The Higgins Report: The Makings of a Great Economy

Columnist and guest speaker Joe Higgins shared his economic outlook at this month’s AVB Summit in Las Vegas.

But things can go sideways very quickly

By Joe Higgins, Quest 4 Quality

To put it mildly, it’s been an interesting start to 2022.

We had the Federal Reserve raise interest rates, the housing market is still in chaos, and foreclosures spiked in January.

We also saw the war in Ukraine escalate, the Consumer Price Index (CPI) rise 7.9 percent in February, and the Dow Jones move in and out of correction territory.

As investment analyst Jim Cramer said, “It’s complicated.”

Inflation

Last month the CPI hit its highest level since the early 1980s, with no sign of slowing down. It is alarming that it has taken so long for Fed Chair Jerome Powell and his Fed presidents to react; they raised interest rates 25 basis points last month in a move that should have happened last summer.

Economists exclude food and energy from the CPI due to their volatility, resulting in a “core inflation” figure, which was up 6.4 percent. While this increase in inflation was in line with expectations, it was the highest we have seen in 40 years.

There was, however, some good news in the February report for those looking to buy a used car — it looks like the cost of used automobiles has finally topped out. While it is a positive sign that prices for used autos slowed by 0.2 percent that month, they are still up 40 percent over the prior year. Cars have had the most significant impact on the current inflationary cycle, so any movement that is either flat or down is good news.

But 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 percent increase in what you are paying at the pump. It appears now that this war will continue much longer than most military experts believed.

Housing

I fielded a lot of housing questions from AVB members as l walked the expo floor of Summit 2022 earlier this month in Las Vegas. My advice is simple: If you own a house, keep it. 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 2021 and has not improved since.

Redfin recently reported that the U.S. housing supply dropped below 750,000 units in February, down over 20 percent 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 inventory situation will worsen in the short term, the spike in 30-year mortgage rates to 4.95 percent last month has changed the long-term outlook. Remember that as recently as last December, 30-year mortages averaged around 3.1 percent. The 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. But don’t worry, homeowners. With the severe shortage in housing stock that the U.S. is experiencing, I believe that home prices will continue to climb for two more years. High-interest rates will slow the rapid trajectory, but in no way does it portend a crash.

The Bottom Line

For the balance of 2022, the U.S. economy will continue to see extraordinary job growth, maybe the most robust in 60 years, with the unemployment rate expected to drop to 3.3 percent by December.

The Fed believes they will get a handle on this cycle of inflation in the second and third quarters. Powell forecast last month that inflation will be at 3.6 percent by year’s end. If that happens, it will ease the burden that consumers are feeling today.

As for the stock market, expect a rebound as corporate profits will be the best in years.

The pandemic seems to be under control for now, which will be another positive factor for the balance of 2022. The newest COVID-19 variant, BA.2, is already circulating in the population and we await a report on its impact.

And lastly, most economists are predicting GDP growth of 2 percent to 3 percent for the full year.

There are, however, some disconcerting signs in our economic picture. The government has ended stimulus payments and savings are falling rapidly. Inflation is running at nearly 8 percent, and if the Fed acts too aggressively it could trigger a recession. Supply chains are still in disarray despite signs of improvement, while 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.

Joe Higgins is a 43-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.