What is the impact of the war in Eastern Europe? Where are we at with inflation? And what does that mean? What about the other economic indicators and reports that have come out from the Fed and other economic agencies? We’re going to be going through the American economy from top to bottom. We're going to be covering a lot of numbers and data of what that looks like, and what's been released from the Fed and from other agencies.
The first item we would like to discuss is the Fed's recent reports saying that last month's inflation figure was 0.8%. That's right. One month at 0.8%. Now, if you're not used to updates from the fed or dealing with inflation figures, that's really bad. Okay. 0.8% is the equivalent of almost 10% extrapolated, right? If you took 0.8%, times 12, almost 10% inflation for the year. That's what we're on track for if you look at that month, okay. That is not good. That is terrible. And the most alarming thing that we're dealing with is after that was announced I'm sitting there looking at all kinds of different financial outlets and they're like: Well, the fed hit their target, the fed hit their estimate," and I'm sitting there losing my mind. You know, why? Not because the 8%, which is terrible, and that on its own is a problem, right? Huge problem. I'm losing my mind more because people are acting like this is okay. The fed announced, they were expecting around 0.8% for that. So they actually hit their target. They hit their estimate of what they expected. Okay. I cannot imagine a worse scenario where I actually feel uncomfortable that they hit their number. Right. I'm looking for positivity from the inflation figures. To me, imagine me with my report card. Right? I'm like, mom, dad, why don't you have a seat and hand them each a copy of my report card. And I go, look, guys, I got some really good news for you here: I hit my target. Exactly what I thought I'd get on my report card is exactly what I got, you're welcome, congratulations. And they're sitting there looking at it and then they look up at me they're like, are you insane??? This is terrible!!! Right? How could you be so confident and so happy that you hit your target when your target is CRAP, it's low and it's BAD. Right? So to me, this is insane, but that said there, I will give them the credit of saying that their target and their estimate hitting that does actually have some weight in the markets. It does have a benefit to the markets because the markets know what to expect. Sure. They can build that in their analysis and pricing. But at the end of the day, 0.8% was really disappointing to me. And when I'm looking at the future of the market, and they're talking about rate hikes, that will go through in a little bit- this is alarming. This is showing that inflation is not under control and that there's a lot to come with that.
Another interesting figure that was released was that personal income went up by 0.1% last month. That's good. That's very, very, very good news. Additionally, 0.1% of disposable personal income went up 0.1%, both very good things. I love to see that, especially in the environment we're in. Here's the downside. Personal consumption expenditures increased by 2.1%. So, with personal consumption expenditures going up by 2.1% and then personal income and disposable income going up by only 0.1%. What we can see is that the American consumer lost essentially 2% to expenses. That's in one month. So, it's important to see that these extrapolations are very interesting and paint their own picture.
In one month, the American consumer lost 2% essentially to expenditures. When you see expenditures rise, 2% higher than those, you see that there's this slow creep where the American population is not getting out ahead of their expenses. That’s why I say this is some scary data that we're looking at and some numbers that we're released by, the bureau of economic analysis.
So interestingly, we are seeing that home prices are 18.6% year on year. So nobody's too surprised. I think we all are very aware that homes have been skyrocketing and pricing in Phoenix, Miami and Tampa are the leading markets for growth. The Fed only has so many tools, one of the classic tools that we see increasingly lately, but they've used historically to get inflation and other things under control are raising rates. This is a very powerful tool in their toolbox. The Fed has come out and said that they're going to be raising them one and a half percent or 150 basis points over the coming year or year and a half. My understanding is over the next 18 months, we're due for about a quarter percent AKA 25 bibs per quarter increase in rates.
So what does that mean for the home buyer? What that means is about every 1% that rates increase the average home buyer sees about a 10% decrease in purchasing power. It has affected about 10% for every 1%. So if you extrapolate that to what the Fed is saying of about one and a half percent rate hikes over the coming months, then you could assume the average home buyer's purchasing power will go down about 15%. Now, here are the balancing factors. The first is, 18.6% was the year over year increase already. So the market is on fire. It's booming. It's on the way up. In addition, there are some estimates that are about 20% over a healthy demand in the market. We're about 20% over that by many estimates. So if there's about a 15% reduction in purchasing power. But generally speaking, it is a good figure. So if there's 20% over demand and 15% reduction in that, by the purchasing power lost by American consumers and home buyers, then the market might start to get a little more realistic. It might start to start to get a little more in range. Now I don't personally believe that we're going to see reductions in home pricing. I believe from all my research I have done on this, we're going to see it as more of a slow down cool off rather than an actual dip in values of homes. I think that's a big indicator because the biggest question that I always hear from people on this topic is when's the right time to buy? I don't think we're going to see that like 2008 where some markets were down 30%. I think we'll see more of a cool off scenario. If you're picking core markets, I don't anticipate too much more than just a cool off, rather than a huge loss of pricing.
Next point I would like to discuss is that there was actually 7% GDP growth in Q4 of 2021. That 7% increase is good. The preceding quarter was only at 2.3%, according to the bureau of economic analysis. The biggest reason that there was that 7% increase was due to non-residential fixed investments in state and local government spending. The government is getting a lot of money and trying to get things back on track. But non-residential fixed investments. That's interesting. Now we need to correlate to the stock market. What did the stock market do in Q4 2021? Well, we saw an 11% increase in Q4. We saw 7% GDP growth. And the bureau of economic analysis is quoting non residential fixed investments as the reason. So basically we can kind of draw that connection as the stock market was great. GDP went up because of it. That's dangerous. Now that we're in Q1. Why? Because the market is down around 18% in Q1. We've been getting freaking hammered. If you're heavy in equities, we do carry a lot of equities, pretty much indexes. We keep it pretty boring and stick to core, consistent stable returns, even indexes are getting hammered right now. So with that being the case, now we're in a bad Q1 stock market. We have huge disruptions and things like global food supplies, global nickel supplies, all kinds of commodity pricing all across the board. We have gas prices at record highs right now, right? So the concern for GDP is that while we saw 7% increase in, in the fourth quarter, Q1 is going to not look good at all, is my personal prediction. We still have a couple weeks left in the quarter, but I’m not holding my breath that it's going to get a lot better. But like any downward trend or any issues in the market, it just opens up opportunities for a buyer that is looking for them. So there are still opportunities. Maybe it's to buy in the stock market right now. We are buying for our side.
In other home buyer news, the FHA has updated standards of mortgage lenders of what that would be required for FHA loans. It looks like a lot of things on the secondary market for a lot of these mortgages. With home prices going through the roof and rate increases on the horizon and increased standards that just shows a more difficult route for home buyers to get loans and will probably affect housing in that way.
One amazing resource we follow to get great information on the single family home market and what that might look like is the National Association of Home Builders. Their most recent study reported builder confidence for single family homes fell one point in February to 82. This was driven primarily by supply chain issues and raising construction costs across the board. Here is what they said, "Production disruptions are so severe that many builders are waiting months to receive cabinets, garage, doors, countertops, and appliances. These delivery delays are raising construction costs and pricing prospective buyers out of the market. Residential construction costs are up 21% on a year over year basis. Higher interest rates in 2022 will further reduce housing affordability even as demand remains solid due to lack of resale inventory.” I see this actually as a pretty interesting factor. I think this is a good balancing point to a lot of the other things going on in the market. On one hand, it slows down the increase and continues to drive up those new construction home prices, even further for all the reasons that they just said. So, I think this in that way, it would be an upward driver of home pricing. However, as mentioned, with rates increasing and buyers able to afford up to 15% less, that drives down pricing as well. So this might help balance the equilibrium a little bit more to balance out the market. So it's less crazy either from rate hikes or from demand. One thing I do wonder about is the profitability of these home builder companies. I know from firsthand experience, we've done some development primarily on the entitlement side. So we take raw land, we get it fully entitled top to bottom and then sell that off to the developer. The final developer then goes and builds all the homes and sells them out. So we do have experience in that. I think across the country, it varies quite a bit what the margins are. My concern with the home builders are: can they sustain market disruptions like this? If construction costs are up 21% year over year, raising interest rates may bring down the ability of home buyers to purchase. Then does that squeeze affect their margins? And how much do they have there? That's a question that I have, and “it depends on the market” would probably be the correct answer. But I'm keeping an eye on that closely just to see where this trend goes for home builders specifically, because new inventory really balances out markets. Similarly, the census bureau reports that construction spending went up 1.3% in January alone, up to 1.6, 8 trillion and up 8.2% from the prior year's figure. So yeah, construction costs are on the way up to say it again, a different way.
On the other side of the spectrum, we have the consumer. How is the average American citizen doing with things and what are they dealing with? Let's drill down into some numbers on that. The university of Michigan consumer sentiment index the CSI declined to 8.2% in February to 61.7. That's down nearly 20% from one year ago. What does the CSI measure? The consumer sentiment index measures the basic overall health of the economy, by the opinion of the average consumer. So when this goes down nearly 20% in one year, it means Americans do not think the market is doing well. They don't think the economy is going well. If it has gone down almost 20%, that is a huge indicator that people are not feeling positive about where we are at. Additionally, Joe Biden's ratings are plummeting. Those are very clearly connected. It means people do not have confidence that he is handling the economy properly. My overall take is that CSI is extremely important. I'm always looking for this in economic updates when I'm compiling my own notes. To see this down 20% is really disappointing. The good news is we do have some good news.
The commerce department reports that new orders of manufactured goods are up by almost 1.5% and shipments of manufactured goods are up over 1%. These are what we want to see. Maybe they could be a lot higher, but they're going the right direction, which is very, very, very good. Just to put this into perspective, manufacturing is one of those things that bring American jobs and manufacturing back. While there's many factors to that, they're right in that the net exports and imports a country has are a big determiner of where international dollars are going. If a country has major net exports, then that means they are trading those exports and bringing in money into their economy. So that's a good indicator. Look at China, right? They're bringing in foreign money to their manufacturing areas which is strengthening their economy. If you're a net importing country, it means you're importing. You're bringing in goods and you're sending that money overseas to someone else. Also a couple good notes on the commerce department's report on manufactured goods is that we are up 20% in the last 21 months. So while we have certainly gotten hit hard by COVID, we are still up most months over the last 21 months, which is very good. New orders on manufactured, durable goods are up eight of the last nine months. So those are really promising and helpful numbers to understand that there are some good trends in the market as well.
Similarly, we have some more good news for the American consumer: employment is going up. This is extremely important. The unemployment rate has edged down to 3.8% with widespread job growth. According to the bureau of labor statistics, this is a saving figure. This is extremely important. Also, I like to dig one level deeper than that, which you'll see governments do oftentimes to say, yeah, our unemployment rate is so low and then you go, wait a second. What percentage of the population is participating in that? What percentage of the population is interested in actually having jobs and is even in the unemployment or employment figure? That's a good question. The answer to that question is the labor participation rate. Right now, our labor participation rate as a country is 62.3%. So almost 62.5%. Now, what does that mean? That means that over the age of 16, which we consider the working demographic, 62.3% of people are working, but 62.3% is actually not that scary. If you look historically at the absolute peak since they started tracking, it was in the early two thousands and we are only 3-4% below that.
So according to Jerome Powell, to the house committee on financial services, he expects the Fed to raise interest rates at their next meeting. That's coming up in mid-March. This is anticipated to be a quarter percent hike, AKA a 25 basis point jump. Now what's gonna happen in the markets? The general consensus is and J Powell has been pretty open about what those expected increases are. So if he sticks to the 25 basis point jump, I think that's already priced into the market. I'd say for equities, you're probably not going to see a major disruption, but if there's less, let's say there's not a rate hike and he's going to wait a following period to raise the rates. I think you'll see the market jump. If he doesn't make that rate hike in March. If it turns out instead of 25 basis points to be half a percent, AKA 50 basis points, the market's not going to be happy. I expect the market will have a big downturn for that period. Also, as the Fed raises rates 25 BIBS at a time I predict commercial real estate will soften. I think industrial real estate is poised really well with great fundamentals. I would have zero surprises if retail just got pummeled by rates going up.
Another note that's interesting here, cryptocurrencies have also been in the sites of the government. Recently, according to the financial stability boards report, it indicates that crypto asset markets could threaten financial stability. They want to get this stuff regulated, the government wants to control it a little bit more and figure out ways to possibly tax it. . The other side is crypto is very clearly here to stay. It is involved in daily business at this point. It is in the markets. So when you see the financial stability board doing full reports saying that they need to regulate it more, to me, that's saying they're taking it very seriously and they believe that there are a lot of implications if they don't get their arms around it today. So I'm interested to see where this goes. If you were to ask me my guess on cryptocurrency as someone who's not full-time on it, I would tell you this. I expect a lot more regulation, a lot more hurdles and a lot more creativity from the government of how they can control it.
So what are my overall takeaways on all the data and information we just went through? I believe that inflation is tweaking everything. I think it's affecting the market top to bottom. We are feeling those impacts. I think in markets like construction, where they're seeing these huge increases and they're holding periods of properties are getting screwed around, waiting for supply chain issues to resolve cetera and inflations going up. It's a concern for inventory. It's a concern for Americans holding cash and what they're going to do with that. If inflation's really 7%, you can't afford to keep money in the bank. That's my thought and my opinion on it. I believe that Americans are waking up to that and they're finding solutions to put money in different places. That's why we created and structured the Saint Income Fund, because we pay 8% and it beats the inflation projected by the federal reserve. There are many options to beat inflation. If you're in cash, it's a huge concern to beat it at this stage, as it opens you up for inflating your way out of the value of your dollars. Also I believe uncertainty is the one of the major drivers as well right now, whether it's the consumer side with them not knowing what exactly is going on, resulting in sentiment dropping nearly 20%. I think a lot of that is just the uncertainty of it all. We have a war that's breaking out in Eastern Europe. We don't know where the US fits into all that on a long term basis. We don't know if this war's going to escalate or resolve. A common thing is to see contraction in industries, in business, taking less risk in investors and taking less risk in general. That's trickling down to the whole economy right now. But as a final point, I want to make my favorite point that I look at any market data with. There is no good or bad market. If you think about it objectively and you are just digesting the information, it's telling you a story and now it's up to you to make the decision of what you do with that information in your life. If you feel the market's grim and it's not going in the right direction, you have to make decisions accordingly and find the opportunities. That's been my entire career. When there's problems, find the opportunities. When things are good, how do you maximize them? That is what we do on a daily basis and I can't recommend it enough.
Inflation is the rate at which the overall price level for goods and services rises, resulting in a decline in the buying power of a currency.
The main causes of inflation include:
1.An increase in the supply of money
2.An increase in demand for goods and services
3.A decrease in the supply of goods and services
4.External factors such as international events, changes in exchange rates, and geopolitical tensions
The economy can experience both good and negative repercussions from inflation. Moderate inflation can enhance economic development in the short term by stimulating spending and investment. Nonetheless, significant inflation can result in diminished buying power and diminished consumer and company confidence, which can ultimately lead to a slowdown or recession.
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Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.