Moneybeat: The rising cost of raising a family

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Time now for our weekly conversation on business, markets, and the economy with financial analyst and adviser David Bahnsen, head of the wealth management firm The Bahnsen Group. Good morning!

DAVID BAHNSEN, GUEST: Good to be with you, Nick.

EICHER: Grab bag of economic data points this past week. I’d like to know what if anything you found most significant. We had a retail sales report for July, virtually unchanged month on month. We saw home sales decline and that’s six months in a row. Industrial production, slight tick up. Any conclusions from any of this?

BAHNSEN: Yeah, I'm not sure if any of it’s overly significant. I think you're right, there were quite a few data points this week. And we can just sort of go through a handful of them. Look, the retail sales for the month of July, were flat, they were not down as many were thinking they would be. And they were up 8.5% from where they were a year ago. There is still a shift in the composition, though I do think what people are buying is a little bit different. But the fact of the matter is, even if there's a little more services and a little less goods, the consumer is just simply not acting like they believe we're in a recession. There's more or less pretty consistently normal behavior from a consumer. I think that the manufacturing data is not great. You did see a negative PMI print, you saw certain issues in housing continuing to go negative, homebuilder sentiment; the industrial production number has been, you know, pretty positive for the most part. So I just think it's a mixed bag of economic data continuing to lean into ambiguity.

EICHER: We saw several stories trying to discern where the Federal Reserve may be going ultimately with interest-rate increases, how far, how fast? All the reports last week were built on the release of meeting minutes of the Federal Open Market Committee, that would be the FOMC meeting where the Fed increased interest rates another three quarters of a point.

So there’s always a fair bit of interpretation of those minutes, trying to figure out what’s likely to happen at the remaining three Fed meetings this year, where is the Fed going to land. How’d you read the minutes, David, what do you think?

BAHNSEN: Well, I guess I have to just keep answering the question because it comes up every day. And it is what a lot of people are asking. So it's a pretty fair question. And yet, I am worried that I myself am a broken record, because I'm repeating the same thing over and over again: The Fed is saying exactly what they have to say.

The minutes for the FOMC meeting from July when they raised the interest rate 75 basis points for the second month in a row, there was chatter about “okay, well, maybe we'll be able to slow down the rate of growth of interest rate hikes into the future if the rate of inflation is coming down.” And the rate of inflation is coming down, and I believe is going to continue to come down.

And so the market took it to be like, “Okay, they're showing the signs of us being closer to the end in the beginning.”

It's hard for me to believe that's a surprise to anybody. It is most certainly my expectation, has been for a long time. I've always felt that if they raised rates five times at such and such a rate or four times at a little higher rate, but regardless, in both cases get to the same place, I don't think it matters. I think that they're getting to 3.5% at the end of the year, and then stopping. That's my belief. And if it's a little bit sooner than that or a little bit later than that, and if it's 3.25 versus 3.75. None of those things matter that much.

But roughly, my expectation is 3.5%, and then stopping going into next year. And the wildcard here is when we talk about the Fed stopping raising interest rates, it's what the impact will be when the quantitative tightening picks up, as they reduce the balance sheet instead of 47 billion a month and closer to 100 billion a month, which begins next month, what will that start to do to financial conditions and things like that? And I've always believed the Fed cares about that, but they're going to be very worried if they see credit markets seize up as a result of their actions.

And all of this is undergirded by my belief that the Fed knows, rightly, that they really can't do much about inflation, that most of the inflation issue we're dealing with is a byproduct of other circumstances.

So they have to pretend one thing, say one thing, but ultimately, do I think that they're going to allow this to go to that extreme level, going into next year with really tight financial conditions when they don't believe it's doing any good anyways? I don't. And that's really what I think the FOMC minutes were hinting at this week.

EICHER: Before we go, I wanted your take on the interesting think tank report that generated a lot of attention, that the cost of raising children, it’s now hit $300,000The Brookings Institution calculated and it represents about a 9% rise over the last time they ran the numbers two years ago. What jumped out was a comment from a Brookings scholar who said: “A lot of people are going to think twice before they have either a first child or a subsequent child because everything is costing more.” I wonder what you think of these kinds of analyses.

BAHNSEN: You know, the Brookings Institute is more center-left institution. American Enterprise Institute, AEI, is more center-right. And Lyman Stone, who's a man of faith and a really wonderful demography expert, has done some work for AEI indicating much of the same.

I wrestle with how much I think the growing cost of raising a kid is a factor in the clearly declining birth rates, but most demographers do believe - and for that matter, most economists do believe - that it's inevitably connected to some degree, that there is a impediment to having multiple kids in a family when the costs continue to increase, where there's another school of thought that thinks it simply they're going to have the kids they are going to have, but then it becomes, you know, the cost takes away from other spending that they may want to do or whatnot, it affects lifestyle, I'd say. I would assume it's probably a little bit of both—anything, though, that is impeding the cause of more family formation, more household formation, people having more kids, I think is a negative.

I am very much in favor of a growing birth rate, both for theological and spiritual reasons and economic ones. I think population growth is vital to productivity, growth and economic well-being.

So the cost structure going higher is problematic. But if we unpack the cost structure, it is not going to come down to consumer-goods prices. The cost structure of raising kids is higher because of housing, period. You can throw in tuition for those who are in private school or college savings. Those things are astronomical. Health care costs have grown.

But to the extent that things like groceries and gas are higher, they are also less than half a percentage of wallet expense relative to what they were 20, 30, and 40 years ago. And so in other words, people are spending more dollars, but it's a lower percentage of their expenditures, because income has grown proportionately, as well. So if anyone's really serious about addressing the cost of having a family, it starts with the ridiculous prices of housing. That's the low hanging fruit here, Nick.

EICHER: David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group—his personal website is Bahnsen.com.

We will soon begin selecting listener questions for David, so you can submit those to feedback@worldandeverything.com.

David, thanks for your time each week, I’m grateful. Have a great week!

BAHNSEN: You bet Nick, thanks so much.

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