US economy refuses to cool off

Jun. 22—Where is that recession the "experts" have been predicting for more than two years?

Despite the continued warnings that everything was about to slow down, the American economy has refused to cool off.

It wasn't that the Federal Reserve Board was concerned about a robust economy, rather it was inflation that worried those who control the flow of money.

From food to housing, prices skyrocketed during and following the COVID epidemic. Interest rates dropped to almost zero percent and the government was mailing out checks like there was no tomorrow.

The Federal Reserve, which was responsible for those low interest rates and resulting inflationary pressures, decided in early 2022 that enough was enough and that it had better do something before inflation really got out of hand.

So, it started raising rates, making loans harder to get. In the span of 18 months, the prime rate has jumped from almost zero to just over 5 percent.

Have those higher rates curbed inflation? Government statistics say they have, but if you've been to the grocery store lately, you know that there has been practically no drop in the price of groceries.

To the contrary, steak and other beef prices are higher now than they were two years ago, in part because cattle prices continue to rise. That's great for the farmer but hard on the consumer.

What about the real estate market? If you recall, last year at about this time there was a housing frenzy. Anticipating that mortgage rates would rise and price them out of the market, buyers were jumping on everything they could find and paying much more than the asking price. Then last fall, the market slowed.

That slowdown, however, was likely more seasonal than a result of higher interest rates because this spring the boom is back, and with the same gusto as in 2022. I have two good friends who are real estate agents, and they can't keep up. The market is that good.

Two weeks ago, one friend had a client who was interested in a house that was about to be listed for $500,000. Understanding that the market is hot, my friend urged the client to offer the owner $520,000 the instant the home became available.

Too little, too late. Within a few hours, the broker handling the listing sent my friend an email saying that the house was sold within an hour to a buyer who offered $600,000. Thirty-one prospective buyers had made offers.

I'm not sure where the government is getting its figures on lower inflation, but it can't be from the housing market, which is as hot as it was a year ago. It is tough for first-time buyers.

Why the higher prices and the quick turnarounds? Inventory. According to industry figures, there are about a million homes on the market nationwide. Meanwhile, there are 10 million people out there looking to buy.

Those who might sell are keeping their homes off the market. Yes, they might get a fantastic price for their property, but what will they have to pay to get another house — if they can find one?

Builders understand the shortage and are putting up houses as fast as they can. Statistics released earlier this week show that there were 1.63 million housing starts in May, many more than were anticipated. Like real estate agents, builders can't keep up with the demand.

Many buyers, according to my friends, are still paying cash for homes. And many are still buying multiple properties that will become rentals. Remember, a housing shortage not only means higher home prices, but also an increase in rent.

Again, it is unclear just where the government finds inflation easing. It is certainly not in food prices, nor in housing. And I don't see automobile prices dropping off the table.

The working man has been helped by the fact that wages continue to rise, which only adds to inflationary pressures.

And the stock market is inching its way up again. The Dow Jones Industrial Average has topped 34,000 several times as it attempts to return to its all-time high close of 36,799 (Jan. 4, 2022). Thirty-four thousand appears to be the latest benchmark. If the Dow can hold that, an upward move seems likely.

The Nasdaq and the S&P 500 are also moving up slowly and helping those 401Ks. Big traders, however, are still cautious.

Meanwhile, the economy keeps rolling along. People are working and wages are good.

Now if we can just get a handle on inflation ...

Donnie Johnston's columns appear twice per week on the Opinion page. Reach him at [email protected].

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