Zombie Debt: Is It Coming for You?
Zombie debt is old and often expired debt that could be revived after being purchased by a collection agency for pennies on the dollar — or less. These “debt scavengers” have plenty of incentive to cast a wide net and take aggressive steps to collect even a small portion of the original debt.
If you are contacted by a debt collector, it could be for a debt you already repaid or don’t owe. For debts written off by creditors long ago, some records might be lost or unreliable. If you don’t remember crossing paths with the creditor, it’s possible that the debt in question belongs to someone else with a similar name or is the result of identity theft.
One example is a recent wave of zombie second mortgages threatening families with the loss of their homes. After the 2008 housing crash, many homeowners had their mortgages modified and presumed (or were told) that their second loans were forgiven. Now that home prices have risen around the nation, more investors who bought defaulted second mortgages are moving to collect those debts, even if it means foreclosing on the homes.1
Unfortunately, this is just one of the ways that zombie debt could come back to haunt you, and depending on the circumstances, you may or may not be responsible for paying it back.
More types of zombie debt
Time-barred debt. You may be contacted about a debt that is beyond the statute of limitations — the length of time during which you can legally be sued by a creditor or debt collector over an unpaid debt. These limits differ based on the type of debt and can vary widely by state, though they generally range from three to 10 years. When a debt is “time-barred,” a debt collector may still try to convince you to repay it voluntarily.
Discharged debt. This refers to debt that has been legitimately wiped out through a bankruptcy case.
Settled debt. A lower payoff on non-secured debt (such as medical or credit-card debt) might have been negotiated with the creditor in exchange for forgiveness of the remaining balance.
Beware of scare tactics
Debt collectors are not allowed to use abusive language, constant harassment, or deception to intimidate you into repaying a debt that is beyond the statute of limitations or is not actually yours — but it’s been known to happen. They might threaten to sue, even if it’s illegal to do so, then offer to leave you alone if you make a partial payment.
Don’t get tricked. In some states, making one small payment on an expired debt can reset the statute of limitations and bring it back to life. The collector could then legally pursue the entire amount. Repaying part of a debt that was never yours could be interpreted as admitting it does belong to you.
Tips for fighting off debt scavengers
How should you respond if you are contacted about a zombie debt? Don’t panic, and don’t immediately make a payment or provide any personal information. On the other hand, it might not be wise to assume it’s a scam and ignore calls or letters from a collection agency.
Start by asking for a debt validation letter, which should include information about the original creditor, the amount of the debt, and when it was incurred. Don’t say anything to a debt collector until you have a chance to research the details, verify the debt is really yours, and determine whether it falls within the statute of limitations.
If you confirm that the debt is a mistake, has already been paid, or is expired, send a letter disputing the debt within 30 days (and keep a copy for your records). If it shows up as delinquency on your credit report, you can also file a dispute with the credit agency. You are entitled to a free copy of your credit report weekly from each of the three nationwide credit agencies: Experian, TransUnion, and Equifax. Visit www.annualcreditreport.com for more information.
Sometimes a zombie debt results from a long-forgotten charge and/or a bill left behind unknowingly when moving from one place to another. If you discover that you do owe the debt and have the money, resolving the unpaid account could help protect your credit. If you can’t pay the entire amount right away, you may be able to negotiate a payment agreement.
Receiving a collection notice for a home mortgage could be a more serious and costly threat. If you are contacted by an unfamiliar lender demanding money for a second mortgage, check the title report for any encumbrances or liens attached to your property. If you find one, consider consulting an attorney to help negotiate with the lienholder or challenge the debt in court, depending on your personal situation.
1) NPR.com, May 18, 2024
The Fed Finally Cut Interest Rates. What Could It Mean for Your Finances?
On September 18, 2024, the Federal Reserve’s Federal Open Market Committee (FOMC) lowered the benchmark federal funds rate one-half percentage point to a range of 4.75% to 5.0%. It was the first rate cut since the Fed raised the funds rate aggressively from March 2022 to July 2023 to help control inflation.1
The long-awaited policy shift suggests that a soft landing — the rare feat of bringing down inflation without causing a recession — is in sight. It also marks a critical juncture for the economy, with significant implications for consumers, businesses, and investors.
Why now?
The Federal Reserve operates under a dual mandate to foster maximum employment and stable prices for the benefit of the American public. For a couple of years rising prices have been considered the more serious threat, but the inflation rate has moved much closer to the Fed’s 2.0% target.
Officials now see these two risks as “roughly in balance.” In his post-meeting press conference, Fed Chair Jerome Powell said, “The labor market has cooled from its formerly overheated state, inflation has eased substantially from a peak of 7% to an estimated 2.2%, as of August.”2
In recent months, job gains have slowed considerably, and unemployment climbed from 3.8% in March to 4.2% in August. Powell maintained that employment data remains at solid levels, but recent changes suggest the downside risks have increased.3–4
Relief for borrowers
Lowering the federal funds rate helps to reduce borrowing costs across the board, creating breathing room in the budgets of many households and businesses.
The prime rate, which commercial banks charge their best customers, typically moves with the federal funds rate. Though actual rates can vary widely, small-business loans, adjustable-rate mortgages, home equity lines of credit, auto loans, credit cards, and other forms of consumer credit are often linked to the prime rate, so the rates on these types of loans should adjust lower relatively soon after a Fed rate cut.
Borrowers with home equity lines of credit, adjustable-rate mortgages, credit card balances, or other outstanding loans with variable interest rates should see their monthly payments fall as well, in many cases within a couple of billing cycles.
Mortgage rates are influenced by a mix of complex factors that includes Fed policies, longer-term inflation expectations, and government bond market dynamics. The rates for 30-year fixed mortgages, which tend to track the yield on the 10-year Treasury note, fell steeply in August after government reports confirmed that inflation and the job market were cooling.5
The average rate on a 30-year fixed-rate mortgage was 6.09% on September 19, the lowest in 19 months. This is down from a recent peak of 7.22% in early May. Aspiring home buyers have gained significant purchasing power since last spring and mortgage rates may continue to fall gradually, but it’s also possible that much of the anticipated decline in interest rates has already been priced in.6
Too much cash on hand?
Savers have enjoyed being rewarded for holding cash in high-yield savings accounts and short-term certificates of deposits (CDs). Although it may not happen overnight, they should be prepared for the yields on these accounts to follow the Fed funds rate downward. Some bank CDs had a feature allowing the bank to “call” them before they mature.
Investors who have more cash savings than they expect to need in the next couple of years might consider locking into today’s relatively high yields by shifting money into CDs or bonds with fixed interest rates, without a call feature, and longer terms. For example, someone could purchase bonds that mature when the money is likely to be needed for retirement expenses or to pay for a child’s college education.
Moving more money into stocks, which have historically generated higher average returns over time, is a riskier option that may be appropriate for investors who intend to hang on to them for the long haul, but only if they can endure frequent price swings.
Rate cuts in a strong economy
Past rate-cutting cycles have aimed to boost growth when the economy was in trouble, which doesn’t appear to be the case this time around. Powell stated clearly, “The U.S. economy is in a good place. And our decision today is designed to keep it there.”7
In the second quarter of 2024, U.S. gross domestic product (GDP) expanded at a healthy 3.0% annual rate, and recent forecasts based on the Atlanta Fed’s GDPNow model indicate that the economy grew at a similar pace in the third quarter.8–9
The September rate cut — which officials hope will keep job market conditions from worsening — is presumably a starting point. The Fed plans to keep cutting interest rates until they reach a neutral stance that should no longer impact the economy for better or worse. According to current FOMC projections, the fed funds rate could drop an additional 0.50% by the end of 2024, and another 1.0% over 2025.10
It can take time for borrowing rates to respond to changes in the fed funds rate and noticeably impact the decisions of consumers and businesses. This “lag” in the effects of monetary policy is one reason that some people fear the economy is not out of the woods.
Whatever happens next, the Committee intends to make policy decisions “meeting by meeting based on the incoming data, the evolving outlook, and balance of risks.”11
The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. The return and principal value of an investment in bonds or stocks fluctuate with changes in market conditions and, when sold, these securities may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Forecasts are based on current conditions, subject to change, and may not come to pass.
1, 9–10) The Federal Reserve, 2024
2, 4, 7, 11) The Wall Street Journal, September 18, 2024
3) U.S. Bureau of Labor Statistics, 2024
5) The New York Times, August 8, 2024
6) Freddie Mac, 2024
8) U.S. Bureau of Economic Analysis, 2024
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
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
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
Can Productivity Keep Driving the U.S. Economy?
Productivity of U.S. workers increased by 2.7% in 2023 — well above the average annual rate of 2.1% since the end of World War II, and a dramatic change from 2022, when productivity dropped by 2.0%. It’s also a substantial improvement over the 0.9% growth rate in 2021.1
According to the nonpartisan Congressional Research Service, “Productivity growth is a primary driver of long-term economic growth and improvements in living standards.”2 On a more immediate level, the productivity surge in 2023 may help explain why the U.S. economy was able to grow at a strong pace while inflation dropped.
Doing more with less
Broadly, productivity is the ratio of output to inputs. A productivity increase means that output increases faster than input, essentially producing more with less.
The most cited productivity measure for the U.S. economy is labor productivity for the nonfarm business sector (the data cited in the first paragraph of this report). In simple terms, this is the value of goods and services produced per hour of labor. The nonfarm business sector comprises most U.S. business activity excluding farms, general government, and nonprofits.
Boosting GDP while fighting inflation
The 2.7% increase in 2023 means that, on average, 2.7% more value was created for each hour of labor. This helps boost gross domestic product (GDP), while also helping to control inflation by holding back the wage-price spiral, which can push inflation out of control.
In a tight employment market, as we have had for some time, a shortage of workers can force businesses to offer higher wages, which they pass on to consumers as higher prices. Because consumers are then earning more at their jobs, they demand more goods and services and are willing to pay higher prices, which pushes businesses to hire more workers at higher wages, continuing the cycle. Increased productivity allows business to keep prices lower even as they pay workers more. This seems to have occurred in 2023, with average hourly wages rising by 4.3%, while inflation dropped to 3.4% — the first time since the pandemic that wages increased faster than inflation.3
Compensating for demographics
Increasing productivity is especially important for the U.S. economy because of lower birth rates, the aging of the population, and more young people staying in school. The labor force participation rate, which measures the percentage of people age 16 and older who are working or looking for work, peaked in early 2000 and has trended downward since then.4 Higher productivity enables a smaller workforce to drive economic growth on a level that would require a larger workforce without productivity gains.
Why is productivity increasing and can it be sustained?
Increases in labor productivity are typically driven by improved tools and technology, more efficient processes and organizations, and increased worker experience, education, and training. The proliferation of computers in the workplace spurred a productivity surge in the 1990s, and some analysts point to artificial intelligence (AI) as contributing to the 2023 increase. It’s possible that AI has already improved some businesses, but any large-scale impact may take years, as businesses integrate AI through worker training and new processes. As this unfolds, AI could help drive a long-term productivity surge.
A more immediate explanation for the current increase may be adjustment and experience with the hybrid work model. A recent survey found that 43% of remote workers felt working from home makes them more productive, while only 14% believed it makes them less productive. (Another 43% said it makes no difference.)5 The ideal situation would allow employees to work in the most productive environment. Three years after the pandemic, businesses may be improving that balance, and it’s possible that further developments in hybrid work could continue to drive productivity gains for some time.
New businesses can spur productivity through innovation, filling specialized niches, and producing specific goods or services more efficiently. New business applications surged during and after the pandemic, with more than 20 million from 2020 to 2023. Only about 10% of applications turn into businesses, but some new enterprises may already be making a difference, and the surge of entrepreneurship bodes well for future productivity.6
A less positive factor may be that some companies laid off employees and made other changes in 2023 in anticipation of a recession that never materialized. Layoffs typically target the least productive employees, and remaining employees may increase their productivity to maintain production levels. While this “lean” model is not always sustainable, it can boost productivity in the short term, and technology and more efficient processes may enable some businesses to stay lean.
Volatile data
Measuring productivity is difficult, especially in service industries, which now comprise the largest sector of U.S. economic activity. For this reason, productivity data can be volatile and often changes with revision. (The 2.7% Q4 data is preliminary.) Even so, the surge in 2023 seems solid, and enhancements such as artificial intelligence, hybrid work, and new business innovation could usher in a sustained period of productivity growth. The Bureau of Labor Statistics releases productivity data quarterly, with Q1 2024 data coming in May. You might keep an eye out for a continuing trend.
1, 3–4) U.S. Bureau of Labor Statistics, 2024
2) Congressional Research Service, January 3, 2023
5) Bloomberg, January 30, 2024
6) U.S. Chamber of Commerce, February 2, 2024
Are you optimistic about the 2024 Economic Outlook?
Despite high interest rates and unsettling geopolitical conflict, the U.S. economy outperformed the expectations of most economists in 2023.1 Inflation-adjusted gross domestic product (Real GDP) accelerated to an annualized rate of 5.2% in the third quarter, after growing 2.1% in Q2 and 2.2% in Q1. Inflation, as measured by the 12-month change in the price index for personal consumption expenditures (PCE), was 3.0% in October 2023, after beginning the year at 5.5%.2 The labor market stayed strong in 2023, though it has cooled off a bit. The unemployment rate edged up from 3.4% in January to 3.9% in October, but is still quite low by historical standards.3
That is all good news considering that a majority of economists polled in January 2023 believed the United States would enter a recession by the end of the year.4 Whether you are an investor, a business owner, or an employee thinking about your career prospects, you may be more interested in what lies ahead for the economy in 2024. Economic projections are essentially educated guesses. Economists in the public and private sectors are tasked with trying to predict the future based on a wide range of indicators, potential risks, and their overall impressions of market conditions. And so far, forecasts for 2024 seem to suggest the economy is kicking off the new year in a more stable position.5
Fed policies and official forecasts
Since March 2022, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve has raised the benchmark federal funds rate aggressively in an effort to control inflation, which had climbed to its highest levels in 40 years.6–7 Raising interest rates is meant to slow economic activity by making it more expensive for consumers and businesses to borrow money, which discourages spending.
In November 2023, the Fed paused its rate hikes for the second meeting in a row, leaving the federal funds rate in a range of 5.25% to 5.5%, a 22-year high.8
Economic projections released at the FOMC’s September meeting indicated that slower GDP growth is expected, with a median projection of 1.5% in 2024. This was an improvement from 1.1% in the previous forecast. The committee expected PCE inflation to continue declining and end the year at 2.5%, which would still be higher than the Fed’s 2.0% target, and that the unemployment rate would tick up to 4.1% (based on median projections).9
Polling the pros
In October 2023, The Wall Street Journal’s Economic Forecasting Survey found that a recession is no longer the consensus view of 65 top business and academic economists polled by the publication on a quarterly basis. On average, the group expects real GDP growth will slow to 1.0%, the unemployment rate will rise slightly to around 4.0%, and inflation (measured by the consumer price index) will fall to 2.4% by the end of 2024.10
Nearly 60% of the economists believed the Fed was finished hiking interest rates, and roughly half thought that rate cuts would begin in the second quarter of 2024, in response to signs of weakening growth.11
At the same time, some economists were still not convinced that the U.S. economy is out of the woods. As recently as November 2023, the Conference Board predicted that a very short and shallow recession will begin early in 2024.12
Global growth trends
According to the Organisation for Economic Co-operation and Development’s September forecast, the global economy is expected to grow 3.0% in 2023 before slowing to 2.7% in 2024. In China, the growth rate is forecast to weaken from 5.1% in 2023 to 4.6%, due to its struggling property market and reduced domestic demand. Growth in the Euro area is expected to improve from 0.6% in 2023 to 1.1% in 2024. Inflation is expected to decline gradually, but to remain above central bank objectives in most economies.13
The problem with projections
Forecasts such as these may be helpful in making some kinds of financial decisions, but it’s also important to consider their limitations and remember that it’s not unusual for economists to change their minds. Recent years have shown how difficult it can be for forecasters to account for the impact of unforeseen economic disruption. Wild cards that could test economists in 2024 include losses from severe weather, fluctuations in oil prices, political conflict in the United States, and expansion of the war in Israel, which could harm an already fragile global economy.
In fact, Fed Chair Jerome Powell called on Fed forecasters to remain flexible in his November 2023 press conference. “Of course, even with state-of-the-art models and even in relatively calm times, the economy frequently surprises us.” He continued, “Our economy is flexible and dynamic, and subject at times to unpredictable shocks, such as a global financial crisis or a pandemic. At those times, forecasters have to think outside the models.”14
The financial markets could continue to react — and occasionally overreact — to economic news and policies announced by the Federal Reserve. But that doesn’t mean you should do the same. As always, it’s important to maintain a long-term perspective and invest strategically based on your financial goals, time horizon, and risk tolerance.
Forecasts are based on current conditions, are subject to change, and may not happen. All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.
1, 4–5, 10–11) The Wall Street Journal Economic Forecasting Survey, 2022–2023
2, 7) U.S. Bureau of Economic Analysis, 2023
3) U.S. Bureau of Labor Statistics, 2023
6, 8–9) Federal Reserve, 2023
12) The Conference Board, 2023
13) Organisation for Economic Co-operation and Development, 2023
14) thehill.com, November 8, 2023
