This is the weirdest "recession" I can remember. Business leaders are constantly talking about how challenging the economic environment is and the need for layoffs etc. Meanwhile most of the underlying indicators are actually positive. Growth is strong, employment is strong. Anecdotally we're still having trouble finding good candidates. It's almost like there is a class of business leaders who are just trying to wish a recession into existence, and I can't figure out why other than maybe they think it would allow them to reestablish power in the labor market.
There never was a real recession - it's an artifact of year-over-year numbers that were so skewed from pandemic effects.
Pent-up consumer demand shifted much activity from 2020 into 2021. This is the source of all the apparent weirdness. Every yearly number in 2021 looked great thanks to comparing an artificially high number to an artificially low 2020 baseline. Then every yearly number from 2022 looks terrible, because it's comparing to 2021's number that was artificially high from time-shifted demand.
Remember the "great resignation"? That was an illusion - it was just normal pent-up demand for job switching that didn't happen during the pandemic. The inflation of 2022 is also largely an illusion - it's really just that a few percentage points of what should have been normal inflation in 2020 and first-half 2021 was time-shifted into 2022. (The inflation is real, but the timing is an illusion - it's not really 8% per year, it's a fairly normal 12% over three years.)
If you believe any year-over-year number from 2021 or 2022, you're falling for headline click-bait without considering the underlying irregularities.
> The inflation of 2022 is also largely an illusion - it's really just that a few percentage points of what should have been normal inflation in 2020 and first-half 2021 was time-shifted into 2022.
Food prices are up 48% at the nations second largest grocery chain.
Rent prices are now through the roof, 20-30% year over year increases are common in major cities.
Things are more expensive, full stop, and it isn't just "an extra year" more expensive.
That's exactly what I'm talking about. Don't look at year-over-year numbers, you're falling for the illusion. A rent jump of 20% for 2022 is because rents were artificially suppressed in 2020 and 2021.
The right comparison is to look at 2022 compared to 2019 and see if it looks out of line for a three-year period. A few things are, but most aren't.
Also, citing one grocery chain is a cherry-picked outlier. Cite them all if you want a real number and not an artificial illusion.
This line of thought doesn't stand up to scrutiny when you look at real data. According to the USDA ERS food price outlook reports @ https://www.ers.usda.gov/data-products/food-price-outlook/ the 20 year average percent change year on year is something like 2.0% - 2.5%. The change from sept. 2021 to sept 2022 has been 11.2%. The forecasted change in 2022 is approximately 10%. The foretasted change in 2023 is approximately 3.5%. This is dramatically more than just delayed increases from a strange year.
I think that is a good point, and one of the reasons this inflationary period seems to be so widely misunderstood and contentious. We just spent over 2 years dealing with a pandemic, there will be side effects caused by the pandemic as well as the solutions to ease its impact.
In regard to car prices, I would say that the prices themselves contribute to the inflation statistics, but they are not caused by inflationary pressure.
That is _not_ exactly what you are talking about: food prices do not normally go up 24% a year. Rent prices do not normally go up 10-15% a year.
If their number is cherry-picked, give a real number yourself. Anecdotally, my grocery bills are easily 30%+ from what they were last year, and the same is true for many people I've asked.
That's still what I'm talking about. Any number you're looking at that's "in a year" is falling victim to the time-shifted demand effects from the pandemic.
Compare 2022 to 2019 and look for the average change over three years. That's the real signal over the temporary noise. There are still some real effects, but it's much smaller than all the one-year-over-year numbers seem to indicate.
This doesn't make sense. How can cost of groceries be up 30% over a three year period be normal. That would leave everyone starving within a decade, and obviously can't be right. Same with the rent increases.
It would not leave everyone starving because salaries go up too, 10% inflation does exist. Argentina deals with 100% yearly inflation and has not blown up yet.
I’m not speaking about your particular scenario but about situations where inflation is actually more than 10% over several years. Salaries always lag, but they don’t remain at 0% increase. The post I’m replying to said that if inflation was 10% a year in food, everyone would starve in 10 years, and it’s simply not true.
If you want to start arguments you can call that opportunistic rent seeking, something to consider in face of 2021 having record corporate profits.
That idea is plausible enough that even some more conservative outlets gave it coverage: https://fortune.com/2022/03/31/us-companies-record-profits-2...
Look at their profits. This is a symptom of greed more than inflation.
Recent research illustrates these inflationary-profit trends, in particular busting the myth of a wage-price spiral driven by increased worker incomes. Over 53% of price increases in the last two years have been driven by profit margin gains
Ask yourself why all of these companies were not greedy in previous years, and how it happened that they all became greedy at approximately the same time. The answer is that this line about greed is political propaganda you’ve been fed. The companies involved were merely responding to market forces as they always do, /for example:
1) Near zero interest rates during the pandemic - technically set by the Fed, but under obvious political pressure to do it from both the former and current administrations.
2) Helicopter money from the government. I’m not just talking about the one time checks that people use as a strawman to attack as an inflation cause. There were student loan pauses, 300/mo per child credit(they tried to make it permanant!), and more. The fact that much of the money actually went to younger or poorer folks, which we celebrate, probably also drove inflation much more than money going to rich people, because the poor and the young are the most likely to immediately spend it. Lots of pandemic loans given to businesses too with little to no oversight too.
3) Supply side constraints due to shutdowns at suppliers overseas.
4) Demand side rebound demand for things people avoided or weren’t allowed during the pandemic.
Much of this is likely attributable to government policy, so I blame our political class.
No company operates in a vacuum. Particularly, companies in commodity based industries, like grocery chains, which average maybe 3-5% gross margins, cannot arbitrarily increase prices without consequences (drop in demand). People will shift their purchasing power elsewhere. Unless, of course, every where else is also increasing prices because of the sheer amount of excess monetary liquidity sloshing around in the economy.
> People will shift their purchasing power elsewhere.
You are neglecting that people may not have a choice.
For people w/o cars, they are limited to whatever grocery stores are within walking distance, or accessible by mass transit.
In my case, my easiest choices are the extremely overpriced organic store, Safeway, or QFC. Once Safeway and QFC merge, I'll be down to basically two local choices, and I live in a major metro.
I know people who have one grocery store around them. There are parts of the country[1] where in a ~15+ mile radius you have a single choice for shopping.
Now throw in people who don't have the time, or ability, to commute, and many grocery stores can charge whatever the heck they want up to the limit of what consumers can afford.
From that thread, yes indeed, the price increase is 76% for 2019 to 2022, but that is (obviously) a completely absurd level of price increases for a 3 year timespan.
And this isn't some unique situation, this is pricing at one of America's largest grocery retailers, a grocery store chain that is the sole grocery store in many communities, and a grocery store chain that is set to soon become much larger.
[1] This isn't unusual, in Washington State if you go outside any major city, you find that smaller cities/towns basically have one Safeway for the surrounding area and that is it. Visiting friends on the east coast, I noticed a similar situation, a cluster of small towns and a single grocery store (Kroger owned).
May be greed, or may be because of regulatory capture. I.e. it is incredibly expensive to start a company due to all the requirements that the companies that do exist can continue to raise prices with no competition.
> Look at their profits. This is a symptom of greed more than inflation.
Inflation is just a rise in prices. Literally just defined as a rise in prices. It doesn't matter if the prices accurately reflect rising costs of doing business or wind up in profits.
Inflation is more about the ability of consumers to continue to pay higher prices and the inelastic demand for whatever the good is. The market is fundamentally an auction and prices get bid up until elastic demand starts to appear.
The data just does not seem to line up with your assessment. Labor force participation rate is down 1% since pre-pandemic. It's not earth shattering, but it is quite a drop.
Also inflation is hardly a few percentage points of catch up. Look at the chart below and tell me you still believe that.
>overall LFPR can be almost entirely attributed to the drop in immigration during the pandemic.
I just heard a report this morning that there was a very real labor participation rate drop among women, particularly with working mothers. How does your immigration hypothesis align with that? Is it that child care work is primarily driven by immigrant workers? Or is it that other groups more than make up for that in the general statistic?
That's roughly double the Fed target rate — annualized 3.8%, which would be the highest any year save 2008, which was itself an anomaly due to the GFC. The last time inflation exceeded 3.5%, save 2008, was in 1991. So 12% in three years is in no sense normal (for the USA).
The inflation is real, and it's serious. It's actually produced a reduction in real wages [1] despite much excitement about workers' bargaining power. Progressives complaining about the Fed (which is finally reacting reasonably) seem to be missing that preventing a wage–price spiral is not the same thing as union-busting.
I really hope you are right but the massive debt taken on by all the western countries has me worried about their ability to actually respond to a hard recession if it hits this winter.
The stock market, interest rates, and advertising spending are leading indicators, while unemployment is a lagging indicator.
Business leaders know the financial structure of their company, and many of them know that they can't survive at 2% rates, let alone 5 or 10% rates. The gloom from business leaders is forward-looking. They're fine for now, while consumer spending holds up and they can run on old debt. But as soon as they need to roll over their debt, everything collapses. They'd need to increase revenues by 2-5x, and they can't.
My prediction is that we drive off a cliff. CEOs know their companies can't survive high rates, so they manage as if a Fed pivot is coming. If the expected Fed pivot happens, they bank windfall profits and get huge stock bonuses. If it doesn't, they go bankrupt, everybody is out of work, and it is not their problem anymore.
> But as soon as they need to roll over their debt, everything collapses. They'd need to increase revenues by 2-5x, and they can't.
That would imply that debt-servicing is their dominant cost. That seems wrong (e.g., a grocery store presumably spends a large fraction of its revenue on purchasing groceries from wholesalers).
The companies that are going to hit hardest are going to be in stuff like commercial real estate. That's where people have been flipping loans over at 1% interest rates in order to survive, living on the margin. As rates go up their debt service balloons and they'll no longer be able to survive given their vacancy rates.
That'll spill over into losses for the financial sector, possibly a CMBS meltdown and a financial crisis, which will spill over into the real economy.
All the job losses in housing and real estate and the hit to the financial sector will result in unemployed people who are no longer buying stuff so you'll see a contraction in everything consumption related. That'll lead to much lower ad buys, so that'll hit the ad companies. They'll all layoff staff which acts as a positive feedback loop.
Right now mostly we're just seeing companies whose CEOs see this coming down the pike who are laying off some staff early and trying to position better for the recession.
It isn't correct to say that e.g. Google's business is reliant on them flipping over loans cheaply, but they are certainly dependent upon other businesses in the economy being able to flip over loans cheaply.
That isn't quite right. What it implies is that debt service is a significant fraction of their margins, which is a subtle but actually quite significant difference.
If a grocery store makes 1% profit on each item it sells, and its debt service cost is 1% of its revenue (making it roughly "1% of its cost") a doubling of debt service cost wipes their margin to zero.
No! A 1% increase in revenue in this situation does make you profitable again, but only barely, and only with some possibly invalid assumptions.
Say you make $100 in revenue and $1 in profit, and $1 of your $99 in costs is debt service. Your debt service increases to $2, your profit drops to zero.
Now your revenue increases to $101, presumably your debt costs stay fixed (this is not a guarantee - revenue expansion costs money), but your non-debt-service costs scale as well, and they are now 0.98 * $101 + $2 in debt service = $101.98. Congratulations, your profits are positive again, but they are $0.02.
I am eliding here the general difference between fixed costs and variable costs, and so it's probably not true that your costs would scale quite this much with revenue, but it's much closer to the truth than that you'd be back where you started, esp. in a low margin business.
There's a reason margins are what they are in a competitive market. "Your margin is my opportunity," as Lord Bezos famously said. Only companies that have captured their market get to raise prices to cover new costs, and all it does is induce people who want to own that margin to find flaws in the business model. This is how Netflix wrecked Blockbuster, and how Amazon killed off chain bookstores.
Google the term "zombie company"; you'll find a lot of interesting stuff.
Bear in mind HN's view of the business world and profit margins and expenses is heavily skewed by the industry we work in, which remains one of the most profitable in the world across a wide variety of subsectors. The profit margin an incredibly profitable grocery or shipping company might have would be considered a danger flag for a tech company, and I don't just mean the big ones, either. A profit margin of 5% is not uncommon and 10% is doing extremely well for most businesses. It's easy to look at numbers in the millions or billions and think they can take anything because in absolute terms on a single human's scale they've got more money than you can imagine, but it doesn't necessarily take very much by percentage points before the profits of a normal company go "poof".
Debt servicing is a constant thing for businesses to be able to make payroll and acquire inventory for later resale or processing.
Based on your thoughts here I'm going to assume you haven't worked at a small business before. If you have it must have been awesome to work at a place that didn't have to borrow money constantly.
I've worked in small start ups before, but all boot strapped out of pocket / revenue. Wouldn't having to borrow money constantly be a red flag that the business is bad / not profitable?
Interesting, I can see this as lending implies some due diligence into a companies financials. At the same time, at the personal level, I know I can get lines of credit that would be very tough for me to pay back. Is corporate borrowing much more stringent?
Depends. If your income comes in 90 days post invoice, but you pay monthly then borrowing some money to smooth over cash flow makes loads of sense. If you need to buy loads of stuff to sell, it also makes sense. Software businesses are pretty weird in the lack of capital costs.
We can't argue this both ways. You can't argue that business leaders are acting as if the fed will pivot away from the current course when the parent is pointing out that they are all tightening in preparation for more to come.
It's different business leaders. The ones who expect their companies to survive are tightening their belts now, to give themselves the runway to survive. The ones that understand that their companies are dead anyway if borrowing costs skyrocket are spending like they won't skyrocket, because otherwise it doesn't matter. The former group is preparing to lose the latter group as customers.
You see this in the media too - some business leaders (often in tech, or finance) are predicting doom and gloom, while others (like in retail or experiences) are saying that it's business as usual and they haven't seen a downturn yet.
Sure you can. They are expecting the tightening to be short lived. As they said, the companies can survive a few years but if rates stay high longer than that and don't come down it'll be bad.
This seems overly pessimistic. I'm sure a high rate environment isn't ideal for a lot of businesses, but we've had much higher rates in the past and most businesses survived it just fine.
Those businesses were the ones that were either created in that environment, or who survived it long enough. The last time rates were this high, they were this high for decades.
I fear the cliff scenario because a lot of business models now were built on a foundation of crazy-cheap debt. The tide is about to go out. Eventually the business environment will re-adjust to the new cost of money, but the transition will be tough.
Seems like it came down after 2007 and 2000 highs at similar levels. But who knows, maybe US government will leave it high. Maybe they will bring it back down to juice asset prices. Maybe the parameters of the world have changed to not allow that.
Although the Fed can backstop commercial paper in emergencies (and they did so at the beginning of the pandemic), it's extremely unlikely that they start taking on enough to move rates in the medium term (like they did with mortgage backed securities). So this is not a rate that the government controls except very indirectly.
We had a taper tantrum in Jun 2019 - the commercial paper markets almost seized up, and the Fed started dropping rates then, a good 9 months before COVID. That's what business leaders remember. We couldn't service 2.5% rates in 2019 (actually more like 2%, it takes time before companies need to rollover their debt), it seems extremely doubtful that we can service 3.25% now.
What do you mean by crazy cheap debt? If you have a loanable funds model where all money that is not being spent is being saved then the interest rate is 0%.
The fact that people don't save the money they don't spend has more to do with how cash works and how it makes it pointless to save.
You're totally right that business can thrive in a high rate environment, but we have a LOT of them right now whose existence has been sustained due to the low rates, extending all the way down to proper zombie companies. A lot of those will be killed by rate hikes, but that's actually a good thing in the long run.
I would say it's like the panicking homeowners that took variable rate mortgages(business take on a lot of debt to expand) and now their mortgage payments doubled(and also the bank demands extra lump sum payments in addition, because the monthly is only enough to payoff the interest not the principal). Now they need to make x2 of their current salary otherwise they loose the house.
I'm not the OP, but there is an idea in bushiness that a company has to have a percentage return on the equity invested. That rate goes up when interest rates go up. Otherwise you could just sell the equity and buy corporate debt instead.
If too many companies can't survive and start to go bankrupt, the Fed will pivot. If we enter a major recession, high inflation will most likely be over.
Easy enough to see which public companies have this debt, when their debt obligations are due, and what their historical expenses, revenue, and cash on hand are.
Could probably script this and build a report. I'm not going to do this (I'm working hard and can't afford to be nerd sniped), but please share if you build this. After buying your own positions, of course. :)
You are thinking of nominal rates, but you should be looking at the real rate, which is the spread of the interest rate over inflation. They can survive 5-10% rates just fine if inflation is 8%. They don't need to raise revenue 2-5x to make coupon payments, because interest isn't their entire cost structure.
Some can - the ones with pricing power. Inflation hits the economy unevenly. Firms with few competitors can raise prices at will to soak up all the extra money floating around. Firms in highly competitive markets cannot raise prices, because as soon as they do everyone moves to a competitor.
The problem is that the ones with pricing power are generally not the ones with high levels of debt, because if they had pricing power, they wouldn't need debt. They may be customers or suppliers of companies with pricing power, though, which forces the latter group to assume lower revenues in the future because some of their customers may go bankrupt.
This is a very spot on analysis. I was wondering why the stock market keeps closing green, when high interest rates discount future values/cash flow. You'd expect it to close red, but as you mention the markets are hoping for a Fed pivot. It is effectively a soft pivot by the Fed.
When companies start trimming their budgets ads are first on the block. I've been in an advertising adjacent field for over a decade and ad spends always decreased prior and at the start of economic downturns and recovered earlier than other macros. My personal experience currently is that budgets and projects are down quite a bit at the moment (a small uptick currently but some of that is seasonal).
This. As someone who analyzes ad spend as part of their job I cannot imagine a scenario in which we would turn down ad spend prior to a downturn in consumer spending? If we're getting good ROAS we aren't turning off the hose.
To give OP the benefit of the doubt. Maybe what OP means is that Ad Spend is one of the first lagging indicators to show up. Consumer demand weakens, companies turn down ad spend, and then a few months later the reduction in revenue shows up in the quarterly report. So as an indicator it leads earnings reports and share price drops but lags actual consumer spending.
It is weird, they say history does not repeat but it rhymes. What is troubling about this good news about GDP growth is the fed's course of raising interest rates will continue on and interest rates will keep getting higher and higher. This will lead to a housing market that will grind to a halt and expect that whole sector will hemorrhage jobs. In addition growth companies will be hit hard by rates being high as we have seen since early this year. Basically the fed will do anything in its power to stop inflation and I expect the only thing to get it back to the target of 2% is to have interest rates in the low teens. I know that sounds crazy but comparing this to the 70's it took Volker raising rates to 20% to tame the bad inflation of that period[1]. We are not seeing peaks of 11%-13%(like the 70's) but 8%+ is very high and is costing Americans dearly.
Mortgage rates at 7% is pretty much the average mortgage rate going back 70 years or so. We're basically at the average mortgage rate now. The Fed screwed up by keeping rates too low for too long which juiced home prices such that a huge chunk of people who would like to be able to buy a home are priced out of the market.
The problem, though, is that home building needs to continue in order to improve the housing supply problem (caused at least in part by the dearth of home-building during the '08-'12 period) and thus help with affordability. I tend to think that the government needs to step in here and do something to either incentivize home-building and/or at the very least do something to streamline permitting/zoning. Building codes need to be examined to see if there might be innovations that could lead to lower building costs which are currently being precluded. But keeping mortgage rates artificially low isn't the answer, that led to prices getting out of hand.
> But keeping mortgage rates artificially low isn't the answer
I don't know what the solution is for the housing issue, on one hand you have people (like myself) who bought at high prices(and at low interest rates). My house will be a money loser if I try to sell, and this includes the thousands/millions? of people also in my boat(we are essentially trapped in our house and unable to move). On the other hand houses that will need to be built and houses on the market now are not selling, the cost to build a house and interest rates are too high in terms of affordability given current prices of houses. This leads to less mobility for Americans, and for those that are locked in their low rates right now(and bought in the past 7 years or so, and at lower levels pre-pandemic) would be crazy to sell which is another factor driving down supply.
"I don't know what the solution is for the housing issue"
To the extent that there is are "solutions", they all exist in the past now. The best solution is to stop trying to "fix" the market and take the pain now, because the efforts to avoid pain now involve lots of pain later. Unfortunately, it's already "later", and quite a bit later at that, after several previous rounds of "oh crap, we can't have rich people being slightly less rich, better goose the market again!"
> The Fed screwed up by keeping rates too low for too long which juiced home prices such that a huge chunk of people who would like to be able to buy a home are priced out of the market.
I disagree: if Jane first home buyer has an income of $50000, and can only just afford $30000 per year on their mortgage, Jane will bid on a house the maximum she can afford. I agree that over the long term, with everybody acting the same as Jane, then the price of homes is mostly controlled by the interest rates. However interest rates, per se, do not affect the affordability of homes very much.
There are secondary effects that do change things. However the primary market dynamic of bidding as-much-as-you-can-afford means that affordability doesn’t change much. (It also means your population is playing a zero-sum bidding game of how-much-can-we-pay-the-banks, which is bad, especially in New Zealand which doesn’t own most of its banks).
Secondly, the usual answer is to increase housing supply. That would work only if there can be a super-abundance of new supply in a suburb. Think of a desirable locarion, and let’s magically create 20% more homes there. Would that fix supply? No, because the latent demand is far bigger than 20%. Why? Firstly, in my circles in Christchurch NZ, relatively well-off people own multiple homes: their primary home in the suburbs, sometimes a second home or an investment property (rented or Airbnb), ideally a holiday home somewhere which is often empty, perhaps even a town-house in a city. Secondly, in my other circles there are a lot of people sharing a home (one home split into several flats, flatting, still living with parents), so there is a huge latent demand for people that want their own home.
I think that in many desirable suburbs, you could double the number of homes and prices would not shift down in the slightest. For people to own their own homes needs something new to happen.
We have had a housing boom going on in Christchurch for say 5 years now, and house prices went up and up, because people bid what they can afford. Projections are for housing to increase faster than population in Christchurch, but that is not fixing affordability. Statistics: “Christchurch City's most recent population estimate was 392,000 (June 2021). The 2010/2011 earthquakes resulted in a net loss of around 21,000 people, but by 2017 the city's population had recovered to pre-earthquake levels. Projections suggest that by 2028 the population is likely to be around 417,000 under a medium growth scenario.” “In 2018, there were an estimated 148,000 households in Christchurch city. Projections suggest that this will likely increase to around 161,000 households by 2028 (medium series).” https://ccc.govt.nz/culture-and-community/statistics-and-fac... I don’t understand their projections, because on the same page they show a graph with more than 10000 new homes already. Also we have massive housing growth outside of Christchurch - I have seen recent large subdivisions in: Rolleston, Lincoln, West Melton, Amberley, Methvyn, etcetera.
Note that's just "enforcement actions," which nowadays largely means giving them a court date and letting them go. It doesn't count anyone who snuck in successfully.
You said "we’ve let in ~5 million illegal immigrants" but this is the count of 'actions', some of which are almost certainly with the same people multiple times. This number also includes some people who weren't even trying to get in illegally:
"Inadmissibles refers to individuals encountered at ports of entry who are seeking lawful admission into the United States but are determined to be inadmissible, individuals presenting themselves to seek humanitarian protection under our laws, and individuals who withdraw an application for admission and return to their countries of origin within a short timeframe."
It's not totally clear, but it seems that it also includes other "border enforcement" actions that are not necessarily related to immigration at all, e.g. intellectual property and drug seizures.
So it has nothing to do with what you were claiming.
Right, but there's no way to get accurate numbers so that's the best we can do. If it's 4 million or 6 million it doesn't really matter that much - the point is it's uncontrolled migration to a country with a housing shortage.
Labor tightness seems to be one of the drivers of the broader inflation. Additional labor may help keep that inflation under control without having to nuke the economy.
Right, and at the same time we've seen wages go up appreciably for the low end of the labor market for the first time in a long time.
I'm not saying there wouldn't be other issues with clamping down on immigration, but if you're trying to tackle the supply and demand issue it's the easiest way to handle it.
I heard a quote from roughly a hundred years ago, from a US immigrant. Paraphrased from memory:
I came to the US and found that, not only were the streets not paved with gold, they weren't paved at all. Furthermore, I was the one that was expected to pave them!
It would cost more, but materials are the largest cost. A significant part of the labor are more skilled jobs that illegal immigrants can't do - plumbing, electrical, etc.
And if people aren't building because it makes more sense to buy a "used" house material prices would also drop.
Materials aren't the largest cost around here (California) There has been a massive worker shortage since 2008, so even incompetent people can charge way more than material costs for most installation jobs. (And then you pay a second person even more.)
Permitting, engineering, etc are also expensive.
Finally, construction costs are difficult to estimate up front, so it is difficult to be a rational actor when deciding to build or not.
After all, if you hit a 33% cost overrun half way through building, your best option is to pay the 33%. At that point the house costs 83% of the expected price of starting over. If you stop now, then you are out 50% of the initial budget.
If you think facing such a tradeoff is rare, look around for lots that are for sale with pre-approved plans or partially constructed houses. They're usually pretty easy to find.
He's saying that while the numbers make it look like we're building homes slightly faster than the population is growing that's not the case once you count off the books immigration. So the housing deficit is getting worse, not better.
Off-the-books immigration is by definition tough to quantify. But it doesn't seem likely that illegal immigrants are either renting or buying houses in large numbers since they don't tend to have a lot of money. More likely they're doubling up with family that's already here and as such not causing a significant amount of housing demand.
A hispanic family lives next door. 1200 sq ft. house. 4 BR (it would be 3 BR but the garage was converted to a BR), 1 bathroom. At times they've had up to 12 people living there. I can't imagine it, but somehow they manage to make it work.
> it’s insane to me that nobody is connecting the two, but in the past two years we’ve let in ~5 million illegal immigrants and built ~3 million homes.
What is the connection here? And why is there a qualification of "illegal"? If these were legal immigrants, what would that change?
You're implying that demand is greater than supply, which has been quite overtly mentioned by many.
Of course demand is greater than supply. If it wasn't prices wouldn't be increasing greater than the rate of inflation.
You're right that the type of immigrants don't matter, but the reason I mentioned illegal immigrants is because the amount is completely uncontrolled. Legal immigration we could easily ramp up or down.
The population pyramid matters quite a bit. Increased working-age population generally pushes prices down thus in most cases immigration reduces housing cost and inflation by decreasing labor costs.
> At a time when seniors are sitting on a mountain of housing wealth and have anxiety about their finances, this should be a well-used program. Instead, despite rising senior population, participation decreased between 2011 and 2018, from 73,112 to 33,000 mortgages.
Does not seem like a popular part of peoples’ retirement plans. Even downsizing a house does not seem like it would yield enough of a profit to be a major component of retirement, unless you go from super popular area to middle of nowhere. But I doubt that is people’s retirement plan either.
There should be no need to sell a home for almost everyone to receive healthcare or long term care (which would be covered by Medicaid/Medicare). And if people wanted to move to higher end facilities, those cost $10k+ per month, so selling a median house to live in one does not buy you much.
Interestingly in some states it's even higher than $636k!
However, I think you're on the nose with the long term care facilities. Medicaid will only pay 100% of any nursing home care (high end or low end) if your countable assets are $2500 or less. Additionally, Medicaid considers your income going back 5 years in order to determine eligibility, so selling (or putting into a trust) sooner rather than later can make sense for a lot of people.
https://www.webmd.com/health-insurance/features/when-how-muc...
> This will lead to a housing market that will grind to a halt and expect that whole sector will hemorrhage jobs.
Construction should be an industry that people care about and policymakers watch out for. But making housing purchases dependent on cheap credit may have been a poor decision, and it's possible that as a result large swathes of real estate as a sector are based on problematic incentives. The housing market needs several resets, and much as it pains me to say it as someone who'd like my own mortgages to be cheap as much as anyone else, it might need years of high interest rates to start getting things back in line -- on top of aggressive vacancy taxes, property taxes scaling on single-family rental volume + inventory scarcity, and anything else that nudges capital towards construction vs operation on existing inventory.
> Basically the fed will do anything in its power to stop inflation
I'm not sure what the limits of the fed's will here are, but what worries me is that monetary policy is not the sole or even primary cause of inflation: big supply shocks and demand shifts in the last 2-3 years are the bigger issue. Monetary policy can only go so far in addressing it.
The reversals in the housing market will be unpleasant, but they go hand in hand with all of the overpriced housing we've had for the last decade.
The Fed failed to follow its own policy, of taking the punch bowl away when the party gets going. It allowed the economy to heat up for too long, and thus the inevitable reversals. Averaged over a few decades it will be the same 3-4% GDP growth that we would have gotten if they'd taken a stronger hand in taming the business cycle.
Their goal is to contain the booms so that the busts aren't so bad. Having let the boom go on, there is no choice but for a bad bust to happen. It would be nice if they'd learn their own lesson for next time, a decade or so away... but unfortunately, everybody loves low interest rates and a roaring economy.
I hate the use of the term "housing" when what we mean is "land". Building materials haven't gotten obscenely more expensive. Building labor hasn't gotten obscenely more expensive. Land has gotten obscenely more expensive.
We are also reaching a point where consumers drive the price of residential land less and less. How much difference does the mortgage rate make when the market is increasingly driven by commercial buyers, who don't use mortgages?
There is no karma system in economics. There is no such thing as having to do a "bust" as if it is some backlog of tasks you have forgotten to work on or a divine punishment from God you must endure. A bust just means the interest rate is above the return on investment in the actual economy. That's it.
There is no karma, but there is a long-term tendency for real economic growth in about the 3-4% range. It's a combination of innovation and increased population. The latter is pretty consistent; the former is not, and yet seems remarkably steady.
You can increase the rates a small amount by borrowing money, but not indefinitely. Eventually, that borrowed money causes inflation, because it increases the money supply. And eventually, people get antsy, and try to cement their gains.
That's not karma, it's psychology. It's how people have behaved, and it's as predictable as anything ever gets in economics. It doesn't take a deity to invoke a bust; it just takes humans.
> This will lead to a housing market that will grind to a halt and expect that whole sector will hemorrhage jobs
Yea and outside of just absolutely ultraviolet kind of hot markets this will mitigate downward pressure on prices now and in the future because home builders (though that's another problem) won't be building homes. Coupled with people who have locked in interest rates, the market seems to me to be poised to grind to a halt and prices to remain quite high.
> a class of business leaders who are just trying to wish a recession into existence, and I can't figure out why
There's also a 'class' of political leaders (primarily the party out of power) that is trying to give the impression that we're in a recession in order to help their party in the mid-term elections.
When I hear it from business leaders, there are three logical reasons 1) exposure to the housing market 2) poor performance by the company (its the economy's fault!) or 3) an excuse to trim fat from a high-margin company that's aware of how bloated it is.
I can't figure out why other than maybe they think it would allow them to reestablish power in the labor market.
It's exactly this and actions/comments from CEOs and the Fed pretty much confirm it. When Powell said "economic pain" was necessary, he meant that mostly for the working class. Look at all the layoffs going on...
By driving up unemployment, the Fed expected “supply and demand conditions in the labor market to come into better balance over time, easing the upward pressure on wages
> This is the weirdest "recession" I can remember.
Its not a recession, which is why it is weird when looked at as a recession.
OTOH, there is still substantial risk of inflation control measures creating a recession. (And there is a bigger risk of business actions anticipating and avoiding being overextended in case of a recession caused by inflation control measures themselves causing a recession.)
There is a class of business leader that is definitely in a recession where that word just means downward financial performance trajectory.
I’d be willing to bet the distinction is how much labor you employ and what kind (pay bands as proxy). Hospitals for example are in a world of hurt post Covid. Labor is their main cost. Rates are down but remain high. Employee satisfaction is low. Revenues do not keep pace with costs and largely uncontrollable.
This is just an opinion based on personal experience across multiple companies, but I think many of us can probably agree that companies (large, medium and small) seem to hire up a lot of people who provide tenuous value during the high times, like what's been occurring since post-2008 in the US.
Those W2 employees are expensive recurring liabilities to the companies employing them. This expense can be offset in various ways (R&D credits, cheap money, endless VS cash, public statements about "always growing", other stuff I don't know about I'm sure). However, when the cracks in the system begin to show companies need to accomplish at least a couple of things: reduce recurring expenses and maintain an image of success (publicly traded or not!) despite the headwinds.
Now, one way to accomplish those goals might be to join in with your fellow "biz leaders" and make statements about an upcoming recession and hard times, etc. This allows you to blend in with the crowd rather than be "that one company that is maybe failing". Once the blending in step is accomplished it leads into being able to start reducing headcount without freaking out too many people (it's not just Meta, it's everyone!).
> ...I can't figure out why other than maybe they think it would allow them to reestablish power in the labor market.
Also, yeah, I've toyed with this idea too. After many years of pay band compression recent years have shown (for at least software engineers) that it's possible to individually negotiate up quite a bit. If you are qualified and can communicate that clearly, then you are in for a big raise or three. Until recently, even if you weren't particularly qualified you could still do this. This knowledge has spread pretty widely. Obviously capital doesn't like it when labor can say "Screw it, I'm out. 'Gonna go get a big raise instead of stick around and deal with X". This could indeed be the opportunity that capital was waiting for to readjust those dynamics again.
Another piece of the puzzle is the big drop in labor productivity lately - https://fred.stlouisfed.org/series/OPHNFB. Could the data you mention be explained by workers previously being in jobs where they were unproductive, being laid off but then quickly reabsorbed by the hot labor market into more efficient lines of work?
What do you think could be behind the noise in this case? It does look like the steepest drop in many decades, and more surprising when we read stories on HN about automation that would imply a baseline increase in productivity.
Companies pay employees to increase the value of the company. The market is reasonably efficient and companies will increase pay to match the value created (somewhat correlated at least. startups often pay more with the hope it balances out in the future, established companies pay less since some of them print cash and they dont have to pay more to get candidates).
Many tech companies are down 80-95%. So if you used to pay employees 100 to generate 100, now you are paying 100 to generate 20 or in some cases 5. This only works if you can massively increase productivity or reduce cost.
There is no evil conspiracy, markets are just down
I’ve been thinking back to the 2008 recession where we had a jobless recovery for the next ~5 years. Part of me wonders if we will have an unemployment free downturn on the flip side. Personally I prefer the later to the former, but I understand people with more savings are less happy about that possibility.
>This is the weirdest "recession" I can remember. Business leaders are constantly talking about how challenging the economic environment is and the need for layoffs etc
I think people's sense of timescale is off. Business leaders are talking about things that we likely won't see for months.
This isn't rocket science; we have insane inflation, rising interest rates, a strong USD and tightening monetary policy around the globe. Where do you see the growth coming from? Have you considered that "things aren't that bad" might benefit one or the other party during the upcoming election?
Did the fed actually say this? There were a bunch of investment bankers who did, and it seems like everyone else ran with the narrative. I haven't seen that the fed actually said it. I think all the fed cares about is bringing down inflation, but if the primary factors in inflation are supply related then unemployment doesn't have to go up for inflation to come down.
Yes, but not directly. If you listen to the last FOMC meeting, Powell mentions there will likely be significant weakening of the labor market and a rise of unemployment. As well as his famous "there will be pain" remarks.
I don't think he directly said "he won't stop until" though.
Unlike smooth talking politicians, the Federal Reserve actually tries to be honest about the effects of their policies. This is something that should be applauded, not exploited as a means to get political capital.
I'm not sure why you think this is true. For month's Powell has been shifting the narrative. First it was under control, then it was a soft landing, now it's going to be a rough landing. What'll it be tomorrow?
I don't think they're being dishonest. I think they're constrained in how forthright they can be, lest they trigger a market reaction.
> I think they're constrained in how forthright they can be, lest they trigger a market reaction.
This is why I said that they try to be honest. Doctors are also inclined to err on the side of optimism when they are uncertain. The difference is that nobody is making conspiracy theories about doctors actually wanting to make their patients sick.
Yeah, I mean maintaining full employment is one of the fed's mandates. It would be an insane thing for a fed chair to just come out and say. I assume he want's to keep his job, and pissing off the Senate isn't the way to go about that.
You don't want to fuck around with inflation because at a certain point it becomes a self-fulfilling prophecy (ie. merchants raise prices pre-emptively just because they internalize inflation at a high steady state).
maximum employment is a pandemic period objective. they aren't intending to crush the labor market. the fed has largely behind the curve in addressing inflation.
I'm not sure why people continue to take what the fed says as being accurate predictions of the future. For example, they said in 2021 that they expected interest rates would be zero until 2024 [1]. They obviously have a lot of real power, but they must be understood to either be deceitful or incompetent given how wrong prior predictions have been.
This is the broadest view of the economy growing. So there may be some business leaders who work in still growing industries who are trying to "wish the recession into existence" as you say..
But on the flipside you have things like housing taking a downturn (not just home prices, but actual housing construction) which negatively impacts all of their suppliers (HVAC equipment, lumber, contracting companies, etc etc).
So there are some of those leaders who have a likely justified negative outlook.
This may just be a localized thing, but housing construction here is not slowing down. My in-laws own a construction business and they're the busiest they've ever been. Their biggest challenge is hiring and getting supplies.
I think there are signs that the economy is balakanizing, and that is not a good thing. We see the same thing near us: construction and landscaping are booming.
In some other places, I hear that there is no work in that profession. The same appears to be happening to companies, with Facebook down 20% today while oil companies see no signs of recession.
Facebook probably isn't the best example. They're down because they've made some really awful business decisions. I don't think their issues are the result of larger economic headwinds.
Be real fun when the strategic oil reserve runs out / stop draining it after November Election.
Nothing was done to increase domestic supply. And OPEC has decided to tighten the screws on us.
"U.S. oil production is almost 12 million barrels per day. By the end of this year, it will be up by about one million barrels per day compared to when President Biden took office, and it is on track to reach a new annual high in 2023. However, a number of industry participants have suggested that, even with today’s high prices, they are concerned about investing in production when prices could fall in the future.
The Administration is announcing its intent to use SPR repurchases to add to global crude oil demand at times when the price of West Texas Intermediate (WTI) crude oil is at or below about $67 to $72 per barrel. This will protect taxpayer interests because the SPR will be repurchasing at a lower price than recent sales, potentially allowing it to repurchase more oil than it released with sale proceeds. It will also help address producer concerns about uncertain demand in future years, encouraging immediate investment."
Because a recession is all but obvious at this point.
While it may not be here now, we probably have more foresight into the fact that there will be a recession than ever before.
The Fed will intentionally create one to stop inflation, despite their talk of soft landing. The only hope otherwise is that inflation subsides on its own, which, given labor dynamics, is looking increasingly unlikely.
So the Fed has to choose between spiking unemployment to contain inflation, or letting inflation run wild. Powell doesn’t intend to be remembered as an Arthur Burns, so it seems most likely he will keep pressing until the recession comes.
Eventually stock prices will come down enough, and debt costs rise enough to actually cause the layoffs they need to pivot.
Final note that, due to public sector debt levels, we cannot choose a path of allowing moderately high inflation for a long period of time. The government budget will become insolvent without a mechanism to fund it, either at the short or long end of the yield curve. Or in short, either we need a quick and sharp recession, or the Fed to give up on the inflation fight so they can drop short end rates and let govt debt inflate away.
Otherwise the US govt will default within a few years.
Everyone forgot the denominator. In terms of GDP/kWh of energy or GDP/calorie of food, we are still seeing sharp decline. Instead, we are measuring in dollars.
When inflation starts to hit salaries and debt needs to be rolled, we will start to see more business contraction. That is what business leaders are planning for.
A lot are just focused on the next earnings call which makes sense I guess. If they work to deal with this "emergency" and it doesn't happen idk if there's a big price to pay.
We just had gone through an unprecedented global pandemic, there's a war in Europe that might become a world or nuclear war, and there's been unprecedented floods and draughts in many key regions of the world. I mean, it's good that they turned out to be wrong, but I won't blame them for expecting a recession in 2022.
It's a recession for NON workers. Normally recessions are managed to make sure they hit workers and everyone else is fine, this one is the other way. Hence the FED rushing to "correct" the problem.
This is inspite of the fed raising the rates. I believe the fed may have missed the boat for a bit but they started raising rates just in time. This economy is resilient and honestly it’s a beautiful thing to see.
I too find that many mysteries become clearer when you look at them through the lens of the constant class warfare that is being waged. All too often in only one direction.
I'll be honest - I didn't use to think the rich/powerful thought like this. I thought it was just the tragedies of capitalism and the invisible hand needing more protection from market failures.
Then I worked for a billionaire's small company for five years right out of college.
Now I recommend "Wage Labor and Capital" to anyone who I think will be able to manage it's low-two-digit number of pages.
The recession is real (but probably won't materialize until we see the 4th quarter of this year's numbers). Lots of sectors are seeing reduced consumer spending, layoffs and of course interest rates rising reduces capital spending.
Overall spending and employment are still increasing. There are always some sectors growing and some shrinking. It doesn’t mean the whole economy is in recession.
The Elite are drunk on PPP money printing, and don't want to downsize. Meanwhile inflation means all your employees expect a 10-15% raise to keep up with higher costs, and paying your employees is verboten in the religion of American Capitalism.
Me with my one comment? Not at all, but there seems to be a lot of skepticism over official inflation figures, particularly for recent reporting.
Given there's usually a fairly significant magnitude of the variation on inflation figures depending on the exact methodology, I'd expect a similar magnitude for inflation-adjusted GDP no?
Are you sure you don't have me confused with someone else? I don't see any multiple comments in my history unless you've gone back over 3 months ago. If that's what you're referring to, I have no problem with it, but it just seemed odd.
>Why are you switching to the passive voice? Are you saying this or not.
Passive voice is a perfectly valid style not a mistake, and I'll take that fight to the death. The sentence indicates not just my own skepticism, but also the sense I get from other people on HN and real life where the prevailing opinion seems skeptical.
>Not really. The price of a basket of goods, over time. Same as it's always been. As as already mentioned, GDP takes into account these numbers.
Boy I have a lot of issues with that. It's NOT the same basket of goods. I don't personally agree with many of the substitutions, nor the exclusion of ownership in housing. There are SEVERAL competing measures of inflation and the variance between them I've seen is on the order of 25% of the reported value. That amounts to at least +/-2%, and that really would have a big affect on purported inflation-adjusted GDP when purported growth is similar in magnitude to the variance on inflation.
So, I'm not necessarily saying that the growth values are flawed. But I think I have a healthy skepticism of it, and I think that's appropriate, and, that skepticism is undeniably tied to the published inflation figures. In my industry, there's been massive contractions in investments and resulting layoffs. I've also seen most of my peers restrict their luxury spending because they've been priced out due to inflation. My personal basket of goods has seen an average YOY inflation around twice the purported value.
It makes no sense to use a November 2020 rate of change in M2 to adjust a Q3 2022 real GDP estimate. GDP is a production metric. An output of the real economy. M2 is a monetary metric. An input into the financial system. To the degree their relationship has meaning, it’s as a rough measure of financialisation [1].
Also money printing isn't necessarily inflationary if the money stays as bank reserves. Unless... The Fed buys treasuries and the government dumps the money on the economy.
The world is wacky right now. Normal patterns of behavior have been disrupted by 2 years of lockdowns. Some people are spending out of spite. Some people are not even leaving the house. There's a certain levity about work - no one seems to be taking it seriously.
Strange times. Really hard to capture in data. Only increases possibilities of a major economic catastrophe because the tea leaves are just too hard to read right now.
>Housing investment, though, plunged at a 26% annual pace, hammered by surging mortgage rates as the Federal Reserve aggressively raises borrowing costs to combat chronic inflation. It was the sixth straight quarterly drop in residential investment.
Thank christ. Please bring on a housing crash ASAP.
We took a hard look at the economy before buying our house. Ultimately, we bought when interest rates were high, but prices had not yet come down.
There's no crystal ball, but it sure looks like our investment will go down in value in the next few years, perhaps precipitously.
I think of it this way: We bought the house we want for the price we can afford, and will happily enjoy it for two decades without price inflation, even though our salaries will likely go up. So, it's a win, even though we bought at what looks like peak market.
Glad you’re content. If you’re in the US, As a bonus, just remember that the US gov always does everything it can to keep housing prices stable or up. Of course it’s not an easy problem for them, but you’re in the same boat as millions of other ppl and the govt won’t let you crash out that hard.
> As a bonus, just remember that the US gov always does everything it can to keep housing prices stable or up
What country doesn't do this? China surely does that even more aggressively than the USA; Australia, yep; so...Japan? That's the only country I can think of that doesn't mind some long term lowering of housing prices.
Ah, not surprising, considering it's one of the most desirable places to live in, and you are competing with a growing global rich class to live there.
Yeah, my wife is an immigrant and the US government makes its best efforts to make immigration as nightmareish as possible. I'll be the first to say the immigration system is broken and needs to be fixed.
Depending on where you live, population collapse is either a myth, meme, overblown but remote possibility, or absolute certainty.
In most western nations, it's not going to be that big of a deal, I wager. In areas with net emigration, especially those that are not good at sharing true demographics with their leaders, it'll be devastating.
I would say population declines within certain tribes leading to changes in political power, and hence distribution of resources, is the central issue in many societies, especially those with very low birth rates.
And the tribes are not necessarily delineated along skin color/region of origin/religion, but even age/education/immigration.
You cannot plug and play 50M young people from Latin America into the US or Africa/Middle East/Eastern Europe into Europe, and expect society to not change in ways that the existing population might not like.
In the US and the Americas it won't have a severe impact. Most countries in America should hold up, and Canada has relatively high immigration levels, so there's that.
Much of Europe and large parts of Asia (China! Japan. Korea.) will face jaw dropping population collapses, happening now and in the near future.
If it's any consolation, we invested in the market in a big way for the first time in October 2021. We just got the "Congratulations on your first year of investing!" e-mail from the service with a link to our account, which happily displays a big red 25% loss on our solidly six-figure investment.
(I do think the stock market losses may be driving a lot of the recession talk. Those losses have happened, for sure)
This was one of the things that convinced me to buy back in 2013 - stable monthly payments for the whole mortgage duration. Just had to get over the down-payment hump.
Supposedly the car market is about to crash as well. There was supposedly 2008 like shenanigans in the auto lending segment and the crows are coming home to root.
Speculation is that people were buying cars they couldn't afford using the stimulus checks as the downpayment and then immediately asking for a halt on payments due to COVID. With both factors no longer in play people can't afford their cars and are defaulting. This should cause a massive wave of repos and a flood in the used car market.
That said, the market can stay irrational longer than you can stay solvent. Car lot managers will be in denial for some time before they actually lower prices to where they should be.
I suspect there is some chunk of the economic doomsaying that is literally political propaganda. A recession is bad for the party in power and a lot of the economic catastrophe drumbeat started around the time early polls opened up.
Stimulus checks were what $2000 total. That's less than 10% on a new car and most competent banks look at your monthly payment and DTI to determine how much to loan.
> A recession is bad for the party in power and a lot of the economic catastrophe drumbeat started around the time early polls opened up.
They've moved from economy to gas and the polls are now on crime. Really anything to stir up FUD.
Apparently there was a lot of 2008 style "ignoring the fundamentals" going on in the auto lending industry because the banks had tightened up the home lending market and the stupid money needed a new place to go. There is the further instability from the government loan crisis in China combined with continuing zero-COVID lockdowns hurting production. However, I think the China problems are being hugely overblown in the west. China is still a net exporter and has a trade surplus to throw at problems. Unbelievably credulous predictions that the Chinese government is going to topple on its own in the next few months are just plain out of touch.
> Unbelievably credulous predictions that the Chinese government is going to topple on its own in the next few months are just plain out of touch.
Isn't that just a straw man? Most serious reporting on China are just predicting a substantial slow down in growth (or even recession), which is what is playing out right now. Chinese emigration rates, which were dropping for many years before, are actually growing again (mostly due to zero COVID and lagging economic growth).
A slowdown is inevitable. The "china miracle" was loads of debt fueled spending to pump the books, but they still have 1.4 billion people who are still near the bottom of the S curve for domestic consumption. Even the dubious official figures showed a slowdown in growth.
You can always cherry pick sources (especially with google search!). But it is a logical fallacy to discount a serious WSJ or NYT report by quoting some unrelated Gorden Chang or EpochTimes article on the web (for example). That is effectively how the strawman logical fallacy works.
China has gone through stealth recessions before when I was living there (GDP growth on paper, but job growth and other indicators clearly in trouble on the ground). They might be going through one now, I'm not sure, but an official recession and housing bubble burst is really due (the latter being necessary for long term health, and even the former useful for getting rid of a lot of unproductive activities).
Not a single link on that search, the first page at least, says the Chinese government is going to topple on its own.
I have never read a mainstream article that says China will collapse. They are a juggernaut that will continue to achieve impressive goals. What seem to be agreed is that they will face significant challenges, and overtaking the US is not a foregone conclusion.
> Speculation is that people were buying cars they couldn't afford using the stimulus checks as the downpayment and then immediately asking for a halt on payments due to COVID.
I wouldn't be surprised if that happened a few times, but I find it hard to believe that it was widespread enough to significantly impact car prices. I certainly haven't heard of anyone doing this.
That said, I'd welcome a reduction in used car prices. Someone ran into our car and totaled it earlier this year. We replaced it with the exact same make model and year, and it cost us several thousand dollars more than buying it the first time, despite it now being several years older.
Housing investment would be 'housing starts' as in new houses being built. I doubt that prices will be going down if there are more people and the same number of houses. Part of the market for existing houses is sensitive to mortgages. All this means is housing will actually cost more in the future on a total cost of ownership basis. If you're a renter with a ton of cash, this is good, but for literally all other stakeholders in the market is it ultimately not good.
Sticker price for houses will fall, so if you're a cash buyer you get a discount. Monthly prices won't, so if you're a mortgage buyer you're paying more to the bank and less to yourself.
My understanding is as interest rates go up prices need to come down as people only have $X/month to allocate towards housing. EX: If you have $100 to put towards housing per month you can put $90 towards the house itself and $10 towards interest on the loan in low interest environments, but only $80 towards the house and $20 in high interest environments. If people can only put $80 per month towards the house you're selling that ultimately means the house price can't be as high as when people are able to put $90 per month towards the house.
For the renter with a lot of cash this means you can come out ahead if you're able to minimize the loan or outright purchase in cash a house. The renter with a lot of cash gets to benefit from the lower prices from higher interest rates while minimizing the downsides of higher interest rates.
Not sure why you used that word. I don't think it applies in this circumstance. Not trying to be pedantic/snarky, I just wonder why you characterize only 18 months or so of higher than has been seen in quite some time inflation as "chronic."
Chronic (adj.):[0]
1a : continuing or occurring again and again for a long
time
2a : always present or encountered
b : being such habitually
Edit: I note (after the fact) that the parent poster was quoting TFA and not making that statement themselves. My apologies for attributing that to alexb and not the AP article. That said, I still think it's odd that they'd use the term "chronic."
There is (was, really) an argument in the public sphere as to whether the inflation we're experiencing is merely "transitory," and this plays into the larger debate about how it ought to be dealt with by the Fed and the US government. Use of the word "chronic" is merely someone noting their position on the question of whether our inflation is "transitory."
edit: looking at it in context, it's someone noting the Fed's decision on the matter (of course it's not transitory), which also makes sense
Although I'd posit that there are a bunch of terms that (at least IMHO) would be more appropriate than "chronic":
Ongoing
Sustained over the past 18 months
Recent and continuing
I'm sure I could come up with a bunch more, but since my comment should really be directed at the Associated Press (AP) and not GP, and I'm sure the AP doesn't care what I think about their choice of adjectives, I guess it's not really relevant.
In fact, when I realized that I was commenting on a quote from TFA, I almost deleted my comment altogether but decided against it.
"Ongoing" serves as a poor rebuttal to "transitory" (something can be transitory and nevertheless ongoing, and the whole point is that we know it's no longer considered transitory) and the others are obviously clunky when you're just trying to imply a minor point. I think you're on your own with this one and the AP did okay, even if I might have phrased it differently.
In my opinion, housing is mostly inelastic unless people have to sell due to external circumstances (like being unable to pay mortgage). I don't expect the housing market to decline more than 15-20%, as the more people are "underwater" from their purchase price, the more likely they're to just "wait out the slump". And with low interest rates locked in, many probably don't want to roll their mortgages now. Since we've had such a crazy runup [1] ([2]) in the past few years, a 20% decline still puts many sellers ahead, but I don't think they'd sell at a loss if prices dropped further. SF Case-Schiller is up 25-30% from 2020, and ~50% from 2017, for example.
My personal opinion is that once you've bought in you're locked in and along for the ride. If your house is down 20%, so is most likely the house you consider moving to. Unfortunately housing is often seen as an "investment".
It would be hard for housing to crash unless the current supply and demand situation changed dramatically.
An increase in supply so large that it would cause prices to crash would take years to build. In fact, inventory is lower than normal in some areas because people who might otherwise sell are holding out for better times, sometimes by renting out their properties and capturing today's unusually high rent prices instead.
A drastic decrease in demand is not going to happen because of mortgage rates. High mortgage rates have already taken a chunk out of demand yet housing has not crashed. The only way I can see demand dropping so much that prices crash is a major recession with mass unemployment, which knocks a large number of potential buyers out of the market entirely because they lost their incomes.
We bought our home last month, past the peak but prices will probably drop below what we bought it for. We did buy all cash and are in this place for the long term so I don’t feel too bad besides the fact that we could have probably afforded more house for the amount we paid if we waited six more months.
IMO, there’s too many people making this bet for it to actually manifest. Not sure exactly how it’ll happen, but I can’t help but think banks are eyeballing those war chests people have saved up for crash. They’d much rather those as rent payments than interest payments.
The Yield curve, Mortgage Rates, Bonds and Asset Prices are all in bad shape. Combined with rapidly falling income (due to 15%+ real inflation) it's a disaster in the making. Homes will likely fall 30-35% in adjusted value in the next 12 months. A lot of people's net worth is in their homes. This will be the largest post WWII drop in home prices. Don't forget the strong dollar is crushing economies around the world, who are our trading partners (and creditors).
Right, I just don't know how it's 'quick'. So much of inflation is supply side and not controlled by the Fed. They have to crush it hard and it may last a decade.
Quick to begin, not to end, I should add. I agree it would likely be a pretty severe recession.
Letting inflation run wild for a decade is probably the less painful path all else equal, but for legacy reasons Powell won’t choose that route. He would be remembered as a failure, just as Arthur Burns is.
I would add that goods inflation is actually coming down, it’s much more about services inflation now which is labor supply driven, primarily.
Services make up a majority of the CPI and aren’t impacted by logistics for the most part.
Citation needed on homes losing 35% of their value. I've paid a lot of attention to predictions on home values and the only people that are predicting drops that big are /r/rebubble and low quality media outlets. I have yet to find a single economist that supports a price drop that large. The biggest I've seen an economist say is a 5% drop.
This is terrible news. Without a recession to curb inflation, the fed will have to get far more extreme with interest rates to get inflation back down. I thought that rates might top out around the end of the year, but now the fed may have to keep raising aggressively well into next year. Mortgages and the housing market are going to get slammed. This is going to get much worse than I previously expected.
> Overall, the outlook for the overall economy has darkened. The Fed has raised interest rates five times this year and is set to do so again next week and in December. Chair Jerome Powell has warned that the Fed’s hikes will bring “pain” in the form of higher unemployment and possibly a recession.
Those hinging important economic decisions on the "Powell Pivot" are going to have to wait longer. There's no way a pivot is happening into a combination of positive economic growth like this, strong jobs market, and sky-high CPI increases.
There are maybe three factors that will cause a pivot:
1. Inflation falls to match the Fed funds rate
2. A rapid housing market decline starts to cause disruption throughout the rest of the economy.
The EU has a similar committee to the NBER, which identifies EU business cycles. They also do not use the colloquial "2 quarters of decline in GDP" definition, though at least 2 quarters of decline is often seen in those recessions that they do identify. [0]
>Most of the recessions identified by the Committee’s procedures consist of two or more quarters of declining real GDP, but declining real GDP is not the only indicator used. As an example, the Committee has identified the period from the first quarter in 1980 to the third quarter in 1982 as a recession, even though real GDP was growing in some quarters during that episode and that real GDP was higher at the end of the recession than at the beginning. As another example, the Committee did not declare a recession for 2001 or 2003, even though the data at the time appeared to show a decline in economic activity (though not for two quarters). Subsequent data revisions have erased these declines.
Those claiming a US media conspiracy to redefine the term "recession" have a political axe to grind, and nothing more. The NBER identifies recessions in the US, they have done it for a long time, and they will continue to do so.
The issue is that the definition of a recession is vague, subjective, and as a term has become so politically important. If the definition was objective, verifiable, etc, then there wouldn't be room for the idea of political manipulation. I wish that society would not place such high value on terms that are so murky. It encourages discourse where the truth is not important.
There is a decently objective definition of recession: two consecutive quarters of declining economic output. Most metrics of economic output tend to have high degrees of (positive or negative) correlation: GDP, (un)employment, etc.
The issue is that what you've seen since the pandemic started has been basically insane macroeconomic statistics that defy historical correlations, so whereas the US GDP declined in Q1 and Q2 of this year, there weren't corresponding declines in other statistics (e.g., unemployment stayed low). If half of the economic indicators are signalling "recession" and the other half are signalling "rip-roaring growth", any definition that pigeon-holes the economy into one or the other is likely a bad definition.
Even if that were still true, the notion of real growth depends on correctly calculating inflation. That calculation has changed over the years, and is fairly subjective.
The whole “actually the terms we’ve used throughout your life aren’t correct and we’re going to pretend there’s nothing unusual about this sudden reversal” is wildly damaging to institutional credibility.
I hold a BS in Econ and even I was shocked by how it was presented to the public. I figured there was a very good chance GDP would rebound for at least a quarter - and the political spin would be “Biden saves America from the Putin recession in record time” or something.
None of those talking heads had a single clue that the “two declining quarters” definition was simply a useful shorthand and yet they all immediately hopped on the exact same script.
Edit: in case it wasn’t clear, I 100% agree that we need more accurate definitions. So much needless harm is being done when the response to edge cases falling outside the colloquial understanding of a term is to quietly change dictionary definitions instead of educating the population.
How do you plan to educate the population about the technical definitions of non-trivial technical concepts - when I can make money/fame/political capital from diseducating them, by providing with simple, convenient, inflammatory, and wrong information?
If your bar for solving a political problem is 'We must first make sure everyone speaks about it the way I want them to speak', you're never going to get there. In a union of ignorance and malice, it's very easy for thought leaders to deliberately misframe speech, as they are the ones who determine both what we are allowed to talk about, and how we are allowed to talk about it.
It’s shocking to me how many people in America are hoping for the national economy to do poorly so that their party could win the next election. This isn’t just limited to one tribe.
The same doesn’t exist in Europe AFAICT. I don’t believe anybody is hoping that Putin would shut down the gas pipes for good so that their favorite politician could win an election next year.
You have your cause and effect backwards. People assume that "the other guy" is constantly doing all the bad stuff in the world and that "their guy" does all the good stuff. They're not hoping the economy tanks to win an election, they're hoping the electorate realizes "the other guy" tanked the economy and now their base will be energized/swing voters will move to their column.
Also, if you don't believe anyone in Europe is rooting for collapses you seem to be ignoring Short positions or how capitalism works. Everywhere in the world, someone benefits from the people in power failing/bad things happening. This isn't an exceptionally American trait.
I don't think that's exactly right. I think everyone wants the economy to do well, but most people's ability to gauge the economy is very limited, so they defer to other information sources to tell them how the economy is doing even if they're personally doing fine [0].
If you look at employment over the past 20 years [1], you'll see that Obama took office when the economy was in freefall and after about 9 months the economy turned around and started growing steadily until someone let COVID run wild in the US, at which point the economy fell off a cliff. But the right wing media isn't going to (and never would) say Obama handed Trump a very strong economy and Trump was the first president to oversee a net loss of jobs in over 80 years. The right wing media also won't mention that Trump was all in on making the money printer go brr so that his reelection didn't also have to overcome an explosion of poverty in addition to explosions in death and unemployment. But the right wing media isn't interested it accurately describing reality; it's goal is to secure power for right wing politicians, and to have a shot of doing that in a democracy, right wing media has to conceal the inconvenient facts that show Democrats are actually better stewards of the economy, produce lower rates of violent crime, and are consistently better at delivering improvements to the net and median quality of life of residents of the US.
That's great, but I was specifically talking about recent discussions regarding the official definition. If you're not interested in that topic, then my comment wasn't for you.
There is less stuff to buy, demand remained high due to stimulus, prices rise accordingly, huge amounts of boomer retirements line up to keep unemployment low, record high corporate profits, economy growing… this is like a boom and a bust at the same time.
