After surprising hugely on the upside in June, the employment report surprised in the opposite direction in July.
The Department of Labor reported that employers added only 142,000 jobs for the month, the first month in the past five that job creation has fallen below the 200,000 mark.
The report was disappointing for most analysts, who were expecting another 200,000-plus month, and “disastrous” for a few, who fear that the economy may stall before it reaches cruising altitude. But the consensus view appears to agree with Dianne Swonk, chief economist at Mesirow Financial, who said the slower hiring pace looks more “like a fluke, not a trend.”
Jim O’Sullivan, chief U.S. economist at High Frequency Economics, echoed that view. “There is certainly no sign of the trend weakening in the latest jobless claims data – or in growth indicators [generally],” he told MarketWatch.
Whatever the numbers indicate, or don’t indicate, about hiring trends, they will clearly ease pressure on the Fed – to the extent that the Fed was feeling any pressure – to take its foot off of the interest rate brakes. In a speech a few days before the labor report was published, Fed Chairman Janet Yellen had noted that “utilization of labor resources still remains significant,” emphasizing again that policy makers want to see clear evidence that the economy is on solid ground before beginning to raise rates.
There were some positive signs in the less robust hiring numbers. The pool of under-employed workers (working part-time but preferring full-time jobs) declined, as did the number of long-term unemployed – at 2.96 million, the fewest in that category since January of 2009.
Also in the “encouraging” category, the second quarter economic growth rate (4.2 percent) was stronger than initially reported (3.9 percent), buoyed primarily by an increase in business spending, indicating either that corporate executives are feeling more confident about the economy or (as some analysts suggested) “they are getting tired of repairing aging equipment.”
Consumers (Aren’t) Spending
Consumers, by contrast, gripped their wallets more tightly in July; consumer spending declined for the first time in the past six months, largely because wages have remained stagnant even as hiring levels have increased.
Although consumers are spending more cautiously, their confidence levels have remained stable. The final reading of the Thomson Reuters/University of Michigan confidence index rebounded smartly from a preliminary dip, recording a slight increase to 82.5 in August, up from 81.8 in July.
Housing data, which hav been the source of considerable indigestion lately, provided some reassurance. Existing home sales increased by 2.4 percent in July, beating a consensus forecast calling for a 0.5 percent decline. Although still 4 percent below the 2013 level, the annualized sales rate (5.15 million) reached its highest level this year as higher inventory levels and slower appreciation rates brought more buyers into the market.
That momentum “is likely to be sustained,” according to Millan Mulraine, an economist at TD Securities, who said in a client report that he sees “the steady gain in employment and still favorable buying conditions buoy[ing] housing activity” for the remainder of this year.
Better Late than Never
Bill Banfield, vice president of Quicken Loans, agrees. The stronger sales analysts have been predicting “are showing up fashionably late for [this] home buying season,” he told s Housing Wire. “[But] this marks the fourth-straight month of increases in existing sales, approaching levels we saw a year ago. Pair this with slowing but sustainable gains in home prices, historically low rates and inventory continually approaching an ideal supply level, and housing finally appears to be gaining solid footing.”
There was some evidence of that solid – or more solid – footing in the National Association of Realtors’ pending sales index, which increased by 3.3 percent in July – the third month in the past four to record a positive reading. The percentage of distress sales also continued to decline, representing only 3 percent of the July total compared with 36 percent in 2009.
Housing starts and permits also recovered from previous dips, both rising by 15.7 percent according to the Census Department report. These numbers are not quite as positive as they appear, however. Most of the gains were in the multi-family sector; single-family starts and permits increased by only 3 percent and 1 percent, respectively.
Home prices are still rising nationally, but the appreciation rate continues to slow. CoreLogic reported a 1.2 percent increase in July compared with June and a 7.4 percent year-over-year gain – the 29th consecutive annual price increase this index has recorded. CoreLogic analysts think the upward price trend will continue, “with more states hitting new all-time peaks this year and into 2015 as the recovery continues,” Anand Nallathambi, president and CEO of CoreLogic, said in the price report.
Although sales and construction have lagged in the new home sector, builder confidence levels are rising. The National Association of Home Builders’ confidence index rose for the third consecutive month in July as builders reported an increase in the number of “serious buyers” entering the market. All three index components – current sales conditions, expectations for future sales and customer traffic, increased in July.
Reflecting less confidence than the builders, many housing analysts continue to pare their forecasts for this year and beyond. Doug Duncan, Fannie Mae’s chief economist, thinks lingering “conservatism” will keep buyers out of the market this year and next; 2015 will be stronger than the two previous years, he predicts, “but it will not be the breakout year some are expecting.”
An equally subdued Frank Nothaft, Freddie Mac’s chief economist, has reduced his estimate of home sales this year to 5.31 million from the 5.6 million he predicted in January. On a more positive note, he also sees the economy “gradually” returning to normal, and taking the housing market with it. In a recent report, he noted: "As we see the economy slowly normalizing we're starting to see its effects in the housing market as well, albeit very slowly," he acknowledged.
