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

Episode Date: November 3, 2023

#470: The economy is booming. GDP grew 4.9 percent last quarter, the fastest rate of growth since 2021. Consumer spending jumped 4 percent. Unemployment is holding steady at 3.8 percent, historically low. The U.S. added net new jobs for the 34th consecutive month. And yet – people are worried. Online discussion around layoffs at its highest point since July 2020. High-profile headlines about major staffing cuts – most recently from Schwab, which is dismissing 2,000 employees – fuel these fears.  Why is there such a disconnect between sentiment, which is pessimistic, and economic data, which is robust? We explore that qu estion in today’s episode. We also discuss the controversial Credit Card Competition Act, which if passed might eliminate credit card rewards like airline miles and cashback. We talk about Mint, the budgeting app with 3.6 million users, announcing that it’s shutting down. We also share details about the student loan repayment debacle. And we describe a landmark court ruling for $1.8 billion – yes, with a B – against the National Association of Realtors and several real estate brokerages, a verdict that may revolutionize the business model of how homes are bought and sold. Enjoy our First Friday of November 2023 episode! Learn more about your ad choices. Visit podcastchoices.com/adchoices

The 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 tradeoff 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. My 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. First, 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. Right 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 students, 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. The 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, but 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. That's between 5 to 6 percent of its total workforce. Spunk 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. So 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. Despite 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.

And now, once again, this meeting, they're also holding interest rates 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? That 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 meetings. So we're seeing this trend around the world of rate. And 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's actually really big news in the world of housing that came out yesterday on Halloween. Again, 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. The 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 home builder 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. Now, the way that home builders, major home builders are dealing with that,

is they're trying to offer incentives. So Pulte Group is actually offering 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. but 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. So 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, that 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. You 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. 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. There'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 list. agent and the buyer's agent. Now, 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. 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. So you're paying $30,000 per every $500,000 worth a 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 buyer's agents, and agents are free to set their own commission rates, which technically they always have been, 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, and 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. It 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. Now, 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. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune

magazine. That's what being a fifth-third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments, a fifth-third better. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair. Black Friday sale. Wayfair has can't miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway,

in the bathroom, very space saving. I have a daybed from them that's multi-purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want, no matter your style, no matter your budget. Wayfair has something for everyone. Plus, they have a loyalty program. 5% back on every item across Wayfair's family of brands. Free shipping, members-only sales, and more terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off.

That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Black Friday is here at IKEA, and the clock is ticking on savings you won't want to miss. Join IKEA family for free today and unlock deals on everything from holiday months. must-havs to cozy at-home essentials, all the little and big things you need to make this season shine. But don't wait. Like leftovers at midnight, our Black Friday offers won't last. Shop now at IKEA.ca.ca.com, bring home to life. Welcome 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 master card, 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. There's Visa, there's MasterCard, there's American Express, there's Discover. 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, the rate that merchants pay is relatively steady. In 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 card. So the Durbin Amendment took effect on October 1st, 2011, and it set a cap on debit card transaction interchange fees. It capped that fee at a flat 22 cents per transaction plus one half of one percent of the cost of the transaction. So the fee is capped there bylaw. 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. They 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. percent down to 20 percent. 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, you know, banks used those in order to compensate for the money that they were no longer collecting from debit card transactions. And those fees were. 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, 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? Also, 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 that both the financial services sector and the travel rewards enthusiasts are watching very, very closely. So next week, I am going to Nashville. I'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. have been making errors, so 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 2.5 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 2 months. 240 months. That's a bill you never want to get. 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 NellNet 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 serve as 40% of loans. Borrowers who try to contact them report waiting on hold sometimes for hours just to get clarity on what they owe. So for you, if you have student loans, the takeaway from all of this is read your documents very carefully because they may or may not be erroneous. If possible, try to log into your my federal

student aid account for, that's for federal student loans. To the extent that you can handle your bills online without having to call, that will be a much simpler path. Again, it's an account called My Federal Student Aid, and anyone with federal student loans can access that. If you do need to call your servicer, do so during an off-peak hour. So if, for example, their opening hours are 7 a.m. to 7 p.m., call it 7 a.m. Now, there is an option for you to... your payments, there's a particular opportunity to use what is referred to as an on-ramp to repayment. So there's this 12-month on-ramp, which lasts through the end of September 2024. And under the on-ramp, borrowers can choose to skip their payments with no adverse credit

consequences. Now, interest will still accrue, but your credit won't get dinged. in order for the on-ramp to make good financial sense, you need to answer no to both of the following questions. Can you afford your monthly student loan payments? If the answer is no, then the on-ramp might make sense. And then the second question is, can you lower your payment to a more affordable amount under the save plan? Because the save plan bases your monthly payment on your discretionary income, which is

defined as any income that exceeds 225 percent. of the federal poverty level. So if you're a family of four with an income under $67,500, you would have a $0 monthly student loan payment under the Save Plan. And under that plan, any unpaid interest is forgiven. So, again, if you're a family of four with an income under $67,500 and you have $50,000 of student loan debt at a 6% interest rate, and your required monthly payment is set at zero because you're under the save plan,

then within a year, your balance will still be $50,000. So the two questions again is, can you lower your payment with the save plan? If the answer to that is no, and if the answer to the question of can you afford your payments is also no, under those two conditions, the on-ramp might be a good option for you. So that's what's happening in the world of student loans. All right, so let's tie all of this together. The economy is going gangbusters and growing faster than people expected. Unemployment is holding steady at 3.8% which is historically rock bottom low.

That said, the national psyche is more worried about layoffs than ever. Online discussions about layoffs are at their highest point since the pandemic. inflation is at a five-month high. The Fed just finished meeting, and they decided to leave interest rates as they are. This is the second consecutive meeting in which they've left interest rates alone, but they're going to meet again in December. Student loans are resuming, but they're messy. Credit card rewards may or may not be going away.

And the fee that you need to pay in order to sell your house is a fifth. officially up for negotiation. So that's the economy as of the beginning of November, 2020. And this is your monthly first Friday state of the economy update. Big news for those of us who like budgeting, which I've got to assume as most people listening to this, Mint, which is the granddaddy of budgeting apps. It's the budgeting app that, got a lot of us started in the world of personal finance, Mint, the budgeting app owned by Intuit, is shutting down. Intuit announced that Mint is going to shut down and it's going to be absorbed into credit karma, which is not even a budgeting app anyway, so I don't know what the heck

they're doing there. Mint is going away January 1st. That's absolutely shocking. So Mint has 3.6 million monthly active users. It was acquired by Intuit in 2009 for 170 million. If anyone has been in the personal finance space for a while, I mean, Mint is part of our DNA, right? It was one of the early products, you know, in the right around 2009, 2010, it was one of the biggest early personal finance apps out there. Unfortunately, despite its heavy user base, its business model just didn't hold up. Its business model was to present users with offers for various financial products like banks or credit cards and to earn a referral fee. But that didn't convert well enough to be able to support the costs of delivering the service to its 3.6 million users. And so it's just shutting

down. So goodbye, Mint. If you are a Mint user and you're looking for an alternative, there are a few, there's Tiller, there is Wynab, you need a budget, and then there is Monarch Money. Monarch is a sponsor of this podcast. We have a discount code for a 30-day trial, Monarchmoney.com slash Paula. But those are the three, Tiller, you need a budget, and Monarch Money, those are all fantastic resources for those of you who are using Mint and now need a new budgeting tool. So it is the end of an era. Goodbye to Mint. It is time to look ahead to new budgeting tools.

I hope you've enjoyed this first Friday bonus episode. Let me know what you think of these first Friday bonus episodes. This is now the second month in a row where we've devoted the first Friday bonus episode to doing a state of the economy update. Let me know what you think of it. If you're listening to Spotify, leave a message. You can directly in the Spotify app. You can comment on what you thought of it.

You can also reach out to me on Twitter. I'm super active there at Afford Anything on Twitter. You can find me on Instagram at Paula Pat. You can chat with other members of the community, affordanything.com slash community. And of course, most importantly, subscribe to our show notes where you can get a synopsis of every single episode. That's available at afford anything.com.

slash show notes. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast, and I will catch you in the next episode.