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 April economic reports delivered a mix of welcome surprises (put employment in that category) and unexpected disappointments ― retail sales and manufacturing both wound up there.

Starting with the better news, employers added 165,000 workers to their payrolls in April and the March figure was revised upward to 138,000, pushing the unemployment rate down a notch to 7.5 percent. An earlier employment report by ADP had suggested a much weaker picture, but another government report had hinted at the more positive outcome, noting that the unemployment rate had declined year-over-year in 26 states while increasing in only 7.

“The demise of this recovery is grossly exaggerated,” Eric Green, global head of research at TD Securities Inc. told Bloomberg News, after the Labor Department released its closely watched jobs report. “We’re still in a soft patch, but the job market is not falling apart. The U.S. labor market is in much better shape than most people feared,” he added.

While many analysts shared that generally positive view, others pointed out that the job numbers, while better than expected, still reflected underlying weakness, “barely enough to cover new people coming into the work force,” according to Robert Borosage, co-director of the Campaign for America’s Future, who termed the employment numbers “abysmal” in a Marketwatch interview.

He also suggested that it is premature to conclude, as many analysts have, that the sequester’s impact has been less severe than feared. In fact Borosage said, the brunt of those across-the-board federal budget cuts, won’t hit until later this summer. “Government austerity…is suffocating the economy just when it needs air, and the perversity will get worse,” he predicted.

Consumers, who were widely expected to reflect that gloomy view, did not. The Conference Board’s April confidence index soared to 68.1 from 61.9, defying the decline that analysts had predicted; the Thomson Reuters-University of Michigan index did slip, but only a little – to 76.4 from 78.6 – rebounding strongly from a dismal 72.3 preliminary reading earlier in the month. The future expectations and current conditions components of the Conference Board index both improved, gaining 9.6 points and 1.2 points, respectively.

On the Down Side

Other reports were less encouraging.

  • Small business confidence, as measured by a National Federation of Independent Businesses (NFIB) index, fell by 1.3 points in March, with 75 percent of the executives responding to the NFIB survey anticipating no change in current conditions over the next six months. Even more disturbing, the percentage of executives planning to increase their payrolls fell by 4 points ─ to zero ― suggesting that the May employment report could surprise in the wrong direction.
  • "For the sector that produces half the private GDP and employs half the private sector workforce—the fact that they are not growing, not hiring, not borrowing and not expanding like they should be, is evidence enough that uncertainty is slowing the economy,” Bill Dunkelberg, the NFIB’s chief economist, said in a press statement.
  • Durable goods orders recorded the largest decline (5.7 percent) since last summer. Although a drop in demand for jetliners was the primary driver, the declines were broad-based in this Commerce Department index.
  • Analysts had expected that the Purchasing Managers Index would decline in April, but they didn’t expect it to fall below 50 (the line between expansion and contraction) for the first time in 3-1/2 years. Of particular concern: The employment component fell to 48.7 from 55.1 in March – the third consecutive setback for this indicator.
  • Although consumer spending increased a little (0.2 percent), retail sales fell by 0.4 percent in March ― the largest decline in 9 months ― following a 1 percent gain in February. Consumers, who had shrugged off the combined effects of sequester fears and higher payroll taxes, finally blinked. As a result, Ellen Zentner, a senior economist at Nomura Securities, told Bloomberg News, “We have no steam going into the second quarter.”
  • The economy overall performed better than expected in the first quarter, growing at a 2.5 percent annual rate. Although better than the anemic 0.4 percent pace in the fourth quarter, the growth rate was also below the 3 percent consensus forecast and too slow to generate the job creation volume the Federal Reserve views as healthy. As a result, the Federal Open Market Committee (FOMC), the Fed’s policy-making arm, announced that it will “maintain downward pressure” on interest rates by continuing to purchase mortgage-backed bonds and Treasury securities. Taking an uncharacteristic and unusually direct swipe at Congress and the president, the FOMC’s public statement noted that while the labor market has improved “somewhat” and the housing market has strengthened, “fiscal policies are restraining growth.”

Housing Still a Bright Spot

The housing market continues to generate most of the positive data and much of the forward momentum in the economy. Fannie Mae’s April housing outlook forecasts a strong spring selling season this year. Residential appraisers are also upbeat: More than half (54.7 percent) of those responding to a recent survey expressed “mildly or moderately strong” confidence in the housing market, which qualifies as irrational exuberance for this typically low-key group. A recent Gallup Poll suggests additional cause for long-term housing optimism: More than half of the 2,000 respondents said they own their homes and intend to remain homeowners; 25 percent who don’t own say they plan to buy in the next 10 years, while only 3 percent of current owners said they intend to sell and rent.

The Trulia Housing Barometer shows the housing market now more than half-way (56 percent) to “normalcy” based on three key indicators: construction starts, home sales, and delinquency and foreclosure rates. That’s up from 43 percent in September and 33 percent a year ago.

Signs of Strength

Existing home sales, hamstrung by sparse inventories, declined a little (0.6 percent) in March compared with the prior month, but they were still 10.3 percent above the year-ago level. And while inventories remain tight, they did increase a bit in March – not enough to make much of dent in the availability problem ― the 4.7 months required to sell available homes remains well below the 6.7 months’ supply professionals view as a balanced market ― but at least moving in the right direction.

New home sales increased by 1.5 percent in March, beating the consensus forecast and ending the strongest year for home builders since 2008. Builders, responding to depleted inventories and rising demand, are increasing their construction pace. Starts jumped by 7 percent in March compared with February, although most of the gain was in the multi-family sector. Single-family starts actually declined a little, but the volume was measured against a five-year high in February.

Belying the strong construction figures, builder confidence, measured by a National Association of Home Builders index, declined in April, reflecting concerns about rising materials costs, tight credit and a limited supply of buildable lots. But while the current conditions component of the index slipped, the future outlook component reached its highest level since 2007.

Yes, We Have No Bubble

Home prices gained more ground than expected in February. The Case-Shiller 20-city index increased by 9.3 percent year-over-year ―the largest jump in nearly 7 years. The Federal Housing Finance Agency likewise, recorded its 13th consecutive year-over-year gain in February, with a 7.1 percent increase.

While encouraging sellers and reassuring analysts about the strength of the housing recovery, the upward price trend has stirred some fears that another destructive price bubble might be forming. But a recent Zillow report notes that the rate of increase per quarter has been slowing – 0.5 percent between the fourth quarter of 2012 and the first quarter of this year compared with a 2.1 percent gain between the third and fourth quarters of last year.

“The sometimes dramatic home value run-ups… were never expected to be sustainable, “Stan Humphries, Zillow’s chief economist, told HousingWire. Recent slowdowns, he added, “are indicative of a market that is slowly finding its natural level.”

Rising prices have clearly been a boon for many underwater homeowners, lifting 1.7 million of them above the negative-equity line last year and pulling another 1.8 million into positive price waters this year, according to a recent Fannie Mae report.

Rising prices have contributed to a “positive feedback loop for the housing market by helping many underwater homeowners…regain their positive equity positions,” Orawin Velz, director of economic and strategic research for Fannie Mae, notes in that report. “This improving trend should help spur mobility and housing turnover,” she predicts, and “the broader economy should also benefit.”