Americans Are Bracing for Something Not Seen Since 2020...

Speaker A: More Americans now believe unemployment will rise than at any point since April 2020. Not inflation, unemployment. And that's according to. Yes, the Federal Reserve. In the latest survey of consumer expectations from its New York branch, the perceived probability that the unemployment rate will be higher one year from today climbed to 44.4%. At the same time, consumers believe that if they lose a job, finding another one will be nearly impossible. And that fear is already showing up in what households are doing. Existing home sales fell below an annualized rate of 4 million in August, one of only two times that has happened since the fall of 2024. Growth in revolving credit, the category dominated by credit cards, was limited to just 2.8 billion in July. Consumers are delaying major commitments while remaining reluctant to finance ordinary spending with more open ended debt. And, and here's the part the Federal Reserve should be paying attention to. Consumers are absolutely seeing the rising price of necessities. They expect gasoline, food, rent, medical care, all to become more expensive. But they are not translating those individual price shocks into expectations of broader self reinforcing inflation. Overall inflation expectations are contained and at shorter horizons, declining. That is exactly what the bond market is saying too. Consumers and markets see an energy shock colliding with a weak labor market, producing demand destruction rather than some inflationary spiral. The Federal Reserve's hawkish interpretation is the outlier, and their own data doesn't agree with it. Not that it will make any difference to policymakers. If you want to understand what's going on right now, don't ask how much things are going to cost. Instead ask whether or not Americans are afraid they'll be able to pay that cost. The most important number in the New York fed survey is 44.4%. That is the perceived probability among consumers that the unemployment rate will be higher one year from now. It's the highest reading Since April of 2020, back when the economy was experiencing a historic employment collapse. That does not mean consumers expect another pandemic style event. It means their anxiety about the direction of the labor market has reached a level not seen since that crisis. And the concern appears on both sides of employment risk. Consumers see a greater likelihood that unemployment will rise and at the same time their perceived probability of finding a new job within three months of losing one remains around levels associated with oh God, 2012. In other words, workers are not merely worried about being laid off. They're worried that a layoff could become a prolonged period without work and that they won't have enough income even if they stay employed. All of this really matters. Enormously. A worker who believes another job will be easy to find can continue spending normally. That person can treat a temporary unemployment disruption as manageable, or they're confident they're going to get a raise. But a worker who believes jobs are scarce behaves very differently. Even if that worker is still employed today. The household delays replacing the car. It avoids taking on a larger mortgage, as we'll see. It becomes more careful with credit cards. It builds cash rather than purchasing discretionary products. It may continue paying for gasoline and groceries because those are unavoidable, but it has to cut somewhere else. That is how labor market weakness spreads into consumer demand before it produces some dramatic increase in the official unemployment rate. People don't need to lose their jobs to become defensive. They only need to believe that losing one would be financially devastating. And the housing market is showing us that defensive behavior in real time. According to the latest data out today from the national association of Realtors, the number of existing home sales in August was less than 4 million. Season adjusted annual rate down another 2%. It was the weakest pace in more than a year and one of only two readings below 4 million since the fall of 2024. And mortgage rates aren't really the issue here. Some would be buyers. Sure, they're waiting for financing costs to fall before they commit a purchase. But a mortgage is not merely a bet on interest rates. It's also a bet on years of future employment and income tax. Buying a home means accepting a mortgage payment, the insurance costs, property taxes, maintenance, and the possibility that moving again could be expensive. A household must feel reasonably confident that its income will remain available. And that confidence is exactly what the consumer survey says is deteriorating. Meanwhile, the housing shortage explanation is becoming less convincing. The NAR itself has blamed a shortage of available properties for weak transaction volumes over the last couple of years. I mean, they had to come up with some excuse since home sales and refused to rebound with falling mortgage rates. The supply of previously owned homes increased 5.9% from a year earlier to 1.62 million as of August, the highest level since November of 2019. At the current sales pace, that represents 4.9 months of supply, the most in more than a decade. More homes are becoming available, but buyers remain unwilling or unable to make the commitment. Inventory is increasing, yet transactions are falling. Since we now see it wasn't supply holding the market back, and it hasn't been interest rates, what's left? The one topic no one at the NAR or the Fed wants to talk about the labor market. So as you can tell. The Fed says one thing, the headlines say another, and the markets may be doing something else entirely. So what we do here at Eurodoll University is give you the ability to take apart all the information from sources that nobody else really looks to, way beyond the conventional indicators, uncovering information hidden in yield curves, interest rates, global money markets. Learn how the monetary system evolved, why mainstream analysis often misses critical signals, and how to interpret changing conditions for yourself. Because this isn't simply about predicting a recession or calling the next crash. It's about building a broader framework for growth and inflation stagflation. Whatever comes next. Go beyond the public videos that we do here on YouTube with Eurodollar University. Stop following the narrative. Learn how the system really works so you can better structure your portfolio for the risks and opportunity ahead. Book a call with us at the link in the description now none of this data means that consumers are expecting prices will fall. Quite the opposite in fact. Consumers are expecting prices of especially necessities are going to continue rising. The New York Fed survey shows that households expect gasoline prices to rise 4.6%, food prices 5.3%, rent 6.6%, medical costs 9.1% and college 6.1%. Those are substantial increases, particularly because they are concentrated in necessities. A family can delay buying a television. It can't easily avoid food, rent, medicine, or the gasoline that's required to get them to work. But here's the crucial distinction. Expecting several necessary items to become more expensive is not the same as expecting generalized inflation to accelerate indefinitely. Consumers appear capable of separating the two. Median one year inflation expectations declined for a third consecutive month to 3.58%. Three year expectations edged down to 3.2%, while the long run measure five years remained at 3%. Those numbers don't show expectations breaking loose from any anchor. If anything, the short medium term direction is becoming more benign. And that is not because households are enjoying a sudden improvement in their standard of living. It's because they understand the demand consequences of expensive necessities and weak employment prospects put together. If gasoline consumes more of the household budget, less money remains for restaurants, clothing, entertainment, travel, everything else. If food and rent consume more income, the household delays buying a car and they stop buying houses. If a worker is worried about losing a job, the worker becomes even less willing to absorb discretionary price increases. That is not inflation. Demand destruction A supply shock can raise the price of energy while simultaneously weakening spending across the rest of the economy. Unless wages, credit and demand begin accelerating strongly enough to validate broader increases, businesses eventually lose the power to pass on every additional cost. We've already seen that among retailers. Consumers are telling us they understand that too. They feel poorer because necessities are expensive, not wealthier because a generalized inflationary boom is underway. Now, the latest consumer credit data, ah, initially anyway, appears to contradict that caution. According to the Federal Reserve's latest statistics, in the month of July, total consumer credit, at least the seasonally adjusted aggregate balance, increased by 15 billion, which was the most in three years. Taken a loan, that could sound like renewed household confidence, exactly the opposite of what I just told you. But almost the entire story changes when the total is separated into revolving and non revolving credit. Non revolving credit produced the overwhelming majority of the increase, and that category includes auto loans, student loans, and financing for other large purchases that are repaid on fixed schedules. Revolving credit, dominated by credit card balances, only increased by 2.8 billion, far less than the larger expansions that were recorded back in March and April. And why does that difference matter? Because installment borrowing can be pulled forward by fear of higher interest rates, fear of what Kevin Warsh's Fed might do for inflation that consumers aren't buying. A household may decide to purchase a car now because it believes auto financing would become more expensive next month or the month after. The loan appears as current credit growth, but it doesn't represent a durable improvement in purchasing power. The household has simply moved a future purchase into the present. Credit card borrowing works differently. Consumers can't usefully pull forward six months of gasoline, groceries, utilities, medical expenses. Those revolving balances therefore say more about current cash flow and confidence in future income. And despite expensive necessities, households are showing limited willingness to add to those balances outside of March and April. That can reflect caution among borrowers, tighter lending standards among lenders, or a combination of the two. A worker who's worried about layoffs may not view a credit line as a safe extension of income. A bank that's worried about borrower risk may become more selective. It might reduce the limits or demand greater compensation. Either way, the signal is defensive. Selected large purchases may have been accelerated because consumers feared higher financing costs. But open ended borrowing credit cards remain subdued because consumers fear, increasingly fear, weaker jobs and in incomes. Those two behaviors are not contradictory. They are different responses to the same uncertainty. Now, the user response to all of this, from the Fed, the mainstream media, or just critics in general, is that the official unemployment rate looks practically benign. In fact, it's been falling all year. But that dismisses the concerns. The reality of the flat beverage labor market that we have been dealing with, that consumers have been trying to navigate for years already. It flat out misses the flat beverage world that everyone has been trying to live in. Job openings, whatever you make of those, however many there might really be, they've declined. Hiring has disappeared. Workers quit less frequently because they're less confident about finding something better. People outside the labor force stop searching because their efforts are producing fewer, if not zero, results. So they drop out of the labor force. Which is why the official unemployment rate doesn't look as bad as it truly is. The economy shifts into a no hire, no fire condition. Then flatter. Beverage, it moves closer to no, higher. Some fire. Exactly what the New York Fed survey indicated consumers are bracing for. And that progression explains why they became deeply pessimistic long before the headline unemployment rate caught up. That progression explains why they can become deeply pessimistic long before the headline unemployment rate catches up. Someone who already has a job may look secure in the official statistics. But if that person has watched friends spend months searching for work, the sense of security changes. The same is true when companies reduce management layers, freeze openings, or demand more output from fewer workers. Remaining employees absorb the message, even if they never receive a layoff notice. And they notice when employers are spending less on capital expenditures. Construction. As I went over in a recent video, the message is very simple. Replacing the job that you have today might be difficult, if not impossible. And this is also why one strong headline Payroll can't erase the broader anxiety. August initial estimate of 162,000 looked like a dramatic acceleration. But recent summer payroll reports have repeatedly been revised lower, sometimes from supposedly solid gains or blowout months into outright job losses. So the August increase was also unusually concentrated in food services and local government education. Consumers, like bonds, aren't responding to a single headline, a single noisy headline. They're responding to the labor market they actually encounter. Which brings us to bonds and interest rates. Yes, nominal yields are rising. But why are nominal yields rising? If it was because of inflation, genuine inflation, disagreeing with what consumers are saying, then bonds would be behaving very differently than they are right now. If investors genuinely believed the energy shock was becoming a sustained economy wide inflation process, the market response would be plainly obvious. Long term inflation compensation would rise meaningfully. The yield curve would steepen, not flatten, as investors demand protection from persistent inflation. That is not what we are seeing. The curve remains comparatively historically flat and inflation breakevens remain benign. Relative to the supposedly enormous inflation threat. Rates have had an upward bias, sure, particularly as markets consider whether the Federal Reserve is is going to trichet itself, but that is different from the bond market, independently confirming an inflation spiral. The front end can stay elevated because investors believe the Fed may keep interfering for longer. Long term yields can also experience temporary seasonal pressure, including the recurring September tendency toward higher rates. Yes, it is September and Eurodollar University knows what that means. The September effect may be back in effect. And if you want to know what Edu knows about it, I wrote about it in yesterday's Deep Dive analysis and we talked about it in our live Tuesday Q and A the more important message is what the curve is not doing. It is not validating the idea that higher energy prices will spread effortlessly into wages, credit demand and every other consumer price. Instead, the bond market is making the same distinction that households are making. Energy and food can become more expensive. Those increases reduce real purchasing power. Weaker purchasing power suppresses spending elsewhere. A deteriorating labor market adds another restraint. Businesses then face greater resistance when they attempt to raise their prices. That process is disinflationary outside the directly affected necessities. The risk perceived by the bond market is not that consumers possess too much purchasing power. It's that policymakers may act without taking any account of a household sector that's already losing confidence. And that's according to the Fed's own data. So now put all the evidence together from the housing market. The Fed surveys the bond market, credit card usage, and a whole bunch of other stuff that we've been talking about more recently. Consumers assign a 44.4% probability to unemployment being higher next year, the highest probability since April of 2020. They believe replacing a lost job would be unusually difficult, if not impossible. Existing home sales dropped to 3.98 million even as available inventory has risen to its highest level since 2020 19. At the current pace, the market has 4.9 months of supply, most in more than a decade. Aggregate consumer credit increased, but the growth was overwhelmingly concentrated in non revolving loans. Revolving credit increased by just 2.8 billion, indicating continued caution around open ended debt credit cards. Consumers expect gasoline and all the necessities to become more expensive. Yet their overall one year inflation expectation has declined declined for three consecutive months, three year expectations have edged lower and five year expectations remained perfectly stable. These are not separate or conflicting signals. They form one coherent story. Households are experiencing higher costs for necessities while simultaneously becoming more worried about employment and income. That combination causes them to delay major purchases, limit discretionary borrowing and resist price increases wherever they have a choice. The home buyer waits the credit card user Pulls back, the worker stays in a job rather than risking a search for another. And households, they absorb the higher gasoline bill by reducing something else. This is not the behavior of consumers preparing for inflation. It is the behavior of consumers preparing for demand destruction and economic weakness. So the entire Fed position and its likelihood to trichet itself rests upon evidence that doesn't exist, not even in their own data. They suggest that energy costs are going to spill over into other parts of the consumer experience. And consumers are saying we don't see it. Instead, what we do see is our businesses, our employers are under pressure and therefore we're more concerned about unemployment than broader inflation. At the same time, we also have to concern about higher gasoline and food costs, which just makes the situation even worse and even more disinflationary. In theory, higher oil prices raise transportation and production costs. Businesses would pass those on to their customers. Then workers would demand higher wages. Those wages support additional spending which allows businesses to raise prices. And there you go, the feared second round inflation process. But the current evidence and future expectations missing several of those links. Consumers are not reporting unanchored overall inflation expectations. Revolving credit is not accelerating dramatically. Housing demand is not recovering. Labor market confidence is deteriorating. And the bond market is not pricing a sustained inflationary breakout either. A price shock can't become a lasting inflation spiral simply because the first round increase is painful. Consumers have to possess the income, the credit and the confidence that would be required to validate continued increases all across the economy and then sustain them beyond just the short run. Right now, they appear to possess less of all three of those. The dangers to the Fed mistakes impoverishment for inflation. A household spending more dollars on gasoline isn't necessarily consuming more, as we saw with circle k paying 33% more to get about 2% less. So paying for fewer gallons while cutting restaurant visits, entertainment and other purchases. Nominal spending can rise while real living standards actually fall. Impoverishment rate hikes aren't going to produce more oil or make refineries run faster than physically possible or lower anyone's grocery bill. Walmart's going to do that for you. It completely ignores the rate hiking in tricheting, completely ignores the labor market that consumers already fear. Right now, the most important economic warning is not that consumers have stopped spending. It is that Americans increasingly fear that the money that they use to spend will be taken away from them. They are worried unemployment is going to rise. They're worried a lost job will become impossible to replace. They're delaying home purchases. They're limiting revolving credit, debt usage and absorbing higher necessary expenses by becoming more selective elsewhere at the same time they're refusing to interpret the energy shock as a permanent economy wide inflation and the bond market continues to agree both consumers and markets see the same mechanism higher prices for necessities reduce discretionary purchasing power while weaker employment expectations restrain credit and demand it's not an inflationary spiral it is demand destruction and if the Fed continues treating every energy price increase as evidence that policy must remain in their terms hawkish what it's actually doing is doing so against all available information including its own the number to Remember here is 44.4% the highest perceived probability of rising unemployment since April of 2020 Housing confirms the caution credit is Americans acting on it uh and the flat yield curves in the bond market are the bond market's way of betting for the same things Americans are primarily not concerned that every single price is going to continue rising forever what they are concerned about in a big way is whether or not their next paycheck actually arrives m.