Fed’s High Wire Inflation Fighting Effort Risks Triggering a Recessionary Fall

Imagine a high-wire act performed without a net.  That describes the Federal Reserve’s effort to curb inflation without crashing the economy.  Success will bring applause and relief; failure, a brief downturn, at best, with a prolonged recession the worst case outcome. 

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The big news this month was the labor market report, and the news was very good. Employers added 257,000 jobs in January — a little below the sizzling pace registered in November and December. The totals for both months were revised upward, adding nearly 150,000 jobs to their totals. Bottom line: The economy produced nearly one million jobs in the final quarter of last year, representing the best three-month performance since 1997. Employment gains for the year were higher than in any year since 1999.

The unemployment rate inched up a little, from 5.6 percent to 5.7 percent. But that was good news, too, because it wasn’t additional layoffs that caused the increase; it was a jump in the number of people looking for work, which boosted the size of the work force by about 700,000.

Further expanding this growing pile of good employment news, hourly earnings increased by 0.5 percent, suggesting that what has been a major drag on consumer spending generally and home buying in particular may finally be lifting. “The little recovery that could just got a whole lot bigger,” the Washington Post’s Matt O’Brien noted in his column, Wonkblog.

Mixed Housing Signals

On the housing front, the signals remain mixed. Existing home sales rebounded in December after stumbling badly the previous month, rising to a 5.05 million unit annual pace. That beat November by 2.4 percent but still left sales for the year 3.1 percent below the 2013 total.

Pending sales, measured by a National Association of Realtors (NAR) index, declined by 3.7 percent compared with the November total, which was revised downward. Lawrence Yun, the NAR’s chief economist, blamed the weakness partly on shrinking inventory levels, which fell by more than 11 percent in November to a 4.4 month’s supply at the current sales pace.

Jonathan Smoke, chief economist at realtor.com, agrees. “Supply is quickly becoming the biggest concern for healthy growth in home sales in 2015,” he wrote in a recent commentary.

The new homes picture brightened in December, as sales increased by 11.6 percent compared with November, reaching an annual rate of 431,000 units ― the highest level in more than 6 years. The December surge pushed the sales total for the year 1.2 percent above the 2013 level, fueling hopes that the year-end momentum, offsetting what had been a less than stellar performance, will carry over into this year.

New home starts increased in December to a 1.09 million annual rate ─ the highest pace in 7 years — mainly on the strength of single-family construction. Multi-family construction, which had been on a nearly year-long tear, declined by almost 1 percent. Permits declined by nearly 2 percent compared with November, but that was mainly because of a steep drop on the multi-family side; single family permits were 4.5 percent higher compared with November.

Builder confidence levels remain high and with good reason, David Crowe, chief economist of the National Association of Home Builders, believes.

“Steady economic growth, rising consumer confidence and a growing labor market will help the housing market continue to move forward in 2015,” he noted in a press statement.

The NAR’s Yun also thinks home sales will strengthen this year, fueled by employment growth, increasing consumer confidence, and new low-down payment loan programs available from Fannie Mae, Freddie Mac and the FHA.

But continuing concerns about housing affordability and slow wage growth are making many analysts cautious about the outlook. The new home starts that some are hailing as evidence of an upward trend are notoriously volatile, Lindsey Piegza, chief economist for Sterne Agee, noted in a recent commentary to clients. The “underlying momentum” in new home construction, he said, is “moderate at best,” while housing demand “remains under pressure, with Americans still struggling to accumulate enough wealth to afford a home purchase.” While the housing market is recovering, Piegza said he agrees with the view the Federal Open Market Committee expressed after its last meeting that the recovery remains “disappointingly slow.”