By Haddon Libby
If it seems harder to make ends meet than it did once upon a time, that is because it is. While it may seem counter-intuitive, the Fed is working hard to slow inflation by slowing the economy through increases in interest rates. They are doing this as history shows that inflation begets more inflation. When the cost of basic necessities goes up, it hurts those who can least afford it the most.
To understand how inflation works, let’s look at how prices have changed over the last 80+ years.
Back in 1930, a loaf of bread was 9 cents while a gallon of gas was 10 cents. The cost of a car was $600 or about 30% of the average family income of $1,970 per year. A new home cost two years of income or $3,850. The US population was 123 million.
Moving forward 30 years, bread cost 22 cents and a gallon of gas was 25 cents. That new car cost $2,600 or one-half of a family’s income of $5,315 per year. A new home was 2.5x income levels or $12,700/year while the US population was 179 million.
Only 32 years ago in 1990, a loaf of bread was up to 70 cents while gas was $1.34/gallon. The new car cost $17,000 which was now 75% of annual income of $29,000. A new home sold for $120,000 or 4 years of income. US population totaled 249 million.
In 2022, a loaf of bread costs $2.50. A gallon of gas in California costs $6 while it is in the mid $3 range across the Southern states. A new car costs about $40,000 ors 75% of the average US wage of $54,000/year. Here in California, the average household income is $80,000 making a new car more affordable than 30 years ago so long as you don’t need gas.
The cost of a new home here in the Golden State is now $843,000 vs. $429,000 for the United States. That means that the average family looking to buy a home in California is paying 10 ½ years of income for a home while the US average is 8 years. The US population is 332 million – 200 million more than 80 years ago.
California has a population of 39.5 million. This is 5% higher than 10 years ago but 20% slower than the United States.
Of that 39.5 million, the Bureau of Labor Statistics says that we have a labor force of 19.4 million. This means fewer than 50% of people living in the state work with the rest being retirees, youths, stay-at-home parents, the homeless and others deemed unemployable. After those exclusions, government statistics suggest that only 4% of those 20 million not working people are unemployed. Stated differently, we had 790,000 unemployed people throughout the state at the end of August.
Trade, Transportations & Utilities is the largest job grouping with 3.1 million workers in the state. Education and Health services employs the second largest grouping of people at 2.9 million. Professional and Business services employ 2.85 million followed by the Government at 2.5 million, Leisure & Hospitality at 1.9 million, Manufacturing at 1.3 million and Construction at 919 thousand.
Looking at job growth rates in the various job categories above, most job segments are still seeing job growth although it is slowing. Where Government was increasing its jobs at a 3.6% rate in January, that slowed to 2.6% in July before dropping to 1.2% in August. Information/tech jobs were growing at a 9% rate at the start of the year only to slow to 1.6% in August. Overall, no job segment showed declines yet in 2022.
This suggests that the Fed is going to need to increase rates hire and keep them high for a while if it wants to stem inflation, make housing and life in general more affordable. Like putting a genie back in the bottle, inflation is hard to get back under control once it takes root.
Haddon Libby if the Founder and Chief Investment Officer of Winslow Drake Investment Management. For more information on our services, please visit www.WinslowDrake.com.
