With The First Quarter Nearly Complete The Outlook is Mixed

by Joe Higgins

March has been a remarkable month; we had the Federal Reserve raise interest rates, the housing market is still in chaos, and foreclosures spiked in January. The consumer price index for February rose 7.9%, the war in Ukraine escalated, and the Dow Jones moved both in and out of correction territory. As Jim Cramer said, “it’s complicated.”

Inflation
The Consumer Price Index rose to 7.9% in February, the highest level since the early ’80s with no sign of slowing down. It is alarming that it has taken so long for Jerome Powell and his Fed Presidents to react; they raised interest rates 25 basis points last week. This is a rate increase that should have happened last summer.

Economists exclude food and energy from the CPI due to their volatility, resulting in “core inflation,” which was up 6.4%. While this increase was in line with expectations, it was the highest we have seen inflation in 40 years.
There was some good news in the February report for those looking to buy a used car; it finally looks like the cost of used automobiles has topped out. While it is positive that prices for used vehicles slowed down by 0.2% last month, they are still up 40% over the previous year. Automobiles have had the most significant impact on the current inflationary cycle, so any movement that is either flat or down is good news.

The continuing catastrophe in Ukraine will have an oversized effect on gas prices as Russia is the third leading oil producer globally. No matter where you live in the U.S., you have experienced a 50% increase in what you are paying at the pump. It appears now that this war will continue much longer than most experts believed.

Housing
I had a lot of questions from AVB members about housing as l walked around the show floor last week. My advice is simple: if you own a house, keep the house. Spiking home prices resulted from a supply and demand cycle that is upside down. Many economists thought that the supply curve would rise once the pandemic abated, but unfortunately, it did not. The housing inventory tracked by Zillow began falling in September of 2021 and has not improved since.

This week, Redfin reported that the U.S. housing supply dropped below 750,000 units last month, down over 20% from a year ago. For home buyers, the bad news is that inventory has declined every month in 2022, and prices keep going up.

While I think the supply situation will worsen in the short term, with the spike in the 30-year mortgage rates to 4.95% last week, the long-term outlook has changed. Remember that in December of last year, the rate was 3.1%. This recent rise in rates has created desperation among house hunters as consumers try to buy homes before the prices and interest rates put them out of reach.

The consensus among economists is that as interest rates spike throughout the year, houses will become less affordable, and inventories will begin to rise. For homeowners, don’t worry, with the severe shortage the U.S. is experiencing, I believe that the prices of houses will continue to grow for two more years. High-interest rates will slow the rapid trajectory, but in no way does it indicate a crash.

Bottom Line
For the balance of 2022, the U.S. economy will continue to see extraordinary job growth, maybe the best in 60 years, as the unemployment rate should drop to 3.3% by year-end.

The Fed believes they will get a handle on this cycle of inflation in the second and third quarters. Powell said last week that inflation would be at 3.6% by year-end. If that happens, it will ease the burden that consumers are feeling today.

The stock market should see a rebound as corporate profits will be the best in years.

The pandemic seems to be under control for now, which will be a positive factor in 2022. The new variant, BA.2, is circulating in the population currently; we are waiting for a report on its impact.

And lastly, most economists are predicting GDP growth of 2% to 3% this year.

However, here are some concerning signs in our economic picture. America has ended stimulus payments, and saving accounts are rapidly falling. Inflation is running at nearly 8%, and if the Fed acts too aggressively, it could cause a recession. The supply chains are still in disarray and showing minor signs of improvement, and the most significant uncertainty in the world today is the crisis in Ukraine. It is not just a war, it is a humanitarian disaster; if it moves beyond the borders and into a NATO country, it is anybody’s guess where this entire episode takes us.