Michigan braces for higher interest rates after latest Fed hike

• Interest rates will increase again, after the Federal Reserve increased its rate by 0.75 percent
• Consumers already feel rate increases in mortgage rate hikes, which are slowing home-buying in Michigan
• More increases may be coming to cool inflation, the Fed said, which persists amid GDP growth and low unemployment

The Federal Reserve approved its fourth consecutive 0.75 percentage point interest rate hike on Wednesday, a sign that inflation continues well above levels the U.S. central bank considers healthy.

The move means the short-term borrowing rate between banks will go to 4 percent, its  highest level since January 2008. Longer-term interest rates are expected to follow, with the costs of consumer borrowing — for mortgages, auto loans and credit card debt — all likely to increase.

At the same time, the Federal Reserve Board is looking ahead to more increases as it sets its goals in December.

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“It’s premature to think about pausing,” Fed Chairman Jerome Powell said after the rate hike announcement. “We have a ways to go.”

The Fed wants to get inflation rates down to about a 2-percent annual rate. 

In September, overall inflation hit 8.2 percent, and models show that it could hover around 8 percent in October and this month, said economist Tim Nash, director of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University in Midland. 

“The data shows a slight decline in inflation, but nothing for the Federal Reserve to say they can slow down substantially,” Nash told Bridge Michigan. 

Price increases for groceries, gasoline, utilities are pressuring both consumers and businesses, like restaurants, which face supply price hikes that they’re not yet fully passing onto consumers. 

Among the most obviously affected areas is residential housing, as the Fed rate hikes are prompting 30–year mortgage-rate increases from around 3 percent to 7 percent. 

The homebuyers, the difference is stark. With a 3.24 percent interest rate on a 30-year mortgage, borrowers seeking to finance $100,000 with 20 percent down would pay $347 a month. But with Wednesday’s 7.24 rate, the monthly cost rises to $545. 

The rate changes follow a “crazy” real estate market in the past few years as prices shot up and competition for available homes turned fierce, said Karen Kage, CEO of Realcomp, a real estate listing service for agents across much of the state. 

Now,  fewer people are listing homes for sale and buying them, Kage told Bridge Michigan.

The mortgage rates “may have taken away that urgency that they had to buy,” she said. 

As October listing and sales data is compiled, Kage said she’ll keep her eye on how interest rate increases may be affecting home values. As of September, the median listing price had increased by 4 percent from a year earlier.

“What's going to be interesting is (what happens with) price,” she said, adding that Realcomp may start to track price reductions in coming months.

The slowdown is affecting lenders, including Michigan mortgage lenders that started staff layoffs or buyouts earlier this year, such as Rocket Mortgage in Detroit and Home Point Capital Inc. in Ann Arbor. It’s also slowing home building in the state, which generated 1,642 residential building permits in September, 225 lower than a year earlier. 

Despite inflation rates, Fed officials said on Wednesday, indicators are pointing to “modest growth in spending and production.” At the same time, national job gains have been robust in recent months, and the unemployment rate has remained low.

While the interest rate hikes could lead to higher unemployment, that doesn’t have to mean widespread and painful job losses, Nash said. 

“The last thing before going into a recession is when…job loss starts,” he said.  “We haven’t seen that yet. That just speaks, in my opinion, to the overall resilience in the American economy.”

Here is a look at some key economic indicators for Michigan and the U.S. — wages, employment and gross domestic product — as interest rates increase again:

Wages & Employment

Wages are increasing in Michigan and nationally. The average weekly earnings in the U.S. were $1,120 in September, up 4 percent over the year. In Michigan, the average weekly earnings reached $1,057 in September, up 6.3 percent from $994 a year earlier.

On the employer side, compensation costs went up 5 percent over the past year, representing wages and benefits.

The numbers show a continued “overheated” labor market, Powell said on Wednesday. 

“I don’t think wages are the principal reason why prices are going up,” he added.

However, the increase in compensation is something the Small Business Association of Michigan is watching, since the interest rate could cool many aspects of the economy before it reaches wages.

Wage inflation “is the hardest to change once it starts ramping up,” said Brian Calley, president and CEO of SBAM, on Monday. 

Over the 10 years before the pandemic, the employee cost index grew on average 2.2 percent, Calley said. 

“You can see it rippling through the system,” he said, “but until it reaches more normal levels, we’re not going to see inflation cool down.”

Meanwhile, job openings are declining in Michigan, where they dropped by 118,000 in August. That was the second highest decline in the U.S., just ahead of Ohio, which lost 122,000 jobs that month. Among all states, 26 lost jobs and only two — Alaska and Wyoming — added jobs in August.

Michigan unemployment stood at 4.1 percent in September, the same as a month earlier and down from 5.7 percent in September 2021. All numbers are seasonally adjusted.

The state’s unemployment compares to an unemployment rate of 3.5 percent across the U.S. in September, down from 3.7 percent a month earlier and 4.7 percent a year earlier.

Labor force participation in Michigan was 60.1 percent in September, unchanged from the previous two months. It was 62.3 percent nationally. Both state and national measures grew by 0.6 basis points over the year. 

U.S. Gross Domestic Product

GDP, the measure of all goods and services produced, rose 2.6 percent in the third quarter, according to data from Oct. 27. The increase followed two negative quarters, and was higher than estimates from economists, who expected it to rise 2.3 percent.

Michigan ranked 34th in the nation in the second quarter, behind only Ohio (28th) in the Great Lakes region. It was ahead of Wisconsin (37th), Illinois (44th) and Indiana (48th).

The Southwest region of the U.S. was the only one in positive territory in the second quarter, driven by Texas (1st in the U.S.) with a 1.8 percent change from the first quarter. The other top three states in the second quarter were Florida and West Virginia.

Michigan’s GDP

Michigan’s GDP declined by 1.7 percent in the second quarter, according to most recent state-level data, which was released in September. That compares to the national average 0.6 percent decline in the same period.

The second-quarter decline follows a first quarter when the state’s economy grew at an annualized rate of 2.5 percent — a time when the national economy contracted by 1.6 percent 

Fifteen of 23 categories saw increases in the second quarter. 

The top categories were professional and technical services, which increased 0.28 percent when seasonally adjusted, followed by finance and insurance, which increased 0.26 percent. The top categories behind them were management (0.16 percent), the information sector (0.15 percent), administrative, support and waste management (0.12 percent) then transportation and warehousing (0.1 percent). 

The state’s declining industries from April through June were: manufacturing of durable goods (-0.94), construction (-0.85), other manufacturing (-0.56), real estate (-0.44), wholesale trade (-0.43) and utilities (-0.16)