Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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The employment figures came in higher in March than they had been trending so far this year ― not quite as high as analysts’ hopes for them, but high enough to ease concerns that the flat to negative growth patterns reflected in several key economic sectors this year might be attributable to something other than the miserable winter weather.

Employers added 192,000 workers to their payrolls, according to the Labor Department report, but the unemployment rate held at 6.7 percent as more job-seekers entered what appears to be an improving labor market.

“This is a very good report,” Nariman Behravesh, chief economist at HIS Inc., told Bloomberg News. “It looks like we’re back on track” he added.

The employment report wasn’t the only sign that winter may be loosening its icy grip on the economy:

  • The Federal Reserve reported that factory production increased by 0.8 percent in February – the largest gain since last August – reversing a 0. 9 percent decline in January.
  • Factory orders also increased by more than expected in February, recording the largest gain (1.6 percent) since September of last year.
  • Consumer income and spending both rose by 0.3 percent in February after several lackluster months in both categories.
  • Consumer confidence levels haven’t rebounded yet, however. The Thomson-Reuters March reading (80) was at a four-month low. But the percentage of consumers predicting that their finances will improve over the next six months was at the highest level since June of 2009.

Vote of Confidence

In a vote of confidence for the economic outlook, the Federal Reserve’s Open Market Committee decided to continue “tapering” the bond purchases that have been keeping interest rates low, citing the “cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.” And that decision came before the March employment report.

Analysts are equally optimistic about the housing market outlook as the spring home buying season begins, although recent statistics haven’t provided a lot of support for that view. On the down side:

  • Existing home sales in February fell to their lowest level since July of 2012.
  • Pending sales, an indicator of future activity, sank for the eighth consecutive month, falling to their lowest level in more than two years.
  • New home sales and starts followed the same downward direction, taking builder confidence levels with them.
  • Construction permits climbed by 7.7 percent, reaching their highest rate since October and the second highest level since the recession ended in 2009. But all of the improvement was in the volatile multi-family sector; single-family permits declined by nearly 2 percent.

Hopeful Signs and Impediments

Looking beyond these less than encouraging indicators, industry executives see more hopeful signs, primary among them: The continuing decline in the supply of foreclosed homes and in the shadow inventory of homes in foreclosure but not yet on the market; the year-over year increase in listing prices (unusual this early in the buying season, analysts note); and the increase in inventory levels – at 5.2 months, nearly 10 percent higher than they were a year ago (although they remain much skimpier in some markets, including Boston).

These trends will spur seller confidence, which “is the key factor too watch” as the spring market unfolds, Steve Berkowitz, CEO of Move Inc., told Realtor Magazine. “This is the market sellers have been waiting for,” he noted, predicting that an influx of homes for sale will spur more buyers to enter the market, improving the balance between supply and demand.

Economists at the National Association of Realtors similarly see a “strong early beginning” to the spring buying season, but they also see several impediments that could cloud the outlook. The major problems:

  • Uncertainty about the new mortgage rules is making lenders cautious about originating news loans, keeping credit standards tight and making it difficult for many would-be buyers, especially first-time buyers, to qualify for loans. “We need more first-time buyers in the market so they can purchase the homes of people who want to move up,” Michael Hanson, an economist at Bank of America, told Bloomberg News. “We won’t see a normal real estate market until they are included, and they are the ones most affected when lenders tighten standards.”
  • Rising home prices are creating affordability concerns, especially for first-time buyers, and spurring renewed fears of another housing bubble in the making.

A Zillow analysis found that more than half the homes available for sale in seven major markets are unaffordable for local residents, triggering an increase in the reliance on non-traditional mortgages, smaller down payments, and bidding wars in some markets – all “worrisome trends” to Zillow Chief Economist Stan Humphries, who sees a reflection of the conditions that brought the housing market to its knees. “We’re not in a bubble yet,” Humphries notes in the Zillow report, “but we’re beginning to see early signs of one in some areas.”