First-quarter GDP growth was negative
According to the economic decision-makers, two quarters in a row of negative GDP growth results in a recession being called. This would be a lot sooner than economists have been anticipating. The Federal Reserve has an indicator called GDPNow: “follows economic data in real-time and uses it to project the way the economy is heading. Tuesday’s data, combined with other recent releases, resulted in the model downgrading what had been an estimate of 1.3% growth as of June 1 to the new outlook for a 0.9% gain.” At the same time, inflation continues to stay extremely high with no indication of decline.
A recession plus high inflation could indicate stagflation ahead. How the Fed will navigate this treacherous economic environment might be answered this week in the announcement on Wednesday after the Fed meeting is over as well as by Chairman Powell in his press conference after the meeting.
The end of last week brought “sell-off” to mind as the SP500 entered correction territory on the close. Current indicators on futures indicate more of the same decline for Monday. At the end of the week, interest rates soared higher to reflect the continued inflation numbers. There is little the Fed or Congress can do to impact inflation in the short term and the market stays at its same levels as of Friday this week.
As far as the price of gasoline, the least responsible for surging prices are gas stations. Even though their profitability increased at the beginning of the Ukraine war, their profits have been shrinking since then. The major responsibility for surging prices is other links in the supply chain principally the producers and refiners. The share of profits of producers and refiners have both increased.
Part of the problem with refiners is that this business has been unprofitable for quite a while so a large number of refiner plants have closed, reducing capacity. Supply and demand, a basic economic principle, is at work. In the next 10 years, demand for fossil fuels should decline as the number of electric vehicles increases, prices will fall. Legislation and corporate goals will also reduce fossil fuel cars, and auto manufacturing companies will increase supply. Along with supply will come an increase in charging stations. These trends are of little help in the short term so shop for hybrids if you are looking for a car if you can find one.
With interest rates rising and housing prices at insane levels, it looks like the housing market might be at a turning point. Not that prices will fall back to a sane level but activity will slow, down-building, buying, and selling, eventually leading to a decline in prices. What indication do we have of this slowdown in market activity? The decline in mortgage applications for new homes?
The recent decline of 40% is a big deal. Purchasing a home will require adjustments. Examples would be a larger down payment or a variable mortgage product instead of a fixed-rate mortgage. For a long while, fixed-rate mortgages were touted as the best choice. Not only were they the most predictable mortgage product from a cash flow perspective, but they were also the best deal.
Now, with the jumps in interest rates, the 30-year mortgage rate is above 5%. Variable products offer some relief from high fixed rates. The variable mortgage products (also known as Adjustable Rate Mortgages) have a period where the interest is fixed, say for a 7-year period or a 10-year period, and then the mortgage interest converts from the fixed rate to a variable rate Usually there will be a cap on the highest rate it could go and often follows the treasury rate or LIBOR index. For any of us who have never used these variable products before, ditching the 30-year fixed rate product may seem daunting. We’re here to answer any questions you have in this regard.
Many adjustments will be necessary to weather the storm of the economy: inflation, asset value declines, slowing growth, war, and more.
Mental Health in the Spotlight
Our team caught this article recently in the WSJ: https://www.wsj.com/articles/moms-are-struggling-with-burnout-is-it-more-work-to-let-dads-help-11654314523#comments_sector.
The article speaks about the “mental load” many mothers bear in raising their household. When households are faced with the pressures and busyness of modern life, it is important to remember that when you get tired, learn to rest up versus giving up. Also, getting tired is HUMAN. Rest is “doing something,” namely, recovering. It’s a normal, natural response to overstimulation, not a deterrent from our worth or capability as a spouse, a parent, an employee, a friend, etc.
As humans it’s easy for us to fall into the “all or nothing” paradox, often getting frustrated with ourselves when we burnout in our efforts to “do it all” - be productive at work, be a good parent, be involved in the community, have a social life, have a clean house, have an exercise regimen, drink enough water, etc. If running our life is the equivalent of a giant excel spreadsheet with intricate what if’s and conditions, it’s no wonder we’re tired. Rest is best. And so is communication. In our households, communication between partners is a superpower.
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