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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Economic reports – on employment, manufacturing, retail sales and even housing (sort of) ― have been increasingly, though not consistently, positive, providing persuasive if not entirely conclusive evidence that the recovery is on track and gaining strength. Why then are consumers still so uncertain about the economy’s prospects and their own?

The Thomson Reuters – University of Michigan consumer confidence index hit its highest level in more than a year in March but the Conference Board’s confidence reading for the same month slipped, after surging by 9 points in February. And that less positive reading came before the disappointing March employment report, when the employment picture had been improving steadily.

Although the Conference Board’s gauge was down overall, its components were schizophrenic, with equal numbers of respondents describing business conditions as good and bad, saying jobs were more plentiful and hard to get, and saying they expect conditions to improve and worsen over the next six months.

Why are consumers, apparently, becoming more confused as the economic indicators seem to become clearer? If consumers were feeling uniformly miserable a year ago, why are some of them feeling better about today but less confident about tomorrow, despite statistics suggesting that conditions are improving?

The answers my lie not in the statistics, but in the way they are reported. Consider these examples:

  • One article introduced the Conference Board survey by noting that confidence “dipped in March as people grew more pessimistic about economic expectations.” Another article reported the same half-point decline, but emphasized that the index “held close to a one-year high.”
  • One headline announced that existing home sales in February remained “near a two-year high,” while another noted that sales “fell unexpectedly. Both articles contained the same upbeat comment from an analyst, who said, “The U.S. housing market is stabilizing and very gradually carving out a recovery.” But readers who didn’t get beyond the “fell unexpectedly” headline would feel glum about the housing outlook while those who saw the “two-year high” description would feel encouraged – opposite reactions based on the same statistical report.

This isn’t to suggest that some reporters, or the media generally, intentionally misrepresent information, but it does indicate that two reporters or two headline writers or two editors may view the same information in different ways. The obvious conclusion, or one of them, is to look beyond the headlines and focus on the statistics themselves, not on how one media source or another characterizes them.

Of course, statistics aren’t always reliable either, as Mark Twain’s famous line, “lies, damn lies and statistics,” reminds us. Data can be outdated, manipulated outright, or skewed by factors that aren’t identified. Given that prospect, it might be worth considering the advice of economists at Wells Fargo Securities, who suggested in a recent analysis of housing trends that the broad picture conveyed by industry data may not be as accurate as the smaller pictures suggested by first-hand observation of what’s happening around you.

Although the Wells Fargo analysts note that some “key” housing market indicators have pointed downward (home prices and home sales among them), they are more persuaded by anecdotal reports from real estate agents who have seen “significant gains in buyer interest and sales,” suggesting that notwithstanding the weakness in some recent data, “better days are ahead” for the housing market.

Their argument calls to mind calls to mind the old Groucho Marx line: “Are you going to believe what I’m saying or what your lying eyes are telling you?” With that thought in mind, we’ll throw out some of the recent economic reports and let you decide how to interpret them – or whether to interpret them at all.

Employment. Employers added only 120,000 jobs in March, far south of optimistic projections that gains would top the 200,000 mark for the fifth consecutive month. The report triggered a flurry of warnings that consumer spending will weaken, increasing pressure on the Fed to do more to prop up the economy. The report also underscored Fed Chairman Ben Bernanke’s insistence that while previous strong employment gains and might lead to a self-sustaining recovery, “we haven’t seen that in a persuasive way yet.”

Consumer Spending. Even before the lackluster March employment report, analysts were worried about the pace of consumer spending. The concern: Spending has been outpacing income gains and, thus, will likely prove unsustainable.

Manufacturing remains a source of strength. The Institute of Supply Management’s factory index increased for the 32nd consecutive month in March and the group’s employment index rose to 56.7, the second-highest level since February 2006. Business spending on equipment and software climbed at a 7.5 percent pace in the final three months of 2011 after a strong 16.2 percent gain in the third quarter, according to a Commerce Department report. Spending on construction projects slowed, however, as did the service sector. Durable goods orders increased by 2.2 percent, reversing a revised 3.6 percent decline in February, but falling short of the 3 percent gain analysts predicted.

This standard comparison between performance and projections raises another question about how to interpret the economic data: If an indicator falls below projections, is that a sign of underlying weakness, or evidence that analysts were overly optimistic? Would that same 2.2 percent increase be evidence of strength if analysts had predicted a smaller increase, or a loss? Would we all be feeling a lot better if economists consistently low-balled their predictions, producing consistently better-than-expected results? Just asking.

Housing. Existing home sales fell in March, but (as noted earlier) remained near a two-year high, with agents in some markets actually reporting bidding wars for scarce listings in some price ranges. New home sales declined, as did starts, but new home prices increased and permits for new construction reached a 3-1/2 year high, suggesting increasing confidence that wasn’t reflected in the National Association of Home Builder’s gauge of builder confidence, which declined in February and remained flat in March.

The Case-Shiller/Standard & Poor’s index of home prices posted its seventh consecutive monthly decline, indicating either that the market is still struggling, as some analysts contend, or that it is “stabilizing,” as others believe.

The pace at which prices are falling has slowed, Anand Nallathambi, president and CEO of CoreLogic, notes in a recent report. That factor combined with “the continued strength of sales activity and tightening inventories in many markets,” represent what he sees as “early and hopeful signs that prices will continue to stabilize and improve in the coming months.”

Other analysts caution against getting too excited about the recent price trend. Prices may be falling more slowly, David Blitzer, chairman of the index committee at S&P noted, but both the 10-city and 20-city composite Case-Shiller indices “are now 34.4 percent off their relative 2006 peaks."

Paul Dales, chief economist at Capital Economics, thinks prices aren’t the best indicator of a housing market recovery, or the lack of one. In a recent report to clients, Dales argues that prices are a lagging rather than a leading indicator of market strength.

"Even if the asking price is at the right level when the home is first listed, it may still take a few months to find a buyer and another month or so before the contract is closed," he explains. As a result, “the selling price that is registered at the end of this process therefore relates to the market conditions somewhat earlier."

Home sales are a much better current indicator of the market’s strength, Dales suggests, and the sales numbers (stripped of comments about whether they are better or worse than projected) have been rising for the past two years. Sales are still well below boom levels, he agrees, but the trajectory has been positive.

“In particular, in the past six months, total homes sales have risen by 13 percent as borrowing costs for home mortgages continue to fall to record lows and investors making up the bulk of sales find opportunities in heavily discounted properties after foreclosures and short sales,” a recent article in Fortune Magazine notes.

Noting favorably Dales’ contention that we should be focusing more on sales than prices as a gauge of market strength, the article suggests: “The evidence reminds us that perhaps we should change our expectations of what a housing recovery might look like, particularly following a crisis marked by record foreclosures and a financial crisis that sent the economy into one of the deepest recessions.” That recovery, this article concludes, is likely to be defined “more [by] the rate at which the glut of vacant properties comes off the market [than by] any steady rise in prices, which some think won't happen for some time.”