Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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As President-elect Donald Trump prepared to take the oath of office January 20th, the consensus economic forecast was “uncertainty” ─ uncertainty about the policies he will pursue, about the initiatives he will be able to implement, and about the impact they will have on the economy.

Stocks and consumer confidence levels have both been riding a post-election bump upward for the past several weeks. Mortgage rates, which had begun to rise before the election, have continued to increase, at least partly because the Federal Reserve, expressing increased confidence in the economy, has suggested that two or more increases in its target rate might follow the 25 basis point increase announced in December -- only the second Fed hike since the 2008 recession.

In explaining the decision to begin reversing the accommodative policy the Fed has followed for nearly a decade, Fed Chair Janet Yellen emphasized “the progress the economy has made and is expected to make.” But she also noted “the cloud of uncertainty” around the Trump Administration’s financial policies, especially Trump’s plan to both cut taxes and increase government spending on infrastructure improvements, which analysts say could trigger inflationary pressures as well as economic growth. “We have to wait and see what changes occur,” Yellen said.

Employment “Solid”

For now, the economy is showing signs of continued strength. The November employment report was solid. Although the 156,000 jobs employers added fell short of the 178,000 economists had expected, worker pay increased at the fastest pace since the recession and the unemployment rate increased slightly, as more job-seekers entered the market – both good signs, analysts agree.

Consumer confidence, measured by the Conference Board’s index, rose to its highest level in nearly 15 years in December, pushed largely by gains in the future expectations index following the November election. “Consumers’ continued optimism will depend on whether or not their expectations are realized,” Lynn Franco, director of Economic Indicators at the Conference Board, said in a press statement.

Affordability Concerns

General confidence in the economy has not extended to the housing market, however. Fannie Mae’s December Home Purchase Sentiment Index fell for the fifth consecutive month, as prospective buyers, eyeing higher mortgage rates, expressed growing concern about their ability to find a home they can afford.

Rising home prices are exacerbating those concerns. The S&P CoreLogic Case-Shiller home price index posted another year-over-year increase in October, the 53rd consecutive month of annual price gains. Although he characterized both home prices and the economic data as “robust,” David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, also expressed concern about the impact of rising interest rates.

"With the current high consumer confidence numbers and low unemployment rate, affordability trends do not suggest an immediate reversal in home price trends,” he told Reuters. ”Nevertheless, home prices cannot rise faster than incomes and inflation indefinitely."

And prices are clearly outpacing income gains. An affordability index produced by ATTOM Data Solutions put affordability in the fourth quarter at its lowest level in eight years, with nearly one third of the 447 counties tracked below their historical affordability averages, compared with only 13 percent in that affordability hole in the fourth quarter of 2015.

“Rapid home price appreciation and tepid wage growth have combined to erode home affordability during this housing recovery, and the recent uptick in mortgage rates only accelerated that trend in the fourth quarter,” Daren Blomquist, senior vice president at ATTOM, said in a press statement. “The prospect of further interest rate hikes in 2017 will likely cause further deterioration of home affordability next year,” he predicts.

Builders Upbeat – Realtors Aren’t

The nation’s home builders, focusing more on Trump’s promise to slash regulations than on affordability pressures, are feeling more confident. The National Association of Home Builders’ sentiment gauge has reached its highest level since July of 2005, reflecting the industry’s view that regulations are largely responsible for increasing home prices, and its assessment that the economic outlook is positive.

"Though this significant increase in builder confidence could be considered an outlier, the fact remains that the economic fundamentals continue to look good for housing," the NAHB’s chief economist, Robert Dietz, said in a statement.

Real estate industry executives are considerably less optimistic. Only a third of the respondents to a Thought Leader Real Estate Confidence Survey conducted by Imprey said they expect housing demand to increase this year compared to nearly 50 percent who expressed that view two years ago. “Confidence for 2017 is lower across nearly all questions related to housing and the economy,” Renwick Cogdon, CEO of Imprey, reported.

Although both new and existing home sales increased in November, pending sales and new housing starts tumbled -- both troubling signs, Lawrence Yun, chief economist for the National Association of Realtors (NAR) believes.

“The brisk upswing in mortgage rates and not enough inventory dispirited some would-be buyers,” Yun observed. “Existing housing supply at the beginning of the year was inadequate and is now even worse heading into 2017,” he added, and apartments are also in short supply. “As a result, both home prices and rents continue to far outstrip incomes in much of the country.” Yun said.

November home starts, which slipped by about 4 percent compared to October, also provided “little to cheer about,” Yun said. The construction decline, he noted, promises “zero relief to the housing inventory shortage,” which continues to put upward pressure on home prices. And that rising price trend, Yun predicts will push consumer prices higher, possibly overshooting the 3 percent inflation rate the Fed has set as its target.

The NAR is now predicting that existing home sales will slow next year, compared with 2015 and 2016, as higher rates and higher prices keep more first time buyers on the sidelines, while discouraging existing owners with low-rate mortgages, from trading up or down -- especially if they’ve refinanced in recent years,” Yun noted. “That’s why it’s extremely necessary for homebuilders to step-up their production of homes catered to buyers in the affordable price range,” he told National Mortgage Professional. “Otherwise, the nation’s low homeownership rate will struggle to shift higher in 2017.”