Smooth sailing

If you’re wishing economists would just make up their minds about whether we’re having a recession or not, you aren’t alone.

Between February and December 2022, the Federal Reserve raised the federal funds rate—the benchmark interest rate that determines all other rates—from 0.08% to 4.10% in an effort to cool the economy down and stem inflation.

By all accounts it’s working. The YoY change in the Consumer Price Index peaked at 9.1% in June and had fallen to 6.5% by December. The risk is that the Fed will raise rates too much or hold them at a high level too long, and tip the economy into recession.

And just like politics, everyone’s got an opinion on how the Fed is doing. Most economists expect to see rising unemployment and weak GDP growth as signs that the economy is cooling, and so far we haven’t seen either one. As a result, some of them think the Fed has screwed the pooch.

Last week, Yahoo! Finance cited economists at Oxford Economics who argue that the Fed has raised rates too much. The Conference Board’s Leading Economic Index has fallen 4.2% in six months and in their view, that’s a sure-fire sign of “an economy barreling toward a recession.”

On Monday, Insider fretted that Federal Reserve chair “Jerome Powell’s ego could trigger a recession.” Insider thinks the Fed has been too aggressive because Powell is less concerned about the pain of a recession than he is about “going down in history as the one who let the economy spin out of control.”

On Tuesday, Julia Pollak, chief economist for online job marketplace ZipRecruiter, told NBC News that she believes another half-point interest rate hike would spook investors. “It may end up being the Federal Reserve itself that pushes the economy into recessionary territory,” she says.

On Wednesday, the Fed raised interest rates, but only a quarter-point. But job openings data for December was also released, and for the tenth time in 15 months, unfilled nonfarm jobs topped 11 million. At this point, notes CNN Business, “there are nearly two jobs open for every one person looking for work.”

Then came Friday, when the January employment report was released. The consensus forecast had been for a respectable 187,000 new jobs. Instead, we added 517,000 jobs and the unemployment rate fell from 3.5% to 3.4%.

By afternoon everyone had forgotten all about the stupid recession. Mark Zandi, chief economist at Moody’s Analytics, told CNN that “any concern the economy is in recession or close to a recession should be completely dashed by these numbers.”

Pollak told Yahoo! Finance that the report “was like a fairytale scenario of falling unemployment and falling inflation. It’s almost too good to be true, like $20 bills on the sidewalk or a free lunch.” 

Time magazine was ready to storm the Bastille. “All that recession talk is looking more and more like CEO fear-mongering.” Time blamed the recent wave of tech sector layoffs on executives talking themselves into a recession when the data is saying otherwise.

In fact, Wall Street isn’t happy about the situation. Stocks closed lower on Friday as the jobs report “stoked fears that the Fed’s rate increases may continue longer than expected,” reports WSJ.

It’s hard to say what WSJ expects, but the Fed has already made it clear that it will continue to raise rates in 2023. That may or may not throttle job growth, but it has already cut the legs out from under the housing market.

Existing single-family home sales fell 17.2% YoY in 2022, from 5,413,000 in 2021 to 4,480,000 last year. New home sales were down 16.4%, from 771,000 to 644,000. Most dealers haven’t seen the full effect yet because the number of units under construction is at an all-time high. Once the backlog gets worked off—the consensus is that it’ll be in the second half of 2023—the downturn will start in earnest.

Presumably it won’t last long if the rest of the economy holds up. According to the Harvard Joint Center for Housing Studies, the market is also likely to get a boost from an unexpected surge in household growth following the COVID-19 pandemic.

But the Joint Center also notes that “population growth has slowed to a near standstill” and that “will soon be reflected in lower levels of household growth” that “could be around for a while.”

The effect of that will be to make housing demand more volatile: increasingly dependent on immigration, income, and affordability rather than predictable population growth.

That won’t make it easier to be in the LBM channel, but it will favor nimble independents over companies that either can’t or won’t adapt quickly as the marketplace shifts gears.

In other words, buckle up. The wild ride isn’t over yet.

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