The economy in the United States is soaring, however, there are warning signs flashing in two crucial industries that also soared during the era of easy money.
Automobile and home sales have slowed in recent months despite the high consumer confidence and low unemployment.
In part, the slowdowns are driven by the Federal Reserve’s efforts to wean the economy off near-zero rates, according to CNN Business. Additionally, borrowing costs are squeezing the automobile and real estate industries. These industries have benefited from a decade of cheap money.
Nicholas Colas is the co-founder of DataTrek Research. He says that the higher interest rates are clearly affecting the economy. The two most expensive things people purchase are homes and cars and both of these purchases are credit sensitive.
The economy has recovered from a recession therefore the Federal Reserve is attempting to remove the training wheels. This has become a delicate task that is trickier that usual because rates were dropped so low and stayed that low for a longer period of time.
The automobile and real estate businesses are on the frontlines of this shift in borrowing costs. Recently, mortgage rates topped 5 percent for the first time since 2011. Homebuyers are noticing that the mortgage rates are still low.
In September, new home sales dropped to the lowest rate in two years at 5.5 percent, according to the Commerce Department. Sales in the Northeast dropped 41 percent and 12 percent in the West. They rose modestly in the Midwest. According to Barclays, home sales are at 22 percent now, which is below their peak in November 2017.
Mortgage rates are rising, and the high prices of homes have people discussing the benefits of renting over purchasing, according to Lawrence Yun, the chief economist of the National Association of Realtors.
On Tuesday, Oct. 30, 2018, the S&P Case-Shiller Home Price Index will be released. It is expected to show that price gains decelerated in August.
The SPDR S&P Homebuilders ETF (XHB) has plunged 30 percent since January. Toll Brothers (TOL) is a luxury homebuilder and has dropped 31 percent, and KB Home’s (KBH) stock has been cut in half.
Additionally, automobile stocks are in a bear market. Ford (F) lost a third of its value since January. General Motors (GM) dropped 28 percent from its peak in October 2017.
Higher borrowing costs and other rising costs caused by tariffs have added to the headache in the world of automobiles.
In September, GM suffered a 16 percent drop, while Ford dropped 11 percent. Toyota and Honda have also experienced a decline in sales. The sales figures for October will be released on Thursday, Nov. 1. GM is scheduled to report their earning on Oct. 31.
The housing and automobile slumps underscore the fears at the heart of the market mayhem. Is the Federal Reserve moving too fast? Are the best days of the recovery over?
Colas says, “it is not a death knell for the bull market of the economy, but it does give people concern that we are beyond the peak of the economic cycle.”
New numbers on the state of the economy will be released on Friday. This is the same day the Bureau of Labor and Statistics is to release the October jobs report.
Last month showed that the economy is going strong. The United States economy added 134,000 jobs in September. The unemployment rate dropped to the lowest level since December 1969, 3.7 percent. However, wage growth is not growing as fast.
By Jeanette Smith
CNN Business: Rate hikes are already squeezing these businesses
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