know they’re coming, and there’s some good news in bad news if you adopt the right perspective. For instance, employers complain bitterly about the lack of workers available to hire, but some demand destruction will ease labor constraints and (eventually) lead to slower wage increases. Weaker economic growth will also take some pressure off overwhelmed supply chains and allow oil, natural gas, and petroleum prices to come back to earth during the months ahead.
In short, don’t panic (unless you had your life savings in crypto).
Week in Review tomorrow will feature residential market data, durable goods orders, inflation, and more. If you’re not a paid subscriber and want more than a free preview, click the button below.