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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The economy is stronger than some indicators suggest, making a recession less likely than some analysts fear, but enough of a risk to make Federal Reserve policy makers more cautious than they might like to be about boosting interest rates this year.

That seems to be the current consensus among analysts as they try to interpret the contrasting, if not contradictory, economic trends reflected in the most recent batch of financial reports.

The first employment report of the year was solid, if not stellar. Employers added 151,000 jobs in January, significantly below December’s robust 292,000 hiring pace but strong enough to suggest that the economy is holding its own, thus far, in financial waters churned by a weakening Chinese economy and plummeting oil prices.

The January employment gains pushed the unemployment rate below five percent for the first time since 2008, while a small but notable 0.5 percent increase in hourly earnings suggested to some analysts that a strengthening labor market may finally be producing the income growth that the economic recovery had not thus far managed to create. Adding to that relatively good employment news, the manufacturing sector added 30,000 new jobs, reflecting surprising strength in a sector that has been struggling to produce positive numbers.

The economy as a whole managed a growth rate of only 0.7 percent in the final quarter of last year, putting GDP growth for the year at the same lackluster rate (2.4 percent) as last year, explaining in part why Federal Reserve policymakers sounded considerably more cautions in January, when they decided to forego an anticipated rate increase, then they did in December, when they increased the benchmark Federal Funds rate for the first time since 2006.

Fed Fears

In December, the Federal Open Market Committee expressed confidence that the economy could absorb the small incremental rate hikes the committee was planning this year. But in January, the FMC noted its concern about declines in net exports and business investment, weakness in the global economy, and other factors potentially weighing on U.S. economic growth.

“The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” the FOMC explained in the statement issue following its January meeting.

Most analysts are still expecting at least two more rate hikes later this year, and that assumption has led some housing experts to scale back their home sales forecast. Few expect housing to duplicate last year’s 5.26 million in sales, which was the strongest performance in 9 years.

Strong Finish for Housing

Housing certainly ended the year on a high note, with a 14.7 percent jump in December sales following a November swoon attributed widely to closing delays caused by the implementation of new mortgage disclosure regulations. “[The data are confirming] it was delays, not cancellations,” that depressed November sales, Lawrence Yun, chief economist for the National Association of Realtors (NAR) told reporters. “All those [delayed closings] rolled over into December,” he noted.

New home sales in December followed the same upward trajectory, with an 11 percent month-over-month gain, ending the year almost 15 percent above the 2014 pace. Housing starts and permits were also up by 10.4 percent and 10.8 percent, which “sets the stage for continued growth this year,” David Crowe, chief economist for the National Association of Home Builders, believes. Although permits overall declined by 4 percent in December compared with the prior month, Crowe noted, most of that decline was in the volatile multi-family sector; single family permits increased by 8 percent.

Other industry analysts agree that housing will perform well this year, but not as well as last year. Rising housing prices, higher interest rates and slow income growth will create head winds that first-time buyers in particular will be hard-pressed to overcome.

The rate of home price appreciation, which had trended downward all year, increased slightly in November to a 5.8 percent annualized rate of increase compared with 5.5 percent in October. Although that’s not a gigantic jump by any means, stubbornly constrained inventory levels will keep upward pressure on prices, NAR’s Yun predicts, creating increasing affordability challenges in many markets.

Despite December’s home sales surge, pending sales for the month were essentially flat, reflecting the difficulty buyers are having finding available homes at prices they can afford. Inventory levels, which fell to a 3.9 month’s supply at year-end, suggest that “a housing shortage is in the cards,” according to Yun, who sees new home construction continuing to fall short of buyer demand.

The seasonal slowdown in market activity disguised that impact to some extent, Yun says, but “once the spring buying season begins,” he predicts, “we’ll begin to feel [the effects] of chronic [under-production] again.”