It has been a while since I used an SBA loan to develop some storage, but I am in a deal where we are using it now for a boat and RV development. We are racing to get it closed by Sept. 14 because the deal was underwritten at today’s interest rates, and if rates go up and the deal is not closed…well, it has to be underwritten at the new rate.
Actually, that is not correct. I learn many things with every deal I am involved in, and here is one thing I learned I didn’t know about SBA loans: the deal doesn’t necessarily have to be closed; we just have to have an SBA loan number assigned to the deal, and that doesn’t happen until all the information required by the SBA is sent by the lender and it is complete. Then a number is assigned. Once that happens, even if rates rise, the loan doesn’t have to be re-underwritten.
What is required is a lot, especially if there are investors, but we can do it. However, that is not the purpose of this episode, to talk about SBA loan details.
Given the race I find myself in, I have paid particular attention to two key reports in the last week and then how the bond market reacted.
As part of our jobs as business owners, I feel we need to be looking into the future so we can react today to what we see on the horizon. The particular horizon I have keenly been watching recently is where interest rates may go for the balance of this year.
Let’s look at two reports that have come out in the last week or so.
Jobs Report (August 7th)
The July jobs report was a genuine shock. From what I can tell, no one really expected what was in it. Some highlights:
- Nonfarm payrolls fell 23,000. Consensus expected +83,000.
- Government payrolls fell 53,000; private sector added 30,000.
- Unemployment edged down to 4.1%, but largely due to people leaving the labor force.
- Average hourly earnings up 3.2% year-over-year, the lowest since May 2021.
- May and June payrolls revised down by a combined 103,000.
This was not a soft landing. This was a stumble. The labor market is weakening across the board, jobs, wages, and downward revisions all pointing to a softer jobs market. This should change the Fed’s calculus significantly. A weaker jobs market often in the past has stimulated a lower cost of capital to stimulate companies’ need for more employees.
This usually bodes well for (1) not raising rates, and (2) at some point even lowering them.
However, this data is usually in tandem with the Federal Reserve Board’s interpretation of the inflation rate environment.
And July’s CPI report was released Wednesday, August 12 at 8:30 AM.
July’s CPI Report
The Bureau of Labor Statistics released the July Consumer Price Index this morning. The headline numbers:
- CPI rose 0.1% month-over-month (after falling 0.4% in June).
- Year-over-year inflation: 3.4%, down slightly from 3.5% in June.
- Shelter costs: up 0.1% for the month.
- Food: up 0.1%; Energy: down 1.5%.
The bottom line: inflation is cooling, but slowly. At 3.4% year-over-year, it remains well above the Fed’s 2% target and it remains above the current rate of wage growth (3.2%), meaning consumers are still losing ground in real terms.
Not a green light for the Fed to cut, but not an extremely valid reason to hike rates either.
Then the last thing I attempt to gauge is the markets’ reaction. Not the stock market, although I am very interested personally in it (my portfolio went up), but the stock market is very fickle. The adult in the room is the bond market, and I was somewhat surprised.
Bond Market Reaction
Important number…5.24%.
That is where the 30-year Treasury bond sat before yesterday’s CPI report.
5.24%…that is where it sits at the close after July’s CPI report was released.
I am not an economist, but I think what this is telling us is the market doesn’t really care. When your inflation report lands good and the long bond doesn’t give you an inch, that is the market telling you something.
The Congressional Budget Office reported yesterday that the federal government is now paying $3.18 billion a day just in interest on the debt. At these yields, the tab does not shrink.
Not to get too political (well, maybe just a little), the Big Beautiful Bill is expected to have a 120-year cost of $5 trillion dollars. The bond market is pricing in not just current inflation but the future supply of Treasury bonds needed to finance deficits of this size. That is a structural headwind on long-term rates that doesn’t go away regardless of what the Fed does in September.
My Takeaway of All This
Now, remember, most people could care less what I think. Sometimes I even bore myself, but my guess is interest rates will remain the same in the Sept. meeting. Who knows what could happen with war in the Middle East, energy prices, housing prices, and so forth. Things can change on a dime today with the current administration.
But, given the backdrop of all this, I really don’t see interest rates going down or going down by much if they do for the next year or so.
Just my thoughts in the middle of August, but I wanted to share it because if you are in the self-storage business, or getting in it, this stuff is very relevant in my opinion.
But understand, everything I predict is coming from a layman’s point of view with a particular worldview. But isn’t that the nature of being human?
