The Consumer Price Index: What Have We Learned in the Last Two Months of the Consumer Retail Activity in the U.S.?

It has been a tough year for American consumers. Inflation everywhere. Rapidly rising interest rates. The housing market is starting to cool off. That begs a question with the holidays right around the corner: Are shoppers finally tapped out?

There is a LOT of data coming out in the next few days that will give important clues about the health of the economy. Beyond a slew of retail earnings reports, the government will report retail sales figures for October on Wednesday. Economists are forecasting a monthly jump of 0.9%. Sales were unchanged in September, a possible sign that inflation was taking its toll on consumers.

But the most recent Consumer Price Index figures for October provided some relief for shoppers…and Wall Street. The pace of year-over-year price increases slowed more than expected, sparking a massive stock market rally Thursday.

Several major retailers are also on tap to report their results for the latest quarter…and potentially give outlooks about sales for the next few months. TJ Maxx, Macy’s and Gap are all on the earnings calendar this week.

Consumer Expectations for the Next Year: The Effect of Increasing Home Price and Mortgage Rates on Retail Prices and Interest Rates and Home Improvement

Credit card rates have hit all-time highs as a result of the Fed’s rate hikes. Many consumers will be paying more for gifts this year with Visas and Mastercards. It is less than two weeks away from Black Friday.

Consumer spending rose 1.4% during the third quarter, according to the government’s most recent gross domestic product (GDP) report. That is still growth but it is slowing down compared to the first and second quarters.

Lowering producer prices have allowed retailers to pass on rising costs to consumers and keep their markups over cost.

The retail fund that has Victoria’s Secret, and is down 25% this year, is in the S&P retail index.

Retailers may continue to struggle in the future according to some experts. Consumers may eventually need to watch their wallets more closely as worries about an imminent economic downturn grow.

We are cautious because we believe that the earnings estimates are a little too high. On a recent webcast, Matt Quinlan, portfolio manager at Franklin Templeton, said that the numbers needed to come down because of the slowing growth.

Quinlan said that there were parts of the sector where earnings estimates needed to be brought down a little bit more.

While interest rates have been the catalyst for the housing market slowdown, the jobs market will play a bigger role in determining how low prices ultimately plunge.

Home sales have been decreasing over the last few months because of high home prices for first-time buyers and the spike in rates. Building permits and housing starts have been less than a year ago, but they have been little changed on a month to month basis.

Sales are falling in other areas as banks take a more cautious approach to lending and people delay purchases in the face of higher borrowing costs.

Investors seem nervous that rising prices will eventually hurt Home Depot and Lowe’s as well. Shares of Home Depot have fallen nearly 25% this year while Lowe’s stock is down about 20%.

Both companies may benefit from a “nesting” trend, where current homeowners decide to spend more on home improvement because they want to stay in their house. If there aren’t many new buyers looking to fix up houses, the retailers may get less of a lift.

The number of transactions dropped from the previous year. But that drop was offset by rising prices. Home depot stated that customers spend an average of $90 when shopping, up from a year ago.

What have we learned in 2021? The impact of the 2008 financial crisis on real estate and home prices in the United States, Japan, and Europe

Monday: President Biden and China’s leader Xi meet at G20; China retail sales; Japan GDP, Eurozone industrial production; earnings from Tyson Foods

            (TSN) and Oatly

Wednesday: US existing home sales; Germany consumer confidence; earnings from Rite Aid

            (RAD), Carnival

            (CCL), Cintas

            (CTAS), Toro

            (TTC) and Micron

Editor’s Note: Erik Lundh is a principal economist at The Conference Board. The opinions expressed in this commentary are his own. Read more opinion at CNN.

Additionally, in the years that followed the 2008 financial crisis, new regulations were introduced. Banks are now required to be better capitalized, lending standards are more rigorous, and most mortgages are fixed-rate. This is the most important thing for the financial system from a housing downturn.

Mortgage rates have ticked down recently, but are still up dramatically from a year ago thanks to the surge in long-term bond yields as the Federal Reserve hiked interest rates.

Grant’s boss at the real estate agency Barfoot & Thompson said that houses were flying out the door. There were moments when agents were gobsmacked at the prices being achieved, he said.

In one case, a house sold for $1 million New Zealand dollars ($610,000), above the asking price in an auction that lasted eight minutes. (Most homes in New Zealand are sold at auction.)

In May of 2021, thousands of buyers competed for the sale and drove prices higher. Since then, Barfoot & Thompson has reduced its clearance rate at auction, prolonging sales times and sending prices lower.

The UK house price crisis is approaching its peak: mortgage rates and forced sales have fallen since 2009, according to the UBS Global Real Estate Bubble Index

The dramatic change is due to rising interest rates. Rate levels not seen for a decade have been taken by the central banks as part of a war against inflation.

In November, US mortgage rates dropped from their highest point in 7 years, but they still cost more than a year ago. Mortgage rates have risen in the European Union and the United Kingdom, making it more difficult for people to buy.

One key factor determining how low prices go? The unemployment rate is. A sharp increase in joblessness could lead to forced sales and foreclosures, “where steep discounts are common,” according to Slater.

Most markets are seeing falling prices as a result of the data lags. “We’re in the early period in quite a clear downturn now and the only real question is how steep and how long it’s going to be.”

According to official figures, the price of new homes in China fell at the fastest pace in over seven years in October, reflecting a deep property market slump that is weighing heavily on the country’s economy. Home sales have fallen this year according to a research firm.

“A skilled service sector worker can afford roughly one-third less housing space than before the pandemic,” according to the UBS Global Real Estate Bubble Index.

Since 2009, more than 4 million first-time buyers have been issued a mortgage in Britain. Tom Bill, head of UK residential research at broker Knight Frank said that there is a lot of people who don’t like what their monthly outgoings are like.

In countries with a larger share of variable rate mortgages, such as Sweden and Australia, the immediate shock could increase the risk of forced sales which can lead to prices being lowered faster.

But even in places where a large proportion of mortgages are fixed, such as New Zealand and the United Kingdom, the average maturity of these mortgages is quite short.

Source: https://www.cnn.com/2022/11/23/business/global-house-price-slump/index.html

Implications of the Global Housing and Job Markets for the Future of the World’s Economy and a Strongly-Forming Credit Market

A report written last month stated that the debt will be subject to higher rates over the next year or so.

“History shows that if labor markets can remain strong, then the chances of a more benign correction are higher,” according to Innes McFee, chief global economist at Oxford Economics.

Employment levels have been recovered in a number of advanced economies. But there are early signs that labor markets are starting to cool as weak economic growth hits demand for workers.

In the third quarter, after the economy rebounded, the number of hours worked was 1.5% down on a year ago and there were 40 million unfilled full-time jobs.

The outlook for the labour market has deteriorated in recent months and job vacancies will decline and growth in employment will diminish in the final quarter of the year.

The US unemployment rate increased to 3.7% in October. Job vacancies in the United Kingdom have fallen to their lowest level in a year. The UK Office for Budget Responsibility expects unemployment to rise by 505,000 to a peak of 1.7 million — an unemployment rate of 4.9% -— in the third quarter of 2024.

Many parts of the economy will suffer if activity is slowed in the housing market, which has links to lawyers, banks, furniture stores and more.

In a worst-case scenario for the world’s economy, it is predicted that the global GDP will expand by just 3% in three years, which is less than the 1.5% expected by Oxford Economics.

The Chinese housing market is in a downturn and is an additional negative factor compared to the global financial crisis. “So rather than offsetting the impact on world output of a global housing downturn, as was the case after the GFC, the Chinese housing sector is contributing to the slump.”

Still, there are some promising signs that the worst could soon be over. Last week saw the release of earnings from one of the largest homebuilders in the US. The number of homes the company expects to deliver next year was a tad higher than analysts estimate, and revenue was higher than expected.

Ken Leon of CFRA Research said that investors may be looking ahead to the next two decades, possibly crossing the valley from a recession to recovery.

It is important to take the recent slide in prices in context, according to data from an investment firm that buys homes to rent out.

Wages are growing, and the job market is still strong. What’s more, many consumers still have decent levels of excess savings thanks to pandemic era government stimulus.

They say that even though housing sales may be weak due to high home prices and still elevated mortgage rates, the good news is that most existing homeowners are still paying their mortgage on time.

Again, that’s a stark contrast from 2008 when many people with subprime loans or borrowers with poor credit histories were unable to keep up with their mortgage payments.

The General Mills Pain Story: Earnings from a Superhigh-Energy Corporate CFO? FactSet, Inc., and the S&P 500

Cereal giant General Mills

            (GIS) will release earnings on Tuesday. Analysts are expecting a slight increase in both sales and profit. Consumers may be growing increasingly wary about inflation and the broader economy, but they’re still eating their Wheaties. General Mills shares have increased in value by nearly 30% this year.

The outlook for sneaker king Nike, used car retailer CarMax and memory chip maker Micron is not as bullish as some analysts think.

The fourth-quarter earnings of S&P 500 companies are expected to decline from a year ago, according to data from FactSet. Analysts have been busy cutting their forecasts too. The FactSet senior earnings analyst said in his report that fourth quarter profits would rise 3.7% as recently as September 30.

The likelihood of a recession is pretty high, says the Chief Economist and macro strategist at Dreyfus & Mellon,Vincent Reinhart. “That will have a knock-on effect for corporate earnings. Higher rates and weaker earnings suggest more pain for stocks.”

Personal income and spending, US PCE inflation, new home sales, and US durable goods orders were all reported on Friday.