Let’s take a look at circles, cycles and bubbles.

Welcome to this week’s Steak House Index update.

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.  

But is the US economy expanding or contracting?

Before COVID-19, the world’s annual GDP was collectively about $85 trillion.  Then it shrank … then bounced back!   We can thank global fiscal and monetary policy for the bounce.   According the the Q3, 2020 ‘preliminary’ numbers, annual US GDP is back UP to about $21.1 trillion.   And still, together, the U.S., the EU and China continue to generate about 70% of the global economic output.  

The objective of this blog is singular.

It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The Blog:

Before I return to bubbles and cycles, let’s talk circles.  Because they actually impact the other conversation.

Take a look at this graph, courtesy of the Bureau of Labor Statistics:

As you’ve probably heard by now, on Friday of last week, we learned payroll employment increased by 916,000 in March and the unemployment rate fell slightly, to 6.0%.  Even more good news:  February’s jobs number was revised UP by 89,000, effectively resulting in a net improvement of more than a million new jobs in March.   The graph above reflects the March improvement in “private” employment — non-government.  The circles above are color-coded.   And the graph pits ‘average weekly earnings’ against the monthly increase in the number of jobs in that segment.   780,000 new “private” jobs were created in March:

It’s no surprise the largest jump was in ‘Leisure and Hospitality.’    Restaurants, hotels and the like.   Construction and education were two other leaders during the month.   If you’re interested in the raw data, here’s the site (right click, ‘Open Link in New Tab.)

https://www.bls.gov/opub/ted/2021/payroll-employment-increased-by-916000-in-march-2021.htm

By any metric, job growth in March was stellar.   Of course, we still have 4 million more unemployed now that about a year ago.  More improvement is still needed.  But the trend is clear:  We are in the upward “leg” of this employment cycle. 

While we’ve seen a significant increase in all-cash home purchases, and a fair amount of institutional purchasing, most home-buyers need a home loan.  And unlike certain countries in Europe where they pay you interest on your home loan, here in America, the home-buyer must still pay interest to the lender.   I know, bummer, right?  🙂

And to pay that interest, homeowners need a job.  Preferably a high paying job.  Take another look at those circles above.  The biggest, again, is the ‘Leisure and Hospitality.’   Now note their average hourly weekly earnings.   Less than $500.   Setting aside the “equity” debate, these numbers clearly show why (1) jobs lost in this segment had little impact on home sales, and (2) jobs gained will have little impact on future home sales. 

New jobs in the blue circles — ‘Professional and Business Services’ and ‘Financial Activities’ — could have more impact.  In March, these two segments grew by 66,000 and 16,000, respectively. 

In the final analysis, job growth, wage levels and wealth all impact the residential real estate markets.  It’s hard to separate the three and say, with any certainty, which is doing a better job today buoying home prices.   With the global perception — and, yes, it is global — that a home is a great “store of value” and a great investment, legions of parents are helping their kids buy homes.   Thus, traditional home “affordability” metrics have less application in this type of market.  There’s a lot of wealth and cash sloshing around the global economy. 

But all this can’t shake the nagging feeling that we’ve seen this movie before — we all remember The Great Recession of 2008 and the housing bust that preceded it.  That was a bubble, and that ended badly.  Could this simply be the next installment?   Let me answer that question with an anecdote from a 3/15 Wall Street Journal article:

“The residential real-estate market is on its biggest tear since 2006, just before the housing bubble burst and set off a global recession. Yet in nearly every meaningful way, today’s market is the inverse of the previous boom.

Anthony Lamacchia, a broker and owner of a real-estate company near Boston, entered the industry in 2004. Home buyers were trading up to bigger, more expensive houses after barely a year, he said. Many buyers paid small down payments, or none at all. When housing prices stopped rising, the market collapsed. By 2009, Mr. Lamacchia was working with clients desperate to dump the homes he had just helped them buy.

Now, he said, housing demand in the Boston suburbs is stronger than he has ever seen. Lamacchia Realty reached $1 billion in sales last year for the first time. Buyers have higher credit ratings these days. They are flusher and are putting down more cash up front.

“On $1 million purchases, people are putting down $500,000,” he said. “You didn’t see that before.”

Correct.  This is new.  Across the globe, liquidity has directly impacted home values.  Just as it has impacted the value of most other ‘real’ and financial assets.   For a number of months now, I’ve “blogged” my opinion that monetary and fiscal stimulus will likely ignite a rocket under asset prices.  I believe we are seeing that impact in today’s home prices.   Add in exceptionally low interest rates, supply constraint, rapidly rising American wealth, and you have a serious imbalance where demand far outstrips supply. 

I’ll close today’s blog quoting myself from my 9/16/2017 blog, entitled “Housing Redux”.:  Here’s what I had to say on the home price topic about 2 and a half years ago:

Are we now near or at the peak?   Will home prices fall from here as fewer buyers feel good about buying today?   Perhaps, but I doubt it.   It is more likely the rate of increase will slow, but I feel home prices will continue to rise in the foreseeable future.

A significant increase in long-term interest rates could change my forecast.   But as you long-time readers of the SHI know, I expect long-term interest rates to remain at about where they are. 

Interest rates matter.  And they directly influence all asset values.   It’s worth noting that the 10-year Treasury rate was about 2.2% in September of 2017.  🙂

And here’s a link to the blog itself, if you want to take another look (right click, ‘Open Link in New Tab.)

https://steakhouseindex.com/shi-9617-housing-redux/

So … is this a cycle or a bubble?  Form your own opinion.  I have mine:  For now, I’ll opine that it’s part of the larger asset value “super cycle”.   Asset prices are rising.  Quickly.  Might a bubble form later?  Perhaps.  We’ll just have to keep our eye on this one.  🙂

• Terry Liebman