For my money, when nothing else makes sense, it’s time to utilize a bit of abductive reasoning.
A great example of abductive reasoning (partial- pun intended) is the duck test..… if it walks like a duck, swims like a duck, and quacks like a duck, it’s probably a duck.
So, let’s overlay that reasoning to the following: If inflation is at a 40-year high, if home sales are cooling off and if the Fed is jacking up interest rates while stocks (and furniture sales) are taking a nosedive, are we on the verge of another recession?
We just might be, and that would be anything but ducky.
Let’s take a closer look at some of the drivers mentioned above and see if any of these merits getting our feathers ruffled.
Housing
According to the National Association of Realtors, sales of existing homes dipped again in March, resulting in back-to-back months of declines.
Specifically, total existing-home sales, dipped 2.7% from February to a seasonally adjusted annual rate of $5.77 million in March. Year-over-year, sales fell 4.5% ($6.04 million in March 2021).
That drop prompted Lawrence Yun, chief economist for the NAR, to say, “The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” adding, “Still, homes are selling rapidly, and home price gains remain in the double-digits.”
Looking around the corner, and with mortgage rates expected to spike, Yun warned that transactions could shrink by 10% this year. He also said that while inventory levels are likely to remain tight, sellers, “should not expect the easy-profit gains and should look for multiple offers to fade as demand continues to subside.”
The shift in the housing market was also referenced by Daryl Fairweather, the Chief Economist for Redfin, a full-service real estate brokerage.
“Price drops are still rare, but the fact that they are becoming more frequent is one clear sign that the housing market is cooling,” he said, adding, “It goes to show that there’s a limit to sellers’ power.”
While acknowledging that demand for homes still outweighs the current supply, he cautioned that sellers can no longer overprice their homes and still expect buyers to clamor at their door.
The Fed and Interest Rates
The Federal Reserve raised interest rates by half a percentage point earlier this month to combat current inflation, which is at a 40-year high.
“Inflation is much too high,” Fed Chair Jerome H. Powell said during a recent news conference. “We understand the hardship it is causing, and we are moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses, ”Powell added.
The Fed gave more of an in-depth explanation in a recent release in which it said, ‘Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.’
So, what could happen? I think we are already seeing the correlation between the rate hike by the Fed and a slowdown in both home sales and mortgage applications
According to the Mortgage Bankers Association, total mortgage applications dipped 5% last week and were off by almost 50% from a year ago.
As stock prices continue to dip, don’t be surprised if consumers keep a closer watch on their disposable income, which could result in a further slowdown in the sales of furniture, bedding, and related home furnishings.
Inflation
Not that this should come as a surprise to anyone, but a just-released survey by the Pew Research Center confirmed that the vast majority of Americans say that inflation is the biggest worry they have.
What follows is a chart from their report along with some explanatory copy from the study.
Seven in ten Americans view inflation as a very big problem for the country, followed by the affordability of health care (55%) and violent crime (54%).
About half say gun violence and the federal budget deficit are very big problems (51% each), according to a Pew Research Center survey conducted April 25-May 1 among 5,074 U.S. adults.
More than two years into the coronavirus pandemic, just 19% of Americans rate the coronavirus outbreak as a very big problem for the country, the lowest share out of 12 issues included in the survey.
In June 2020, in the early stages of the outbreak, 58% rated it as a very big problem, placing it among the top concerns at the time.
So, looking at all this information in the aggregate, are we on the verge of another recession?
The stage seems to be set. I guess we will have to wait until the house lights go down and the ducks dressed up as actors, waddle onto the stage.
