The GDP Grew 4.9 Percent, Unemployment is at a Near-Record Low … and Everybody’s Stressed About Layoffs

0:00The U.S. economy is growing way faster than expected. The entire world of real estate sales may be completely upended. And inflation is at its highest point since May. What is going on in today's economy? Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice that you make is a trade-off against something else. And that doesn't just apply to your money. That applies to any limited resource you need to manage, like your time, your focus, your energy, your effort. So what matters most? And how do you make decisions accordingly? That is what this podcast is here to explore.

0:38My name is Paula Pant. I'm the host of the show. Typically, we're a weekly show. We air every Wednesday-ish. But once a month, on the first Friday of the month, we air a First Friday bonus episode. So welcome to the November 2023 First Friday bonus episode. In our last First Friday episode, the October 2023 First Friday episode, we gave a synopsis of economic news of the moment, and that got very positive feedback. So we're going to do that again. Let's take stock of where we are economically. What is this point in time? What is our current economic situation? And where do we go from here? Here's what's happening in the world around us and what it means for you.

1:27First, the U.S. economy grew at a 4.9 % pace last quarter. That's the fastest pace since 2021. This was very largely driven by consumer spending, which jumped at a rate of 4%, which is also the highest rate since 2021. Consumers are feeling good. Consumer spending is high. The economy is going gangbusters. that is not what the Federal Reserve wants to see. The Fed is trying to slow growth, not have the highest growth that we've had in the last two years. Now, there are several economists who believe that this high rate of growth, even without a future interest rate hike, is not sustainable. There are economists who believe that while consumer spending is growing, it's driven mostly by temporary factors.

2:15Right now, people have some extra cash. As you'll recall, savings rates peaked during the pandemic when nobody could go out, nobody could spend. But as savings wane and as student loan payments resume, real disposable income is projected to drop. In fact, real disposable income has already dropped 1 % in the last quarter. And so a lot of economists are saying that even if there isn't a further interest rate hike, this momentum in consumption will probably decline. Also, globally, we're seeing declines in many other parts of the world. The German economy shrank in the third quarter, which raises the risk that Europe might be headed for a recession.

2:58The German economy will be important to watch in the months ahead as an indicator of what may happen across Europe. Now, let's look at two other pieces of data in order to understand this economic world around us. And then, of course, we'll talk about what all of this means for us, for me and you. Let's look first at the labor market. So the labor market is really robust. Employment unexpectedly surged in September. And economists estimate that payrolls, even despite that surge, rose by 180 ,000 jobs in the month of October. Those are based on forecasts. We don't have firm October data out yet.

3:39But it's looking like despite the high profile headlines, the labor market continues to grow. Now, what's interesting about this is because of headlines that tell the stories of tech firms, financial firms, all kinds of high profile companies that are laying off some of their workforce, U.S. workers are increasingly worried about job cuts. According to Glassdoor.com, which is a job search website, discussions of layoffs have reached their highest level since July of 2020. So people are worried that they're going to get laid off, even though broader economic data is strong. And that's largely because you open the business pages and you see that Schwab just laid off 2 ,000 employees.

4:31That's between 5 % to 6 % of its total workforce. Splunk cut 7 % of its workforce, which is about 500 employees. The tech sector lost about 240 ,000 jobs so far this year across companies like Google, Amazon, Microsoft, Yahoo, Meta, and Zoom. So we hear these stories about job cuts. And as a society, as a workforce, the online discussion about what if I lose my job is at its highest point, despite the fact that the labor market overall continues to grow. The unemployment rate is expected to hold at 3.8 % for a third consecutive month. And that is a 3.8 % unemployment rate is historically rock bottom low.

5:25So there is a bit of a disconnect between how many workers feel about their job security and between the data. And some of that disconnect may come from the industry that you work in, right? It doesn't matter if jobs are growing in a different sector, if they're not growing specifically in your sector. But that's an interesting and contrasting set of numbers to illustrate current labor conditions. Next, let's talk about inflation. Inflation jumped to 4.2%. That's its highest point since May. And according to a survey that was conducted by the University of Michigan, more than 80 % of consumers said inflation is going to be their number one source of financial hardship in the coming year.

6:11Despite all of this, despite the strong economy, the low unemployment rate, and the high inflation rate, those of us who are Fed watchers are aware the Fed met on November 1st. They concluded a two-day meeting on November 1st. I am recording this episode on Wednesday, November 1st at 3 in the afternoon Eastern. So there's live news that is still breaking from the Federal Reserve's meeting. But they have just announced that the Fed is going to hold interest rates steady. So this is the second meeting in a row. If you recall, the last meeting that they had prior to this, the meeting back in September, they held interest rates steady.

6:53And now once again, this meeting, they're also holding interest straight steady. In fact, so again, I'm recording this on Wednesday, November 1st. It's 314 in the afternoon. It looks like Jerome Powell, the chairman of the Fed, is holding a press conference to discuss why they made that decision. But, and here's the real million dollar question, the Fed is going to meet one more time this year. They're meeting on December 13. What will they do at that meeting? Are they going to hold it steady for the third meeting in a row? Or are they going to raise interest rates again when they meet on December 13?

7:31That is the question that everybody wants to know. Globally over in Europe, the European Central Bank also paused interest rate hikes. They've left their rates unchanged as of their most recent meeting. So we're seeing this trend around the world of rates holding steady, at least for now. What does all of this mean for you? Well, the impact of interest rates is largely seen in the housing market. You see it in credit cards. You see it in the auto market, the car market. But the big, big thing that is on a lot of people's minds is housing. And there are two – well, there's actually really big news in the world of housing that came out yesterday on Halloween.

8:16Again, I'm recording this Wednesday, November 1st. So yesterday, Halloween, huge news. We're going to talk about it in just a second. But there was a landmark court ruling that might change how home sales are done potentially forever, like in a major way. We're going to talk about that in just a moment. But first, let's talk about what the current interest rates are doing to the housing market. So mortgage rates are at a 23-year high. At the start of this calendar year, rates were at 6.48%, according to Freddie Mac. And as of last week, they hit a high of 7.79%. That's according to Freddie Mac.

9:04The result of that is that home buying has fallen to its lowest levels. Applications for 30 years fixed rate mortgages have fallen to the lowest level since 1995. And what that means is that builders aren't building. Single-family housing starts did increase 8.6 % in September over where they were a year ago, but a lot of economists believe that that recent uptick in activity is the anomaly rather than the norm. You can see that reflected in the stock of homebuilder companies. Companies like Pulte Group, DR Horizon, Lennar, Those stocks have all dropped by around 16 % since they peaked in July, largely because demand for new homes is drying up.

9:53Now, the way that homebuilders, major homebuilders are dealing with that is they're trying to offer incentives. So Pulte Group is actually offering 5.75%, a 5.75 % loan on a 30-year fixed rate. and they say that between 80 % to 85 % of their buyers have received an incentive towards interest rates. Now, that's according to the Financial Times. So they're basically trying to get in there directly and take the place of the banks. But there are limits to how much they can do that, and there are also limits to how much demand there is for new construction homes, which tend to be, generally speaking, more expensive than existing homes.

10:35But existing home sales have plunged to the lowest level since 2010, according to the Census Bureau. Now, the National Association of Home Builders put out a statement saying that high interest rates have really done two things. They've not only driven buyers away, they've also raised construction costs because business owners have to spend more money in order to borrow the money that it takes to run their companies, right? So construction costs are higher, buyers are fewer. And as a result, builders are building fewer homes, which only exacerbates an already severe supply shortage. Now, Goldman Sachs put out a research note on Monday saying that it expects interest rates to stay high throughout 2024.

11:21So there isn't going to be a reprieve from this at any point in the coming year. At least that's what forecasters are predicting. But there might be, and this is where we get to the big landmark court decision that happened on Halloween, there might be a reduction in home prices that's come from an unexpected source. Okay, so on Halloween, and this is like straight from the school of what? On Halloween, a federal jury ruled that the National Association of Realtors and several large real estate brokerages had conspired to artificially inflate the commissions paid to real estate agents. And the jury ordered these realtors, the Realtors Group and the Realtor Brokerages, to pay damages of nearly$1.8 billion, billion with a B, to a group of home sellers.

12:24That is a stunning decision that potentially could rewire the entire business model of how real estate is transacted. So basically, here's how it works. And I should say before I start this explanation that I myself am a former licensed real estate agent. I have an expired license. I was a licensed real estate agent in the state of Georgia. I never served any clients. I only had the license so that I could have direct access to the MLS for myself and so that I could represent myself in my own deals. I've been through the training and I can tell you, this is how it works. So in any real estate deal, you've got two parties.

13:14You have the listing agent and then you have the buyer's agent. Now, very confusingly, the buyer's agent is also referred to as the selling agent because they are selling a property to a buyer. That's very confusing when you say, oh, there's the listing agent and the selling agent. So for the sake of simplicity, you've got the listing agent who represents the seller, and then you've got the selling agent that represents the buyer, who we'll just call them the buyer's agent, right? These agents connect through a platform called the MLS. Now the MLS, the Multiple Listing Service, goes back about 100 years.

13:53There's a rule that anyone who uses the MLS, any listing agent has to pay the person who brings them the buyer. So if a buyer's agent uses the MLS to bring a buyer to a listing agent, then there's a rule the listing agent has to pay them a commission. And these commissions technically, technically speaking, are negotiable. I remember in real estate training, that was something that we were quizzed on. They are technically negotiable, but in practice, they are, for all intents and purposes, pretty much set in stone. So the split is generally in the state of Georgia, it was typically 2.8 % slash 3.2 % split between the listing agent and the buyer's agent.

14:45Now, that entire fee is paid by the home seller. The home buyer doesn't pay a fee, right? It's the home seller who pays about 6%, and then that approximate 6 % haircut that the seller pays gets split between the two agents. So that's the way the system works. But in this lawsuit, a group of home sellers claimed that the way that the system works is forcing them to pay excessive fees to the agents. Because taking a 6 % haircut every time you sell a home is a huge fee, right? That means if your home is worth$500 ,000, you're paying$30 ,000 in agent commissions, right? You're paying$15 ,000 to your agent who helped you list the property, and you're paying another $15 ,000 as a commission to the buyer's agent.

15:41So you're paying$30 ,000 per every$500 ,000 worth of home. sellers went to court saying this is anti-competitive and this is far too onerous and the jury agreed with them and so under this verdict sellers are no longer required to pay their buyers agents and agents are free to set their own commission rates which technically they always have been but in practice not so much so the lawsuit was filed by nearly half a million home sellers in the state of Missouri. And before it went to trial, two major real estate brokerage firms, one is Remax, and the other is a group called Anywhere Real Estate.

16:26And that group has subsidiaries that include Coldwell Banker, Sotheby's Realty, and Century 21 Real Estate. So those two groups both decided to settle prior to trial. But the National Association of Realtors, Keller Williams, and Home Services, those three groups headed to trial. And on Halloween morning, the jury decided, yes, there has been a conspiracy. And it awarded 1.78 billion of damages. The National Association of Realtors says that it plans to appeal the verdict. In a statement, they claim that this verdict, quote, this verdict does not require a change in our rules. But it's clear that this decision is now really undercutting the standard practice of that 6 % commission.

17:18It opens the door to sellers saying, hey, I as the seller don't want to be the person who pays the buyer's agent. The buyer should pay their own agent. Why isn't the buyer paying the agent that they're working with, right? Why am I as the seller paying for both agents? There's still a long way to go. NAR is going to appeal. But if these commissions can be lowered, that could mean potentially that home prices go down. Because right now, the high commissions are being factored into the price of homes. So that's what's happening on the real estate front. Lots of drama, really fascinating to watch.

18:02Now, hey, I have some exciting news. We've got some sponsors who make this show possible. So let's go hear from them. And when we come back, more drama. You know those rewards you love so much? The airline rewards, the cashback rewards, the free nights at hotels, all of the credit card rewards that you love? Well, they might be going away. There's this proposed legislation called the Credit Card Competition Act, which might change the face of credit card rewards as we know it. More on that in a moment.

18:38You know, when you're a kid, you dream about being an astronaut or working with wildlife or all these cool things. And then when you grow up, you think about not just what you want to do, but also you think about this other layer to it, which is how do I want to impact the world? What legacy do I want to leave behind? And how do I want to do that through my work? For a lot of people, that's when you start dreaming about owning your own business. But to do that, you're going to need a website, a payment system, a logo, a way to find new customers and that can be really overwhelming and it's a big workload.

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19:48Sign up for your one month,$1 per month trial period and start selling today at shopify.com slash paula. Go to shopify.com slash paula shopify.com slash paula this year give a gift that goes far beyond the moment and invest 529 account whether it's a child grandchild or someone just starting out you're helping them safe for education that can open doors for a lifetime invest 529 is a tax advantaged way to help save for college trade school or even apprenticeship programs it's flexible, easy to start, and you can contribute any amount, big or small. Because the money can grow tax-free, it's a gift that can really build value over time.

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22:34Welcome back. All right, the Credit Card Competition Act is a proposed bill that aims to increase competition among credit card networks and lower merchant fees. So right now, every time that you use a Visa or a MasterCard, every time that you swipe, that merchant has to pay a fee to the credit card company. Now, for many merchants, you know, for big merchants, Target, Walmart, they can handle it. But for many small businesses, that little corner bodega where you get your morning bagel, for those small businesses, these merchant fees can be pretty substantial. And as we've all seen, there's not a ton of competition or a ton of choice among credit card networks.

23:26There's Visa, there's MasterCard, there's American Express, there's Discover. However, by and large, Visa and MasterCard dominate the market. So the goal of the Credit Card Competition Act is to boost competition, lower fees. It's positioned to be good for small business. But if it passes, it would likely gut the rewards that are associated with credit cards. So airline miles, cashback, hotel points, all of those rewards would likely evaporate. Now, here are some facts about the situation. First, when you compare Nielsen data from 2019 through 2022, the rate that merchants pay is relatively steady.

24:18In 2019, it was 2.189%. In 2022, it was 2.194%. So in other words, a merchant who processes$100 ,000 per year in credit card transactions paid on average$5 more in 2022 than they did in 2019. So the rates have not increased significantly over the last few years. Now that data is compiled between both credit cards and private label cards. Private label cards are cards that are tied to a specific retailer and not usable at other merchants. Now, advocates for the act say, yes, it's true that rates have been holding relatively steady, but they have been increasing. Let's take a look at what happened when the Durbin Amendment was passed, because the Durbin Amendment for debit cards is what the Credit Card Competition Act is trying to be for credit cards.

25:13So the Durbin Amendment took effect on October 1st, 2011, and it set a cap on debit card transaction interchange fees. It kept that fee at a flat 22 cents per transaction plus one half of 1 % of the cost of the transaction. So the fee is capped there by law. And the effect of the Durbin Amendment is that it did lower cost for merchants. According to a study from the University of Pennsylvania, the fees that banks collected from debit card transactions dropped by$6.5 billion annually after it passed. However, according to the same UPenn study, banks decided not to just absorb this drop in revenue.

26:03they decided that they were going to look for revenue in other places. And so they offset the loss by raising other account fees. Essentially, banks said, hey, there's$6.5 billion that we are no longer collecting, that we used to collect last year, but that we're no longer collecting this year. How are we going to plug that hole? And so what happened next was that the number of free basic checking accounts with no monthly minimum balance requirements, that number dropped from 60 % down to 20%. The average checking account fees increased from$4.34 to$7.44. So it nearly doubled. And so between those two things, the loss of free checking and the increase of checking account fees, banks used those in order to compensate for the money that they were no longer collecting from debit card transactions.

27:06And those fees were, according to UPenn, disproportionately borne by low-income consumers who don't have the account balances that they need in order to have the monthly minimum checking account fee waived. So the loss of free checking became an unintended consequence of the Durbin Amendment in the world of debit cards. Now, shift that focus over to credit cards. Pretty much everybody universally agrees that if this passes, it would significantly reduce, if not entirely eliminate, rewards programs. It would have, in particular, a huge, huge impact on airline and hotel co-branded cards. Because what's the point of getting a Delta Airlines card or a Hilton Hotels card if there aren't going to be any rewards associated with it?

28:00Also, credit unions, particularly small local credit unions, will be among the groups hurt most if the Credit Card Competition Act passes. So credit unions oppose this legislation because it would limit their ability to provide credit cards to their members. The current status is to be determined. This bill was reintroduced to Congress in June of 2023. It lacks support right now to pass into law, but it is awaiting discussion by several committees. And it's something that both the financial services sector and the travel rewards enthusiasts are watching very, very closely. So next week, I am going to Nashville.

28:49I'm going to a conference called CardCon. It is a conference for credit card media. While I'm there, I will be watching a debate between a leading travel rewards expert and a leading advocate for this particular act. I'll be watching a debate between the two of them about the various pros and cons of this particular proposal. So this is inside of the world of credit cards behind the scenes. This is a big issue on everybody's mind. And speaking of debt, let's turn our attention to student loans. Student loan repayments, of course, have recently restarted. It's off to a messy start. There are a lot of student loan servicers that have been making errors.

29:38So more than 830 ,000 people missed their first student loan payment after the payment pause ended because a particular servicer, the Missouri Higher Education Loan Authority, failed to send timely statements to two and a half million borrowers. So it's a bit of a messy restart after the pandemic pause, as a lot of borrowers are not getting bills or they're getting erroneous bills. They're trying to call customer service and they're getting super long wait times. In some instances, there were servicers who told borrowers that they owed more than$10 ,000 a month. According to a memo from the education department, in fact, a few people got a notice that they owed$100 ,000 per month because the contractors accidentally set repayment terms at one to two months instead of 120 to 240 months.

30:38That's a bill you never want to get. But meanwhile, that same servicer, the Missouri Higher Education Loan Authority, is also going to transition millions of borrowers' accounts to a new platform. And that means another 30-day delay in posting payments. Now, this isn't just limited to one servicer. There's also a student loan company called Nelnet that's facing a huge backlash as borrowers are reporting problems with the website, problems with the repayment system, unclear loan balances, interest being improperly charged. And Nelnet is huge. They service 40 % of loans. Borrowers who try to contact them report waiting on hold, sometimes for hours, just to get clarity on what they owe.