After a Massive Breach, Is Your Data in Danger?
National Public Data, a consumer data broker, confirmed last week that a hacker had targeted the company in December 2023, “with potential leaks of certain data in April 2024 and summer 2024.”1) Other reports indicate that this leaked data had been found on the dark web and could include the names, addresses, phone numbers, and Social Security numbers of millions of Americans. 2) A data breach of this magnitude is especially worrisome, and is the latest in a string of major data breaches this year. 3) Following are some steps to help protect yourself against the growing threat of identity theft.
Place fraud alerts and credit freezes
One way to reduce your risk after a data breach is to place a fraud alert or a credit freeze on your credit report. Both are free tools that can help you prevent fraud, but they work somewhat differently.
A fraud alert is a notice placed on your credit report that warns potential creditors that your identity has been compromised. It allows them to check your credit but requires them to take extra steps to verify your identity before issuing new credit in your name. You can place a fraud alert by contacting one of the three major credit bureaus (Equifax, Experian, and TransUnion), and that agency will notify the others. An initial alert will last for one year, but can be extended to seven years if you have become an actual, rather than potential, victim of fraud.
A credit freeze (sometimes called a security freeze) may also help protect you if you suspect your personal information was stolen, but it’s more stringent. Once you have a credit freeze in place, potential creditors won’t be able to access your credit report or credit score (there are some exemptions). This helps prevent identity thieves from opening fraudulent accounts in your name. To request a credit freeze, you will need to contact each of the three major credit reporting agencies. The credit freeze will stay in place until you decide to lift it, which you will need to do at least temporarily, before applying for credit.
A fraud alert or credit freeze can be set up online, by phone, or by mail, following each credit bureau’s instructions. This may also be a good time to request a free credit report so that you can check recent credit activity. Here are the website addresses and phone numbers for each of the three major credit bureaus.
- Equifax, at Equifax.com 888-298-0045
- Experian at Experian.com 888-397-3742
- TransUnion at Transunion.com 800-916-8800
Continue to monitor your personal and financial information
- Consider subscribing to a credit monitoring service if you need extended support. These services come at a cost, but may bundle together credit report monitoring, credit report locks, scans of the dark web, help with recovering from identity theft, and identity theft insurance.
- Periodically review your credit reports to spot suspicious activity. You can receive free weekly online reports from all three credit bureaus at the official site annualcreditreport,com.
- Sign up for alerts for your bank, financial, and credit card accounts that will notify you when a transaction has occurred, or someone has signed into your account. Check your accounts frequently and review your statements.
- Pick strong passwords that are different for each account, and change them periodically. For an extra layer of protection, use a password manager that generates strong, unique passwords that you control through a single master password.
- Enable multifactor authentication when offered. For example, in addition to providing a password, you may be required to enter a code sent to your phone or email, answer a security question, use a physical security key, or sign in using a facial or fingerprint scan.
- Keep your device and security software up to date. Operating system and software updates may include security fixes. An easy way to do this is to turn on automatic updates.
- Watch out for phishing attempts from scammers looking to obtain passwords or financial information. Be cautious if you receive a link or attachment in your email or via social media. Don’t click on it until you can verify that it’s legitimate. Let unsolicited phone calls go to voicemail, and double-check phone numbers, even if they appear familiar or seem to come from a company that you normally do business with.
1) National Public Data, August, 2024
2) KrebsonSecurity.com, August 15, 2024
3) Identity Theft Resource Center, 2024
New Consumer Protections for Weary Airline Passengers
Banks, hospitals, retailers, and airlines are still dealing with the fallout from the massive CrowdStrike IT outage in July. The tech meltdown impacted businesses across the globe, and airlines were hit particularly hard. This was not good news for the airline industry, which just last year had the highest number of flight delays ever recorded.1
The U.S. Department of Transportation determined that the delays and cancellations resulting from the CrowdStrike outage were “controllable,” or caused by the airline. As a result, most airlines were obligated to provide some sort of compensation and assistance to stranded travelers.2
Fortunately, there could be much-needed relief for airline passengers on the horizon, thanks to a new federal law and rules issued by the U.S. Department of Transportation.
Hassle-free refunds
In the past, airline passengers were forced to figure out how to obtain a refund by researching an airline’s website or waiting for hours on the phone with an airline’s customer service department. Airline passengers will be entitled to an automatic refund for:
- Cancelled or significantly delayed flights (e.g., departure or arrival times delayed by three hours or more for domestic flights and by six hours or more for international flights), regardless of the reason
- Significantly delayed baggage return
- Extra services (e.g., Wi-Fi, seat selection, or inflight entertainment) that were paid for but not provided
Airlines must issue refunds of the full amount of the ticket purchased within seven business days of refunds becoming due for credit card purchases and 20 days for other payment methods. Passengers who accept a ticket for a significantly delayed flight or are rebooked on a different flight to their destination will not receive refunds. The refunds must be in the form of cash or whatever original payment method was used to make the purchase (e.g., credit card or airline miles). Finally, airlines are not allowed to substitute for other forms of compensation (e.g., vouchers or travel credits) unless a passenger affirmatively chooses to accept an alternate form of compensation.
Protection against surprise fees
Many airlines advertise cheap “teaser” fares that don’t take into account additional fees — all of which can significantly increase the cost of a ticket. Airlines will be required to disclose various ancillary fees up front, such as charges for checked bags, carry-on bags, and changing or cancelling a reservation. They must also provide a detailed explanation of each fee before a ticket can be purchased. In addition, under a proposed rule airlines will be prohibited from charging families an extra fee to guarantee a child will sit next to a parent or adult travel companion.
When are these protections scheduled to take effect?
These consumer protections are scheduled to have different implementation periods over the next year. In addition, the rule on surprise fee disclosures was temporarily blocked by a U.S. Appeals Court last week. Visit the U.S. Department of Transportation’s website at transportation.gov/airconsumer for more information.
1-2) U.S. Department of Transportation, 2024
Tax Treatment of Work-Life Referral Services
The IRS has provided informal guidance on the federal income tax treatment to an employee of certain work-life referral services offered as an employee benefit.
What is a work-life referral program?
Employers often provide eligible employees with a work-life referral service as an employee benefit. Work-life referral services assist employees with identifying, contacting, and negotiating with life-management resources for solutions to a personal, work, or family challenge.
Work-life referral services might be offered in connection with, for example, the following:
- Identifying appropriate education, care, and medical service providers
- Choosing a child or dependent care program
- Navigating eligibility for government benefits, including Veterans Administration benefits
- Evaluating and using paid leave programs offered through an employer or a state or locality
- Locating home services professionals who specialize in adapting a home for a family member with special care needs
- Navigating the medical system, including private insurance and public programs, and utilizing available medical travel benefits
- Connecting the employee with local retirement and financial planning professionals
How are work-life referral services taxed?
A fringe benefit provided by an employer to an employee is presumed to be income to the employee unless specifically excluded from gross income under the Internal Revenue Code. One exception is for de minimis fringe benefits: a fringe benefit which, considering its value and the frequency with which it is provided, is so small that accounting for it would be unreasonable or administratively impracticable.
The IRS guidance notes that work-life referral programs may be available to a significant portion of an employer’s employees, but they are used infrequently by employees and only when an employee faces one of the challenges the programs are designed to address.
Accordingly, the IRS concluded that work-life referral services are excluded from gross income as a de minimis fringe benefit. Furthermore, these services are excluded from federal employment taxes, including FICA (Social Security and Medicare taxes), FUTA (federal unemployment tax), and federal income tax withholding.
Work-life referral services are often included in an employee assistance program (EAP) or otherwise bundled with other types of services offered by an employer. The IRS guidance provided here applies only to the work-life referral program itself; it does not address the tax treatment of direct or indirect payment for the life-management resources offered through an EAP or that may be bundled with a work-life referral program. Under the general rule, those other services would be presumed to be income to the employee unless specifically excluded from gross income under the Internal Revenue Code.
See FS-2024-13, April 2024
Real Estate Commission Changes August 17, 2024
In March 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement after losing an antitrust lawsuit filed by a group of home sellers. As many as 50 million people who paid commissions on homes sold in recent years could receive a small amount from the class-action settlement. The powerful industry group also agreed to change long-standing practices related to sales commissions.1
Background
For decades, many real estate agents have had little choice but to join NAR and follow its rules regarding local Multiple Listing Services (MLS) — the databases used by most brokers to list information about properties for sale. Listing brokers typically cooperated with buyer’s agents and split the commission paid by the seller, with the amounts communicated via the MLS in fields that were only visible to agents.
Plaintiffs claimed that NAR (and brokers that require agents to be NAR members) conspired to artificially inflate commissions through an industry-wide practice requiring the seller to pay commissions to brokers on both sides of the transaction. They believed this helped to uphold a nationwide standard of five to six percent of the sales price, which is significantly higher than the commissions paid in many other countries.2
Practice changes
Effective August 17, 2024, NAR will implement the following new policies related to how real estate brokers are compensated to handle transactions.3
- Commission offers for buyer’s agents can no longer be required or appear in the MLS, though they are still permitted. Listing agents can advertise specific commission offers on brokerage websites and over the phone, text message, or email. Home sellers and their agents will negotiate directly with buyers and their agents regarding compensation.
- Prior to touring homes, buyers will have to discuss and set compensation directly with their own agents, as sellers do with listing agents. They will be asked to sign written representation agreements that outline the agents’ services (e.g., showing property, negotiating offers, transaction management) and how much they charge. This is to help ensure that buyers are fully aware of the costs they could be responsible for paying.
Implications for buyers and sellers
These changes are intended to allow more room for negotiation and spur competition, which could conceivably help lower costs for sellers. Commissions have always been baked into transaction prices, so in markets where sellers’ costs fall, home prices would likely be reduced as well.
Some economists believe commissions could drop as much as 30% if buyer’s agents face pressure from potential clients to discount their fees, but savings of this magnitude aren’t guaranteed.4 The impact on real estate commissions will ultimately depend on market conditions, which can vary greatly by location, and how sellers, buyers, and agents respond to the new practices.
Like other businesses, brokerages have overhead that includes rent, liability insurance, marketing, and other operating costs. Most individual agents must split sales commissions with their brokers (from about 60/40 up to 80/20 for the most productive agents), or they pay fees to the company.
A buyer’s agent sometimes shows property to clients over a period of days to months and may write numerous offers for deals that never come together. Many experienced buyer’s agents — long accustomed to receiving the same commission as the listing agent — may be reluctant to work for less, even if they must justify their value more regularly.
Buyers will determine the commission for their own agents, but the money may or may not come out of their own pockets. For example, it’s possible that an offer could be made contingent on the seller paying the buyer’s share of the commission or include a request for a general credit toward closing costs in the amount needed to pay the buyer’s agent. Current lending guidelines and regulations would prevent most buyers from adding commission costs to their mortgages. A rule pertaining to VA loans, which specifically prohibited borrowers from paying agent commissions, has been temporarily suspended.5
In some cases, sellers might agree to cover buyers’ commissions, as it has long been customary and could still be in their best interests. Nationwide home prices have risen more than 50% since 2019, and high interest rates have made mortgage payments much less affordable.6 This means sellers with equity tend to be in a better position to pay commissions than potential buyers, many of whom may struggle to produce enough cash for the down payment. For these reasons, a seller who’s willing to pay all or some of the buyer’s commission may receive more offers, and a higher purchase price, than one who refuses to do so.
Online sites have made it easier to shop for a home without using an agent, so more buyers might brave the market on their own if they think they can pocket the savings. Yet buying a home is the biggest financial transaction many people will make in their lifetimes, and the issues that come up during the process can be unexpected. There are many situations in which buyers could benefit from having their own representation, especially if they are inexperienced or unfamiliar with the local market.
First-time buyers in particular — who were responsible for 31% of existing home sales in May 2024 — may have more confidence and make more informed decisions if they work with a trusted professional.7 But many will need help from sellers to pay their agents’ fees, putting them at a bigger disadvantage than ever against buyers with more access to cash in competitive markets.
Negotiating commissions among all parties is likely to make it harder to strike deals in general, so buyers may have to search longer and write more offers before they are successful. It’s also possible that sellers will see slight change in commission costs in the coming months, while the market is in flux. But in time, the new rules could spark innovation that creates new business models and expands lower-cost options.
1) The Wall Street Journal, March 15, 2024
2, 4) The New York Times, May 10, 2024
3, 5, 7) National Association of Realtors, 2024
6) The Wall Street Journal, June 27, 2024
The Economic Impact of an Aging World
During the week of June 10, 2024, French markets were rocked by a government bond sell-off after a strong showing by the far-right National Rally party in the European Union election. With polls suggesting the party might win a plurality of seats in the upcoming French parliamentary election, investors feared a promised social spending program, including a reduction of the minimum retirement age from 64 to 60, would further strain the already struggling French economy.1
As it turned out, the left-wing New Popular Front coalition, which also promised expensive social spending and a reduction in the pension age, won the most seats on election day. The initial reaction in the government bond market was muted, but analysts predicted further turmoil to come.2 By contrast, when France raised the retirement age from 62 to 64 in 2023, aiming to strengthen the economy, workers took to the streets in protest.3
Supporting senior programs
The French conflict over the retirement age reflects a fundamental social and economic issue throughout the developed world. Put simply, the world population is getting older, which means the percentage of workers in the population who can drive the economy and support old age pension and health-care programs is gradually diminishing.
The U.S. Social Security program is a prime example. In 1960, there were 5.1 workers paying into the program for each beneficiary. In 2024, there are 2.7, projected to drop to 2.3 by 2040. Because of this demographic shift, Social Security no longer pays for itself and has been partially supported by trust fund reserves built up when there were more workers per beneficiary. The reserves for the Old-Age and Survivors Insurance Trust Fund, which helps support retirement benefits, are projected to run out in 2033, at which time program income would cover only 79% of scheduled benefits unless Congress takes action to increase funding.4
Medicare faces a similar challenge. The Hospital Insurance Trust Fund reserves, which help pay for Medicare Part A inpatient and hospital care benefits, are projected to be depleted in 2036, at which time payroll taxes and other revenue will pay only 89% of costs. Part B medical benefits and Part D prescription drug coverage are automatically balanced through premiums and revenue from the federal government’s general fund, but they will require an increasingly larger share of the federal budget unless economic growth outpaces spending.5
Longer lives, fewer children
The shift to an older population is driven by two demographic trends: people are living longer and having fewer children. One in six people in the world will be age 65 or older by 2050.6 The United States is already at that level, with more than 17% of the population age 65 or older in 2022, projected to reach almost 23% by 2050.7 Many other developed nations are even older. In 2022, the median age in the United States (the age at which half the population is older and half younger) was 38.9, the highest on record.8 In 2021 (most recent data), it was 48.4 in Japan, 46.8 in Italy, 44.9 in Germany, and 41.6 in France.9
The fertility rate, the average number of children born to each woman, has dropped throughout the world, due to a variety of factors including education, access to birth control, employment opportunities, and lifestyle choices. In the developed world, a fertility rate of about 2.1 is considered the replacement rate at which a country’s population remains stable. It is slightly higher in developing nations with higher mortality. Most developed countries have been below replacement since the 1970s, so they have depended on immigration to maintain or grow population.10 The U.S. fertility rate was 1.62 in 2023.11 Although fertility is higher in developing countries, it is dropping. Based on preliminary data, one academic study suggests that the global fertility rate may be near or below replacement for the first time in human history.12
Challenges and solutions
Spending on programs for an aging population is already straining economies throughout the world, and the economic pressure will increase as populations continue to age. The burden is not only the cost of the programs, but also the potential for lower production and tax revenue from a workforce that is smaller in proportion to the total population. This is likely to drive up government debt, and increased government borrowing, along with competition for a smaller pool of workers, may lead to higher inflation.13
So far, government programs to encourage couples to have more children have not had a significant impact, and there is no clear correlation between the fertility rate and child-care and housing costs, student debt, employment, religious beliefs, or local laws governing contraception and abortion. This suggests that the decision to have fewer children is more deeply ingrained in fundamental lifestyle choices. For developed countries, immigration may continue to provide a larger workforce, but recent immigration to developed nations has tended to be unskilled workers.14
The funding gap for government pension programs such as Social Security can be addressed by a combination of solutions that may be politically unpopular but are unlikely to derail the broader economy: higher retirement ages, increased payroll taxes, and means testing for wealthier beneficiaries.15 The larger question is how to keep growing the global economy. This may require increased worker productivity driven by recent technologies and greater integration of older workers into the workforce.
U.S. worker productivity increased at an annual rate of 2.9% in the first quarter of 2024, well above the annual average since the end of World War II. If this trend continues, it could help balance some productivity loss as older people exit the workforce. Americans are already working longer, about one out of five of those age 65 and older was employed in 2024, almost double the number in 1985.16 The long-term solution may require rethinking the traditional model of a career, with more opportunity for lifelong learning and late-life career development. Studies indicate that working longer may help prevent cognitive decline, but it also could help balance the macroeconomic effects of global aging.17
Projections are based on current conditions, subject to change, and may not happen.
1) Bloomberg, June 16, 2024
2) CNBC, July 8, 2024
3, 17) The New York Times, January 21, 2023
4) 2024 Social Security Trustees Report
5) 2024 Medicare Trustees Report
6, 9–10) United Nations World Population Prospects 2022
7–8) U.S. Census Bureau, 2023
11) National Center for Health Statistics, April 2024
12, 14) The Wall Street Journal, May 13, 2024
13) Bloomberg, May 21, 2024
15) Social Security Administration, September 27, 2023
16) U.S. Bureau of Labor Statistics, 2024
Real Estate Roundup: Feeling the Impact of Higher Rates
U.S. commercial real estate prices fell more than 11% between March 2022, when the Federal Reserve started hiking interest rates, and January 2024. The potential for steeper losses has chilled the market and still poses significant risks to some property owners and lenders.1
On the residential side of the market, the national median price of an existing home rose 5.7% over the year that ended in April 2024 to reach $407,600, a record high for April.2 Despite sky-high borrowing costs, buyer demand (driven up by younger generations forming new households) has exceeded the supply of homes for sale.
Here are some of the factors affecting these distinct markets and the broader economy.
Slow-motion commercial meltdown
The expansion of remote work and e-commerce (two byproducts of the pandemic) drastically reduced demand for office and retail space, especially in major metros. An estimated $1.2 trillion in commercial loans are maturing in 2024 and 2025, but depressed property values combined with high financing costs and vacancy rates could make it difficult for owners to clear their debt.3 In April 2024, an estimated $38 billion of office buildings were threatened by default, foreclosure, or distress, the highest amount since 2012.4
In a televised interview on 60 Minutes in February, Fed Chair Jerome Powell said the mounting losses in commercial real estate are a “sizable problem” that could take years to resolve, but the risks to the financial system appear to be manageable.5
Locked-up housing market
The average rate for a 30-year fixed mortgage climbed from around 3.2% in the beginning of 2022 to a 23-year high of nearly 8% in October 2023. Mortgage rates have ticked down since then but not as much as many people hoped. In May 2024, the average rate hovered around 7%.6
The inventory of homes for sale has been extremely low since the pandemic, but a nationwide housing shortage has been in the works for decades. The housing crash devastated the construction industry, and labor shortages, limited land, higher material costs, and local building restrictions have all been blamed for a long-term decline of new single-family home construction. Freddie Mac estimated the housing shortfall was 3.8 million units in 2021 (most recent data).7
Many homeowners have mortgages with ultra-low rates, making them reluctant to sell because they would have to finance their next homes at much higher rates. This “lock-in effect” has worsened the inventory shortage and cut deeply into home sales. At the same time, the combination of higher mortgage rates and home prices has taken a serious toll on affordability and locked many aspiring first-time buyers out of homeownership.
In April 2024, inventories were up 16% over the previous year, but there was still just a 3.5-month supply at the current sales pace. (A market with a six-month supply is viewed as balanced between buyers and sellers.) The supply of homes priced at more than $1 million was up 34% over the previous year, which may help affluent buyers, but won’t do much to improve the affordability of entry-level homes.8
New construction kicking in
Newly built homes accounted for 33.4% of homes for sale in Q1 2024, down from a peak of 34.5% in 2022, but still about double the pre-pandemic share. The growth in market share for new homes was mostly due to the lack of existing homes for sale.9
April 2024 was the second highest month for total housing completions in 15 years, with 1.62 million units (measured on an annualized basis), including single-family and multi-family homes.10 This may cause apartment vacancies to trend higher, help slow rent growth, and allow more families to purchase brand new homes in the next few months.
Renters are seeing relief thanks to a glut of multi-family apartment projects that were started in 2021 and 2022 — back when interest rates were low — and are gradually becoming available. In Q1 2024, the average apartment rent fell to $1,731, 1.8% below the peak in summer 2023.11
Effects weave through the economy
By one estimate, the construction and management of commercial buildings contributed $2.5 trillion to U.S. gross domestic product (GDP), generated $881.4 billion in personal earnings, and supported 15 million jobs in 2023.12 And according to the National Association of Realtors, residential real estate contributed an estimated $4.9 trillion (or 18%) to U.S. GDP in 2023, with each median-priced home sale generating about $125,000. When a home is purchased (new or existing), it tends to increase housing-related expenditures such as appliances, furniture, home improvement, and landscaping.13
Both real estate industries employ many types of professionals, and the development of new homes and buildings stimulates local economies by creating well-paying construction jobs and boosting property tax receipts. Development benefits other types of businesses (locally and nationally) by increasing production and employment in industries that provide raw materials like lumber or that manufacture or sell building tools, equipment, and components.
Shifts in real estate values, up or down, can influence consumer and business finances, confidence, and spending. And when buying a home seems unattainable, some younger consumers might give up on that goal and spend their money on other things.
If interest rates stay high for too long it could accelerate commercial loan defaults, losses, and bank failures, continue to constrain home sales, or eventually push down home values — and any of these outcomes would have the potential to cut into economic growth. When the Federal Reserve finally begins to cut interest rates, borrowing costs should follow, but that’s not likely to happen until inflation is no longer viewed as the larger threat.
1, 3) International Monetary Fund, January 18, 2024
2, 8, 10, 13) National Association of Realtors, 2024
4) The Wall Street Journal, April 30, 2024
5) CBS News, February 4, 2024
6–7) Freddie Mac, 2022–2024
9) Redfin, May 20, 2024
11) Moody’s, April 1, 2024
12) NAIOP Commercial Real Estate Development Association, 2024
Tax Treatment of Home Energy Rebates
The IRS has provided guidance on the federal income tax treatment of certain home energy rebates offered by states, with funds provided by the U.S. Department of Energy (DOE).
Background
The Inflation Reduction Act of 2022 included two provisions allowing rebates for home energy efficiency retrofit projects and home electrification and appliance projects. These home energy rebate programs are to be administered by state energy offices, with the DOE providing guidance and oversight.
For a home energy efficiency retrofit project with at least 20% predicted energy savings, a rebate may be available per household for 80% of project costs, up to $4,000 (reduced to 50% of project costs, up to $2,000, if household income is above 80% of area median income (AMI)). For a home energy efficiency retrofit project with at least 35% predicted energy savings, a rebate may be available per household for 80% of project costs, up to $8,000 (reduced to 50% of project costs, up to $4,000, if household income is above 80% of AMI).
For a home electrification and appliance project, a rebate may be available per household for 100% of project costs, up to specific technology cost maximums, with a maximum total of $14,000. The 100% of project costs limit is reduced to 50% if household income is above 80% of AMI. This rebate is not available if household income is above 150% of AMI. The specific technology cost maximums range from $840 for an Energy Star electric stove to $8,000 for an Energy Star electric heat pump for space heating and cooling.
Treatment of DOE home energy rebates to purchasers
A rebate paid to or on behalf of a purchaser pursuant to either of the DOE home energy rebate programs is not includible in the purchaser’s gross income. However, it will be treated as a purchase price adjustment for the purchaser for federal income tax purposes.
To the extent the rebate is provided at the time of sale, the rebate is not included in the purchaser’s cost (or tax) basis in the property. To the extent the rebate is provided later, the tax basis is reduced.
Treatment of DOE home energy rebates to certain business taxpayers
Payments of rebate amounts made directly to a business taxpayer, such as a contractor, in connection with the business taxpayer’s sale of goods or provision of services to a purchaser are includable in the business taxpayer’s income.
Coordination of DOE home energy rebates with the energy efficient home improvement credit
In some cases, a taxpayer can receive an energy efficient home improvement credit for federal income tax purposes. The credit is for 30% of amounts paid for certain qualified expenditures, with limits on the allowable annual credit and on the amount of credit for certain types of qualified expenditures. The maximum annual credit amount may be up to $3,200.
If the taxpayer receives a DOE home energy rebate (whether at the time of sale or later), the amount of qualified expenditures used to calculate the energy efficient home improvement credit must be reduced by the amount of the rebate. If the taxpayer purchases items eligible for both the DOE home energy rebate and the energy efficient home improvement credit, the taxpayer can make a pro rata allocation of amounts received as rebates to the individually itemized expenditures as a share of total project cost in determining the amounts treated as paid or incurred for such items for purpose of the various limits on costs under the energy efficient home improvement credit.
What Stubborn Inflation Could Mean for the U.S. Economy
The U.S. Bureau of Labor Statistics April 10, 2024 released the Consumer Price Index (CPI) for March, and the increase in CPI — the most cited measure of inflation — was higher than expected. The rate for all items (headline inflation) was 3.5% over the previous year, while the “core CPI” rate, which strips out volatile food and energy prices, was even higher at 3.8%. The month-over-month change was also higher than anticipated at 0.4%.1
The stock market dropped sharply on this news and continued to slide over the following days, while economists engaged in public handwringing over why their projections had been wrong and what the higher numbers might mean for the future path of interest rates. In fact, most projections were off by just 0.1% — core CPI was expected to increase by 3.7% instead of 3.8% — which hardly seems earth-shattering to the casual observer. But this small difference suggested that inflation was proving more resistant to the Federal Reserve’s high interest-rate regimen.2
It’s important to keep in mind that the most dangerous battle against inflation seems to have been won. CPI inflation peaked at 9.1% in June 2022, and there were fears of runaway inflation like the 1980s. That did not happen, and inflation declined steadily through the end of 2023. The issue now is that there has been upward movement during the first three months of 2024.3 This is best seen by looking at the monthly rates, which capture the current situation better than the 12-month rates. March 2024 was the third month in a row of increases that point to higher inflation.
High for longer
While price increases hit consumers directly in the pocketbook, the stock market reacted primarily to what stubborn inflation might mean for the benchmark federal funds rate and U.S. businesses. From March 2022 to July 2023, the Federal Open Market Committee (FOMC) raised the funds rate from near-zero to the current range of 5.25%–5.5%, to slow the economy and hold back inflation. At the end of 2023, with inflation apparently moving firmly toward the Fed’s target of 2%, the FOMC projected three quarter-percentage point decreases in 2024, and some observers expected the first decrease might be this spring. Now it’s clear that the Fed will have to wait to reduce rates.4–5
Higher interest rates make it more expensive for businesses and consumers to borrow. For businesses, this can hold back expansion and cut into profits when revenue is used to service debt. This is especially difficult for smaller companies, which often depend on debt to grow and sustain operations. Tech companies and banks are also sensitive to high rates.6
In theory, high interest rates should hold back consumer spending and help bring prices down by suppressing demand. So far, however, consumer spending has remained strong. In March 2024, personal consumption expenditures — the standard measure of consumer spending — rose at an unusually strong monthly rate of 0.8% in current dollars or 0.5% when adjusted for inflation.7 The job market has also stayed strong, with unemployment below 4% for 26 consecutive months and wages rising steadily.8 The fear of keeping interest rates high for too long is that it could slow the economy too much, but that is clearly not the case, making it difficult for the Fed to justify rate cuts.
What’s driving inflation?
The Consumer Price Index measures price changes in a fixed market basket of goods and services, and some inputs are weighted more heavily than others. The cost of shelter is the largest single category, accounting for about 36% of the index and almost 38% of the March increase in CPI.9 The good news is that measurements of shelter costs — primarily actual rent and estimated rent that homeowners might receive if they rented their homes — tend to lag current price changes, and other measures suggest that rents are leveling or going down.10
Two lesser components contributed well above their weight. Gas prices, which are always volatile, made up only 3.3% of the index but accounted for 15% of the overall increase in CPI. Motor vehicle insurance prices made up just 2.5% of the index but accounted for more than 18% of the increase. Together, shelter, gasoline, and motor vehicle insurance drove 70% of March CPI inflation. On the positive side, food prices made up 13.5% of the index and rose by only 0.1%, effectively reducing inflation.11
While the Fed pays close attention to the CPI, its preferred inflation measure is the personal consumption expenditures (PCE) price index, which places less emphasis on shelter costs, includes a broader range of inputs, and accounts for changes in consumer behavior. Due to these factors, PCE inflation tends to run lower than CPI. The annual increase in March was 2.7% for all items and 2.8% for core PCE, excluding food and energy. The monthly increase was 0.3% for both measures.12
Although these figures are closer to the Fed’s 2% target, they are not low enough in the face of strong employment and consumer spending to suggest the Fed will reduce interest rates anytime soon. It’s also unlikely that the Fed will raise rates. For now, the central bank seems poised to give current interest rates more time to push inflation down to a healthy level, ideally without significant slowing of economic activity.13
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Projections are based on current conditions, subject to change, and may not happen.
1, 3, 8–9, 11) U.S. Bureau of Labor Statistics, 2024
2)The New York Times, April 10, 2024
4) Federal Reserve, 2023
5) Forbes, December 5, 2023
6) The Wall Street Journal, April 15, 2024
7, 12) U.S. Bureau of Economic Analysis, 2024
10) NPR, April 18, 2024
13) Bloomberg, April 19, 2024
International Investing: The Diverging Fortunes of China and Japan
The MSCI EAFE Index, which tracks developed markets outside of the United States, advanced 15% in 2023, while U.S. stocks in the S&P 500 Index returned 24%.1 One of the world’s hottest developed stock markets was in Japan, where the Nikkei 225 rose 28% in 2023, delivering the best performance in Asia.2 On the other hand, in China — which is still considered an emerging market — the benchmark CSI 300 Index lost more than 11% over the same period.3
Investing internationally provides growth opportunities that may be different than those in the United States, which could help boost returns and/or enhance diversification in your portfolio. It may help to consider the risks, economic forces, and government policies that might continue to impact stock prices in these two news-making Asian markets and elsewhere in the world.
A tale of two economies
Ranked by gross domestic product (GDP), a broad measure of a nation’s business activity, China is the world’s second-largest economy after the United States.4 Japan fell from third place to fourth, behind Germany, at the end of 2023.5
In February 2024, the Nikkei surpassed a peak last seen in 1989.6 Conversely, Chinese stocks fell more than 40% from their peak in June 2021, before turning up slightly in February and March.7
GDP growth in Japan has been lackluster; in fact, the nation barely averted a recession at the end of 2023.8 What has been driving the market’s outperformance? After battling deflation (or falling prices) for more than two decades, the emergence of inflation in Japan has been good for businesses. Japanese companies have been putting their capital to work, growing profits, and returning them to shareholders, which has attracted foreign investors. A weaker yen helped by making Japanese products cheaper overseas.9 The Bank of Japan ended the era of negative interest rates when it raised short-term rates on March 19, 2024.10
China’s GDP growth slowed to about 5.2% in 2023, as weaker consumption and investment cut into business activity. China is still growing faster than most advanced nations, but it’s contending with a years-long real estate crisis.11 Deflation has set in, while underemployment and youth unemployment have risen to high levels, damaging consumer confidence.12 Moreover, a visible government crackdown on the private sector has rattled investors and scared away many foreign firms.13 In early 2024, the Chinese government took steps to help stabilize the stock market that included boosting liquidity, supporting property developers, and encouraging more bank lending and homebuying.14
Global economic outlook
The International Monetary Fund sees a path to a soft landing for the global economy, projecting steady growth of 3.1% for 2024, about the same rate as 2023. Inflation, which has fallen rapidly in most regions, is expected to continue its descent.15
The downside risks to this hopeful outlook include fiscal challenges, high debt levels, and lingering economic strain from high interest rates. Price spikes caused by geopolitical conflict, supply disruptions, or more persistent underlying inflation could prevent central banks from loosening monetary policies. The possibility of further deterioration in China’s property sector is another cause for concern.16
A world of opportunity
It can be more complicated to perform due diligence and identify sound investments in unfamiliar and less transparent foreign markets, and there are potential risks that may be unique to a specific country. Mutual funds or exchange-traded funds (ETFs) provide a relatively effortless way to invest in a variety of international stocks. International funds range from broad global funds that attempt to capture worldwide economic activity, to regional funds and others that focus on a single country. The term “ex U.S.” or “ex US” typically means that the fund does not include domestic stocks, whereas “global” or “world” funds may include a mix of U.S. and international stocks.
Some funds are limited to developed nations, whereas others concentrate on nations with emerging (or developing) economies. The stocks of companies located in emerging nations might offer greater growth potential, but they are riskier and less liquid than those in more advanced economies. For any international stock fund, it’s important to understand the mix of countries represented by the underlying securities.
It may be tempting to increase your exposure to a booming foreign market. However, chasing performance might cause you to buy shares at high prices and suffer more severe losses when conditions shift. And if your long-term investment strategy includes international stocks, be prepared to hold tight — or take advantage of lower prices — during bouts of market volatility.
Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. The return and principal value of all stocks, mutual funds, and ETFs fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares. Foreign securities carry additional risks that may result in greater share price volatility, including differences in financial reporting and currency exchange risk; these risks should be carefully managed with your goals and risk tolerance in mind. Projections are based on current conditions, are subject to change, and may not happen.
Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) London Stock Exchange Group, 2024
2) CNBC.com, December 28, 2023
3, 7) Yahoo! Finance, 2024 (data for the period 6/01/2021 through 3/20/2024)
4, 13) The Wall Street Journal, March 18, 2024
5) CNBC.com, February 14, 2024
6, 9) The Wall Street Journal, February 22, 2024
8, 10) CNBC.com, March 19, 2024
11, 15–16) International Monetary Fund, January 2024
12) The Wall Street Journal, January 27, 2024
14) Bloomberg, February 7, 2024
How long can Consumers Keep Carrying the Economy?
Consumer spending accounts for about two-thirds of U.S. gross domestic product (GDP), so it plays an outsized role in driving economic growth or slowing it down.1 For the last 18 months, U.S. consumers have kept the economy strong despite high inflation and rising interest rates. There is much discussion as to whether consumer spending will continue into 2024.
The Federal Reserve recently did not adjust interest rates. Raising interest rates has the same impact as increasing consumer spending. Both the level of consumer spending and increased interest rates help combat inflation. The Fed’s actions regarding interest rates try to balance numerous factors including consumer spending and employment. A reversal of spending and interest rates could lead to a recession
Measuring spending and inflation
The standard measure of consumer spending is personal consumption expenditures (PCE), released each month by the Bureau of Economic Analysis (BEA). Economists look at the monthly change in PCE for the short-term trend and the year-over-year change for the longer-term trend.
September PCE increased 0.7% over August, a strong monthly growth rate and up from 0.4% in August over July. The September increase was 0.4% measured in “real” inflation-adjusted dollars, which indicates that consumers were spending more than the rate of inflation. The annual change in PCE was 5.9%, well above the 3.4% annual change in the PCE price index, which is the Fed’s preferred measure of inflation. (The Fed’s target for PCE inflation is 2%.)2–3
The pandemic effect
The current consumer spending story began with the pandemic recession, when a broad range of business activity stopped, and consumers received large government stimulus packages with little to spend it on. In April 2020, the personal saving rate — the percentage of personal income that remains after taxes and spending — spiked to a record 32%, almost double the previous high. It declined as businesses reopened but remained above pre-pandemic levels until late 2021, when stimulus had ended, and high inflation made spending more expensive. The September 2023 saving rate was just 3.4%, well below the 6.5% average before the pandemic.4 While a low saving rate could be cause for concern in the long term, it indicates that consumers are willing to spend their income despite higher prices.
Why are consumers spending instead of saving?
Multiple explanations have been offered for this high-spending/low-saving pattern. Some lower-income consumers may be spending a larger percentage of their income because they must — they are spending more for basic needs due to high inflation. People with more disposable income might still be responding to pent-up demand for goods and services that were not available during the pandemic. And, after the tragedies and disruptions of the pandemic, some consumers may prefer to spend now and worry less about the future. The expensive housing market could be adding to this trend by making a typical saving goal seem unattainable to younger consumers.5
On a macro level, however, consumers may be spending instead of saving because they still have substantial savings. Although it was thought that pandemic-era savings were nearly exhausted, revised government data suggests there may be $1 trillion to $1.8 trillion in so-called “excess savings” still available. About half of this is likely held by households in the top 10% income bracket, but that still leaves a large savings buffer that could continue to drive middle-class spending for some time.6
The recently released Federal Reserve Survey of Consumer Finances revealed a similar story. The average inflation-adjusted median net worth of American families jumped by a record 37% from 2019 to 2022 — more than double the previous highest increase in the Fed survey, which is released every three years. Every demographic group saw substantial increases, but the largest by far was for consumers under age 35, whose net worth increased 143%. Because this survey only went through 2022, it does not capture the effects of continuing inflation in 2023.7
Wages and inflation
While pandemic-era savings may support consumer spending well into 2024, only wages can maintain strong spending for the long term. The question is whether wages will keep up with inflation without rising so quickly that they drive inflation even higher. For the 12-month period ending September 2023, average hourly earnings increased 4.2%. This was above the 3.4% PCE inflation rate over the same period, but down from the 5.1% pace of wage increases a year earlier.8 The fact that wage growth is keeping up with inflation while also slowing down bodes well for the goal of taming inflation with continued consumer spending.
Holiday spending
The winter holiday season, officially defined as November and December, accounts for about 20% of retail spending for the year, and is even more important for some retailers. An annual survey by the National Retail Federation found that consumers plan to spend an average of $875 this year on gifts, decorations, holiday meals, and other seasonal items. This is up from $833 in 2022 and slightly above the five-year average.9 Two broader surveys have found declines in consumer confidence in recent months, but it remains to be seen whether this leads to a decline in spending.10-11 While the winter holidays are not a “make or break” situation for the U.S. economy, this year’s holiday spending may provide clues to consumer behavior in the new year.
1–2, 4) U.S. Bureau of Economic Analysis, 2023
3, 7) Federal Reserve, 2023
5) The Wall Street Journal, October 1, 2023
6) Bloomberg, October 10, 2023
8) U.S. Bureau of Labor Statistics, 2023
9) National Retail Federation, 2023
10) The Conference Board, September 26, 2023
11) University of Michigan, October 27, 2023
