Higgins: “Getting inflation under control will be like turning a giant tanker at sea: it will be slow and deliberate, but we will eventually get it turned around.”

But as always, the American economy will bounce back

By Joe Higgins, Quest 4 Quality

The Bureau of Labor Statistics reported last week that the economy added 261,000 jobs and significantly beat the market forecast of 200,000. In addition, there was an upwardly revised number of new jobs in September, from 263,000 to 315,000. This is a further indication of the strength we have going right now in our economy. 

The unemployment rate jumped to 3.7% in October, up from 3.5% in September. A move up in the rate at the same time as  significant job growth usually indicates more people entering the workforce; however, that did not happen this month. The overall labor force participation rate fell slightly to 62.2% from 62.3% in October. There are two reasons we see supply issues with labor: 10,000 baby boomers are retiring every day, and the pandemic caused millions of Americans, especially women, to leave their jobs.

Many economists believe that we may enter a so-called “growth recession,” which Forbes defines as “a period of slow economic growth along with rising unemployment rates, but without a full contraction in the economy.” It is challenging to imagine a recession when the economy produces 261k jobs and wage growth exceeds 5%. However, a slowdown is on the horizon as the Fed raises interest rates.

American small business owners will continue to experience a need for qualified workers. Job openings are now lower than in the summer; job creation numbers have also fallen from the rapid pace we witnessed for most of this year. In the first half of 2022, the economy was adding almost 400,000 jobs a month. October’s report would indicate that rising interest rates could cause that number to fall below 200K well into 2023. So, while the Fed is slowing the job market, the demand for labor is still exceeding the supply.

Housing

Housing is one of the largest sectors in the U.S. economy, and it is critically important to independent retailers. Housing growth translates to an increase in purchases of appliances, electronics and furniture. The pandemic years created a new way to think about housing as millions of workers left their offices, moved to the suburbs and bought residential real estate. It was one of the largest mass migrations in U.S history. 

Home prices reached record highs these past two years as demand outstripped supply. Mortgage rates are now at their highest rate in 20 years, exceeding 7% in October. Rising rates, short supply and inflated values mean this is not a good time to buy a house. 

In all my years running the builder division at Whirlpool, this may be one of the most inopportune times for consumers to buy a home. 

Mortgage loan applications were down 37% last month, and applications to refinance a home loan were down over 80% in some markets, according to the Mortgage Brokers Association.

My educated guess is that home prices will not do what they did in 2008 after the Great Recession. New regulations will not allow buyers with insufficient credit strength to purchase homes. Homeowners have higher levels of equity than existed during the subprime mortgage crisis, they have better-paying jobs and the unemployment rate in 2009 reached 10%; today, it is 3.7%.

But there will be price depreciation in some regions of the United States, especially in areas that enjoyed rapid growth in pricing. Places like Idaho, Arizona, California, Texas and Florida will see more significant home price declines than the Midwest and the Northeast. Redfin commented in a recent call that cuts in pricing could be as much as 18% to 32% in the Sun Belt regions across the country. In a survey from Zillow, just 19% of Americans said they are in the market right now for a home. The reasons given were sky-high mortgage rates, the rapid rise in home prices over the past two years and inflation in the U.S economy

Bottom Line

This month’s jobs report will force Jerome Powell and the Fed to continue raising interest rates after November’s fourth consecutive 75-basis-point increase. So, look for another increase in December and continuing into next year. 

Here is what all this means: The pace of hiring, as I indicated above, will continue to slow; you will see the unemployment rate rise to 4.5%; and Americans will lose jobs. The Fed is attempting to raise rates to cool the job market and slow the economy to bring inflation under control. It is like turning a giant oil tanker at sea, it will be slow and deliberate, but we will eventually get there.

Expect more challenges over the next twelve months, as rapid change is in our future. We are dealing with inflation, the pandemic, a war in Ukraine, rising interest rates and gasoline and food prices are at all-time highs. Recessions and recoveries are part of a functioning economy; we have been through rough patches in our history, and we will get through this period. 

Joe Higgins is a 45-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.