Interest Rates, Inflation, and the Economy: July Market Pulse Webinar Roundup
The July 2024 Market Pulse webinar discussed:
recent trends around fraud,
best practices for reducing overall fraud risk,
consumer behaviors,
and chargebacks for B2B and consumers.
Since the Market Pulse webinar is so dynamic, we want to ensure you do not miss one observation. Below, we recap macroeconomic updates from Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates.
Be sure to check out Part 2 (coming soon) for consumer credit trends from Maria Urtubey, Equifax Risk Advisor.
And, find the discussion from Scott Przybyla, Senior Vice President of Sales and Identity Fraud at Kount, an Equifax company, and Gaurav Mittal of Ethoca, a Mastercard company, in Part 3 (coming soon).
MACROECONOMIC UPDATE with Amy Crews Cutts, President and Chief Economist, AC Cutts & Associates
Opening on a positive note, we learned inflation is expected to decrease. In June, the Consumer Price Index (CPI), which measures the cost of all items, showed a 3% increase from last year. This is above the Federal Reserve's target of 2%. However, the Fed prefers to look at the Personal Consumption Expenditures (PCE) price index, which has not yet been released for June.¹ The Fed uses a version of this index, called "super core," that excludes volatile prices like food and energy because these can change due to politics or natural disasters rather than consumer demand.
In the "super core" measure, they also exclude housing costs because the way they measure it isn't very accurate, especially for homeowners. In May, this "super core" inflation rate was at 2%, which gives the Fed room to possibly lower interest rates soon if they decide to change their current policy.¹
Although the Fed has not revealed their plans, many in the financial markets are already expecting interest rate cuts this year. It is important to note the difference between inflation slowing down and prices actually decreasing. Slowing inflation means prices are still going up, just not as quickly. When inflation is around 2% annually, prices generally increase gradually, which can improve our quality of life as wages often rise slightly faster. The Fed aims for stable prices to avoid sudden changes that can disrupt people's budgets from month to month.
Economists predict the Federal Reserve might cut interest rates for the first time in November. If cuts happen, they could total 0.5%, likely split into two cuts of 0.25% each. These changes are more symbolic than impactful on consumer or business loan rates, but banks are already adjusting by lowering rates on CDs. Similar cuts are expected from the European Central Bank and the Bank of England. The Bank of Japan, after years of near-zero rates to combat deflation, might raise rates slightly in the coming months as its economy improves.²
The Federal Reserve is considering cutting interest rates while facing an "inverted yield curve," where short-term interest rates are higher than long-term rates. Economists see it as a warning sign, although it probably will not directly cause economic changes. If the Fed cuts rates, short-term rates could drop even more, potentially reversing the inverted curve by mid-2025. This could stabilize mortgage and auto loan rates, impacting affordability and consumer demand in the market.³
The Federal Reserve uses monetary policy, mainly adjusting interest rates, to influence the economy. Recently, despite significant rate hikes, the economy has not responded strongly. The labor market, for example, took time to show changes, with unemployment ticking up only recently. Even though 4.1% unemployment would normally be seen as good, after a long period at 3.5%, it seems less impressive. Economists now expect the Fed to cut rates in November to support economic growth and keep inflation low. Job openings have decreased, suggesting some positions went unfilled, and hiring has slowed.⁴ This trend reflects a healthy but cautious job market where fewer people are leaving jobs for new opportunities compared to before.
Economists watch the auto market closely because it is a major employer and reflects consumer strength. Currently, new car sales are running at about 15.5 million per year, down from 17 million before the pandemic. Light trucks are more popular than sedans, which are declining in demand. Electric vehicles (EVs) are becoming more affordable, but the average cost of a new car is still around $50,000. Recently, consumers have regained some negotiating power as car inventories have improved. Prices are no longer just at the manufacturer's suggested retail price (MSRP); buyers are getting about a 2% discount on average. Additionally, incentives like low-cost financing or cash-back offers are returning, although not as generously as during the early pandemic period.⁵ These data points indicate that now might be a good time for consumers to negotiate and take advantage of deals if they're in the market for a new car.
High interest rates are making it harder for people to afford homes, but there are not enough homes for sale. This imbalance has driven home prices up a lot, with sales staying modest at around 4.8 million new and existing homes combined per year.⁶ Compared to before the financial crisis, not enough new homes are being built to keep up with demand. About 500,000 new homes are needed each year just to replace old ones that are no longer livable. Currently, only around 700,000 new homes are built annually. This shortage keeps pushing prices higher in many places across the country, even though some areas have seen prices drop due to people moving out. Economists predict that while home price increases may slow down, they won't go down overall. This situation affects both homeownership affordability and the overall housing market's strength, with slower home sales expected to continue despite high home prices.⁷
The National Association of Credit Management's Credit Managers’ Index tracks how businesses are handling their accounts receivable. Recently, the index has been volatile but mostly above 50, suggesting a mixed economic outlook. However, more companies are reporting problems with customers not paying bills on time, leading to an increase in accounts sent to collections. This trend is more pronounced in the service industry compared to manufacturing. This stress in the business sector is also reflected in rising bankruptcy filings among consumers.⁸
Consumer bankruptcies dropped dramatically during the pandemic. They have remained very low compared to before the pandemic, though they have increased slightly recently. On the other hand, business bankruptcies have returned to pre-pandemic levels. It is unclear whether this rise in business bankruptcies is a cause for concern or just a return to normal. Currently, there are some signs of weakness in the business sector, highlighted by trends like the collections index from the NACM's Credit Managers’ Index.⁹ While there is some caution, there is no immediate alarm, and monitoring these trends will be important to see where things are heading.
STAY IN THE KNOW
Explore our Market Pulse homepage where you can:
register for upcoming webinars,
find our monthly Small Business Insights,
and explore our National Consumer Credit Trends Reports.
All the Equifax data and insights presented on our Market Pulse webinars and this blog are pulled directly from these reports.
In today’s dynamic economic landscape, forward motion is not just a strategy. It's a commitment to your customers. Challenging financial times require proactive planning, goal setting, and relentless momentum. To stay on top of all our insights and updates, make sure to follow the Equifax for Business LinkedIn page. Plus, don’t miss our Market Pulse podcasts where we will continue with more in-depth conversations on topics we have discussed here.
(c) Equifax Inc. 2024. All Rights Reserved. The static provided herein are for informational and illustrative purposes only and shall not be used for any other purpose.
Sources:
AC Cutts & Associates, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis (FRED)
AC Cutts & Associates, LLC, Blue Chip Economic IndicatorsⓇ
AC Cutts & Associates, LLC, Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis (FRED), Blue Chip Economic IndicatorsⓇ. Forecasts are quarterly averages.
AC Cutts & Associates, LLC, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Federal Reserve Bank of St. Louis (FRED)
AC Cutts & Associates, LLC, U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis (FRED), COX Automotive, used with permission
AC Cutts & Associates, U.S. Census Bureau, U.S. Department of Housing and Urban Development, NBER, Federal Reserve Bank of St. Louis (FRED), National Association of Realtors, used with permission
AC Cutts & Associates, S&P Dow Jones Indices LLC, S&P CoreLogic Case-Shiller, Wall Street Journal July 2024 Economist Survey
AC Cutts & Associates, National Association of Credit Management, used with permission
AC Cutts & Associates, United States Courts
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