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Shelter from the economic storm

On today’s episode of the 5 Things podcast:

Something is off, the world seems wobbly.

If you feel like you are in the Twilight Zone right now, you aren’t alone. Food and gas prices are up, rent is up and help wanted signs are everywhere. The housing market doesn’t seem so hot anymore. According to the Mortgage Bankers Association and The National Association of Realtors the demand for a mortgage is at a two decade low, yet home prices are still high. Is this a recession or not?

According to President Joe Biden the U.S. is not in a recession despite two consecutive quarters of decline.

But that seems counterintuitive to everything we’ve learned about economics. So what’s going on?

The team at 5 Things sat down with Medora Lee, a money and personal finance reporter at USA TODAY to try to wrap our heads around just what is going on.

For more on the Fed rate hikes, click here.

To read more about annuities like Lee talked about in the episode, click here.

For more on ‘revenge spending’ click here.

To follow James Brown on Twitter, click here.

Podcasts: True crime, in-depth interviews and more USA TODAY podcasts right here.

Hit play on the player above to hear the podcast and follow along with the transcript below. This transcript was automatically generated, and then edited for clarity in its current form. There may be some differences between the audio and the text.

James Brown: Hello, and welcome to 5 Things. I’m James Brown. It’s Sunday, July 31st, 2022. I can’t believe summer is almost over. Every week we take an idea, a story or question and go deep. And this week is all about money. I think I’m not alone when I say that something is off. The world feels a bit wobbly. The stock market party appears over, for now at least. I check my 401(k). It ain’t pretty. Help wanted signs are everywhere. Food and gas prices are way up and rents and housing costs are up too. You know that raise you asked for last year, it doesn’t really matter because that cushion has already evaporated. Thank you inflation. Job offers of different sectors, like high tech are disappearing. A wave of hiring freezes and layoffs are sweeping through those companies.

In the housing market, it’s not as hot as it used to be. The Mortgage Bankers Association say demand for mortgages is at a two decade low. Then came talk of a recession, or is it? If you believe president Joe Biden, two consecutive quarters of declines in economic growth isn’t a recession. If you’re like me, that makes no sense. It’s counterintuitive and against everything I learned about economics. But treasury secretary, Janet Yellen is insisted on it.

Janet Yellen: Most economists and most Americans have a similar definition of recession. Substantial job losses and mass layoffs, businesses shutting down, private sector activities slowing considerably, family budgets under immense strain. In some, a broad based weakening of our economy. That is not what we are seeing right now.

James Brown: Jerome Powell agrees. He leads the federal reserve, the fed raised interest rates for the fourth time this year, reaching levels not seen in a while. That means buying anything with a loan will likely cost you more. From cars to houses and your credit card rates could go up too. During his remarks on Wednesday, Powell said the situation is really tough on Americans.

Jerome Powell: Price stability is the thing that makes the whole economy work. It’s what can give us a strong labor market and wages that aren’t being eaten up by high inflation. If you talk to people, again, people who are making wages relatively low wages, they’re the ones who are suffering the most from inflation. So it’s all the more reason why we need to move on this.

James Brown: This was a lot to get my head around. So I asked for some help. For a quarter century Medora Lee has kept an eye on all this. She covers business, economics, markets and personal finance news. She now works for USA Today. I can’t think of anyone better to help me make sense of what’s going on, including some ways that people are seeking shelter from this economic storm.

Medora Lee: Technically, so this is what the narrative is going to be. Technically, that is a recession, two consecutive quarters of negative growth. However, this time is different. I’m told this is not a recession. And the reason is because the employment picture is still so strong. That there’s no way that we could have this low unemployment rate and a recession. There’s also hope that GDP, Q2 GDP will be revised again, and maybe it’ll be revised up. So we don’t really know for sure, right? But no matter how you put it, we’re not really in a great position. Whether we’re in a recession or not, I mean, now we’re splitting hairs because most people expect that we will be in a recession. If not now, it’ll be a little later. Some people are pulling their forecast forward now and looking to the end of the year. And some people are looking early next year. So whether we’re in a recession or not, doesn’t really matter because we’re going to probably be in a recession sooner or later,

James Brown: The revisions are very interesting. I understand. They happen just about every quarter, correct?

Medora Lee: Yes. And sometimes they’re big. I think that for Q1, if I remember correctly, they originally reported negative 1.4% growth and they revised it to negative 1.6% growth. The revisions can go either way. So some people are saying that the revisions could push it higher, but we’ll see. It’s kind of a coin toss. I’m not really sure which way it’ll go.

James Brown: Yeah. You sound a little bit skeptical.

Medora Lee: I am a little skeptical. I mean, up until just earlier this week, I think before these numbers came out, I saw some Wall Street economists actually thinking that they were too negative on second order growth estimates and revised their forecasts up. And most of them were expecting a little bit of growth. So I don’t know. I’m not sure Wall Street’s had such a great record these past two years. I still think they got paid the same though.

James Brown: I wish we all did.

Medora Lee: I always tell my kids, I always say, “You should be a weatherman, because a weather person on the news, they don’t always have to be right, but they still get paid the same.” Maybe it’s the same on Wall Street, economist.

James Brown: Speaking of economists, you covered Jerome Powell’s press conference, announcing the rate hike as the fourth rate hike of this year. What were your takeaways from it?

Medora Lee: He basically said that he was going to continue looking at the data to make their decisions. It sounds like he doesn’t really want to forecast anymore because everybody’s had a terrible record with forecasting. So he says he’s going to look at incoming data and that’s how they’re going to make their decisions, but he needs to see cooling in inflation before they stop. I’m not really sure how much of a cooling he needs to see. I’m not sure if two months would be enough for him to make any big conclusions. But I think that the consensus is right now that they might go to 50 basis points rate hike instead of 75. So we’ve had two 75s in a row. That’s very big. So they think that they might see enough cooling that we might slow it down a little to 50 basis points next time. But either way there’s no cutting rates.

James Brown: Cooling, being less inflation?

Medora Lee: You’ll always have inflation. It’ll cool and the inflation will be growing at a slower rate.

James Brown: Okay. All right, I’m wrapping my head around this. So inflation’s not a thing that would go away completely. As I understand, it always exists to some degree. It’s the level of inflation that we’re concerned about.

Medora Lee: Exactly. So the economy can take maybe 2%, which is their goal, 2% inflation. Maybe it can absorb it a little bit of three, because there’s sort of the idea is that there’s a sweet spot of inflation where there’s enough inflation that shows economy is growing, because there’s some demand. So people might raise prices a little bit. You get wage increases, but they’re not going to have to be astronomical to keep up or beat inflation. It’s something that companies can absorb. But so about two to 3% is where people think the economy can handle inflation. So we are over 9%. So we’re like, “That’s pretty high.” I think that he’d like to see it come back down. I mean he says his ultimate goal is to try to get it back down to 2%. That seems very far away. Doesn’t it?

James Brown: It seems like that would take a dramatic shift in the way things are operating, I would think.

Medora Lee: Yes. That’s why we had these gigantic rate hikes, 75 basis points in a row. And just in case, you’re not sure, 75 basis points is 0.75%. So three quarters of percentage point and I mean that’s 150 basis points in two months. That’s a lot. That’s how alarming inflation has become. They need to put a clamp on demand by raising the cost of borrowing, to slow the economy, to slow the demand. Because if you have to pay more to borrow that money, you may not borrow that money and spend that money. So demand would go down. That’s what they hope. I mean, we’ve seen it in the housing market. The housing market demand has collapsed, but somehow prices are still at record highs.

James Brown: Yeah. It doesn’t seem to make a whole lot of sense. It seems like we’re in this sort of fun house mirror world of a bit of economics.

Medora Lee: Yeah. I feel that’s maybe why Wall Street economists and the Fed economists haven’t really done well in forecasting. They’re trying to use old models for this different economy that we’ve had post pandemic. I mean, no one’s ever spent this much money like the government and nobody really knew what all the stimulus was going to do exactly. We had some ideas, but we weren’t really sure. So I think people were not looking closely enough or thinking things through or watching carefully enough. That’s my opinion.

James Brown: I wanted to touch on one of your recent pieces that I found really interesting. You wrote about revenge spending slowing down.

Medora Lee: Yes.

James Brown: What is revenge spending?

Medora Lee: I’m not sure what you did, but when COVID first started and they told everybody to stay at home and they closed the businesses and they said, “Stay at home.” So everybody stayed at home. Or at least I did. So we all stayed at home. We canceled our… I canceled my spring break trip with the kids because that happened in March 2020. And then we didn’t go on vacation that summer. We didn’t really go out. And finally they took away most of these COVID restrictions all over the country and all over the world. And now that’s all people want to do. Revenge spend. They just want to go out. They want to travel and they’ll do it at any cost because they’ve missed out so much.

James Brown: So that started to slow down.

Medora Lee: It’s still pretty strong. But I think that inflation is now eating into that. People are dipping into their savings. The smut stop market is down. Stimulus checks are over. Child tax credits are over and gas prices are so… Everything else is so high, just living every day, eating and getting around town is expensive now.

James Brown: You also spent some time diving into annuities. So help me out. What is an annuity?

Medora Lee: I have to tell you, I didn’t know what an annuity was, but I kept seeing commercials for them. Do you ever watch late night TV? I do sometimes I can’t sleep. And so I watch the old reruns of these eighties shows and there were these really long commercials about selling annuities. And I even turned to my husband and I said, “What are these? Why are there so many commercials for annuities? Is this a good time to buy one or something?” So I decided that I was going to look into this. And so it’s very interesting. These are insurance contracts. They’re contracts that you sign into with an insurance company. And a lot of people use them for retirement investments. And so there are different kinds. First you have to know that there’s something called immediate annuity and then there’s a deferred annuity. Immediate means that I can put in some money, I buy this contract.

And the insurance company starts paying me out right away, whatever the payment annually or monthly, whatever you agree to. That would supplement my income. It’s just a fixed amount. And then there’s the deferred annuity, which means that I can put in every month, some money. And I pay the insurance company, what they call a premium. But at a certain age, the insurance company will pay me a certain amount regularly, whether it’s monthly or annually, whatever you agree to for the rest of my life, forever until I die.

And so I know it sounds too good to be true, right? You’re like, “Wow, for the rest of my life, till I die? Sounds like a great deal.” But it gets more complicated than that. So that’s just step one, to know that the difference you can get paid now, or you can get paid later. And so then after that, there are three basic kinds. There’s a fixed annuity, there’s variable annuity and index annuity. And right now I was actually right that this is apparently a time that a lot of, lot of people are really interested in annuities because annuity sales last quarter hit a record high.

So fixed annuity is the one that most people have been buying. And this is because a fixed annuity will mean that… They just guarantee, it works a lot like a CD. You buy it, they guarantee a certain rate and they pay it for whatever term the contract is. So in that way, it’s very safe. You can never lose what you put in, they say. But the difference between this and a CD is the interest rate on annuities is much higher. So it’s safe. People are looking for safety and they’re looking for guaranteed returns because the economy is so uncertain. The outlook is so uncertain. Inflation is so uncertain. So people have been flocking to these annuities trying to find better returns on their money. And it’s higher than a CD. It’s higher than a savings account. So they enter into these contracts with the insurance company. That’s the one that’s been most popular right now.

James Brown: That’s just one of several types of annuities. I take it that the appeal is that you know better where you stand. If the stock market is a bet that over time, that investment will go up. This is a bet with a lower downside in most cases.

Medora Lee: They serve their purpose for a diversified portfolio. If you need to lower you the volatility or you need some guaranteed safe income. So they can have a place in a diversified portfolio. I don’t know if people want to put all of their money into an annuity and bet on that, but that’s never a good idea for anything, right? So the recommendation that I got, that someone I spoke to gave was, if you’re interested in one of these do not call the insurance companies. Because I was like, “Well now what if I want one?” And he said, “Don’t call the insurance company because they’re going to sell you whatever because they get commissioned. So what you should do is you should find someone who is a planner and ask them question number one, are you a fiduciary? Because then you know that they have to work in your best interest and that person can go and kind of like look around and find annuities that might be right for you or price them for you and things like that.”

So he said, “Then you can go touch them.” And he said, “And your first meeting should be free because that’s a consultation.”

James Brown: If you’d like the show, write us a review on Apple Podcast or wherever you’re listening and do me a favor, share it with a friend. What do you think of the show? Send me an email at jabrownusatoday.com or find me on Twitter at James Brown TV. I love hearing from you. Thanks to Medora Lee for joining me. And to Alexis Guston for our production assistance. Taylor Wilson will be back tomorrow morning with five things you need to know for Monday. And from all of us at USA Today, thanks for listening. I’m James Brown and as always, be well.

This article originally appeared on USA TODAY: 5 Things Podcast: Seeking shelter from the economic storm