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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Although the employment numbers for March fell below expectations, disappointing many analysts, the Fed isn’t expected to alter its plan to boost interest rates at least twice and maybe three more times this year.

Employers added only 98,000 jobs in March, falling far short of the 200,000-plus mark they had registered in January and February and missing the consensus forecast that called for gains close to that level. Despite the stumble, the unemployment rate fell to 4.5 percent from 4.7 percent and wages ticked up, suggesting to many analysts, that the employment market remains strong despite the weakest report in nearly a year.

Many blamed unseasonably warm weather in January and February for inflating the statistics for those months. “This is mostly just weather-related noise,” Paul Ashworth, an economist with Capital Economics, told the Wall Street Journal. “There was always going to be some payback in March, when the weather snapped back to seasonal norms,” he added.

Gus Faucher, an analyst with PNC Financial Services Group, quoted in the same Journal article, echoed that view. Even with the March dip, he noted, employment gains are still running close to last year’s healthy pace. Combined with other positive indicators (especially wage growth and labor market participation), he predicts the Fed will probably view the weak March figure as “an aberration,” and not an argument for scaling back its interest rate plans.

Housing Outlook Dims

Consumer confidence is among the positive indicators that analysts think will keep the Fed on its current policy-making course. The Conference Board’s confidence index hit its highest level in 16 years in March, as consumers reported strongly positive views of current business and labor market conditions, the short-term employment outlook and their personal income prospects.

But they appear to be decidedly less optimistic about the housing outlook. Fannie Mae’s Home Purchase Sentiment Index fell by nearly 4 percent in March after reaching an all-time high in February, as the number of buyers rating this “a good time to buy” declined by 10 percentage points. On the other hand, the number of homeowners who think this is a good time to sell increased by 9 percent, reflecting what Doug Duncan, Fannie’s chief economist, described as the “double-edged sword” of rising home prices ― a boon for sellers, but an increasing affordability drag for buyers coping with the double-whammy of rising prices and rising interest rates.

Duncan thinks the housing market could get a boost later this spring, however. He suggests that more sellers, looking to capitalize on higher prices, may list their homes for sale, increasing anemic inventories, while reluctant buyers may decide to act for fear that rates and prices will continue to rise.

Inventory Mismatch

There aren’t many signs of that anticipated market boost thus far. On the contrary, a recent Wall Street Journal article predicts that this spring selling season will be “the toughest for buyers in a decade.” Although demand has been strong, the article notes, inventory levels remain near 20-year lows. The big problem, analysts agree, is not just that listings are scarce, but that the available supply is skewed, with an excess of “luxury” properties at the high end, where demand is slack, and a shortage of entry-level and trade-up properties at the low end, where demand is strong.

A Trulia survey analyzed inventory distribution in the 100 largest metropolitan areas between 2012 and 2017. It found that the number of starter and trade-up homes available for sale declined by8.7 percent and 7.9 percent, respectively, compared with a decline of only 1.7 percent for premium homes.

"The homes most buyers are in the market for are unfortunately the most difficult to find and ultimately buy,” Lawrence Yun, chief economist of the National Association of Realtors (NAR), observed. Limited supply in the “affordable” price range, he added, “continues to be the pest that's pushing up price growth and pressuring the budgets of prospective buyers."

Home prices have been rising steadily and show no sign of reversing that trajectory. The S&P CoreLogic Case-Shiller price index reached a 3-month high in January, beginning the year nearly 6 percent higher than a year ago, and taking a bite out of home sales.

Mixed Housing Stats

Existing sales fell more than expected in February, declining by 3.7 percent to a seasonally adjusted annual rate of 5.48 million units. Analysts had predicted that sales would fall by only 2 percent from January, when sales reached the highest level in nearly a decade.

Pending sales, on the other hand, rebounded sharply in February after pretty much tanking in January, reaching their second-highest level in almost a decade and providing hope that sales will be stronger this year than many analysts are predicting.

New home sales also improved in February, increasing by more than 6 percent compared with a dismal January performance. The annualized rate of nearly 600,000 units represented the second-strongest performance for new homes since the housing market recovery began five years ago.

Single-family construction activity also increased in February, as did permitting levels, a marker for future construction, which reached an annualized rate of 832,000 units – the highest level since September of 2007.

Prospective buyers should be encouraged by those statistics, Ralph McLaughlin, chief economist at Trulia, told USA Today, because they indicate that “a healthy dose of new homes will be available this spring in an otherwise inventory-constrained market.”