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 big news on the housing front last month was not the unexpected declines in existing home sales and new home construction activity; it was former Federal Reserve Chairman Ben Bernanke’s revelation that he has been unable to refinance his existing mortgage.

Bernanke noted his difficulty during a Q&A session at a housing conference, insisting, when members of the audience initially laughed at his comment, that he was not joking. 

In what housing industry executives would no doubt view as a staggering understatement, Bernanke said, “It’s entirely possible [that lenders] may have gone a little bit too far on mortgage credit conditions,” as they have responded to tighter lending regulations. “Housing is [one area] where regulation has not yet got it right,” Bernanke added.
Mark Zandi, chief economist at Moody Analytics, who moderated the session with Bernanke, agreed, telling reporters in a subsequent interview that tight mortgage credit “is the key constraint on the housing recovery.”

Current housing reports reflect that constraint.  Existing home sales, which have been trending upward much of this year, declined by 1.8 percent in August, falling for the first time in five months.  Pending sales, an indicator of future home buying activity, also fell by 1 percent compared with the previous month and by 2.2 percent year-over-year, according to the National Association of Realtors (NAR).  Lawrence Yun, the trade group’s chief economist, attributed the dip primarily to the withdrawal of investors, who have been driving home sales for much of the recovery, and the failure of homeowners, thus far, to pick up the slack.

A New Dynamic

Redfin Chief Economist Nela Richardson sees the August numbers as evidence that buyers and sellers are adjusting to a changing dynamic created by slowing home price gains.  (The Case-Shiller 20-city index rose only 6.7 percent in July – its smallest annual gain since November of 2012). 

“Buyers want to buy but they’re patient and more careful not to overpay,” Richardson told CNBC.  Sellers, she said, “are adjusting to having less power, which seems to have put a damper on some listing their homes.”

While price gains have moderated in recent months, they have continued to pull buyers out of the negative equity bog in which millions have been mired.  CoreLogic reported that nearly 950,000 owners reached positive equity ground in the second quarter, leaving an estimated 5.3 million homeowners – 7 percent of those with mortgages – with negative equity, compared with 14.9 percent (7.2 million) a year ago.   This report indicates that housing market conditions “are moving solidly in the right direction,” Sam Khater, CoreLogic’s deputy chief economist, said in a press statement. 

New Home Sales Plunge

New home statistics – at least some of them – suggest otherwise.  Construction starts plunged in August, falling 14.4 percent below the prior month, which had recorded the highest pace in the past 7 years.  Permits for future construction also fell 5.6 percent compared with July to an annual pace of 998,000 units – below the 1.04 million pace economists had predicted. 

Most analysts quoted in news reports found the statistics “disturbing,” but Matt Graham, COO of Mortgage News Daily, insisted that the report was “actually pretty good – certainly not as bad as the headline might make it seem.”  Most of the weakness, he noted, was in the volatile multi-family sector, where starts declined by 13.4 percent month-over-month and 17.5 percent year-over-year.  Single-family starts were off by only 2.4 percent; and even with the steep multi-family decline, starts overall were still 8 percent higher than the year-ago level, Graham noted.  Permits were also nearly 6 percent higher in a year-over-year comparison. 

Providing an optimistic counterpoint to the construction reports, new home sales soared by 18 percent in August, reaching an annualized rate of 500,000 units – the highest level since May, 2008.  While industry analysts unanimously welcomed that surprising show of strength, some downplayed it, noting among other qualifiers – August had more weekend days this year than last. Even with the strong August gain, most analysts are predicting that sales for the year won’t do much better than match last year’s total.

The August sales surge represents “welcome news in an otherwise mixed outlook,” Diane Swonk, chief economist for Mesirow Financial, said in a note to clients.  “But we are still a long way from the housing market recovering from the bust.”

Apparently focusing more on the positive statistics (new home sales) and less on the negative (new construction) ones, home builders have become more optimistic.  Builder confidence levels, measured by a National Association of Home Builders index, rose to 59 in September from 55 in August, to reach the highest level since 2005.  Industry executives are expecting moderating home price increases and an improving employment picture will encourage more would-be –buyers to enter the market. 

Labor Market Rebound

The employment picture brightened considerably in September, as employers added 248,000 new jobs, pushing the unemployment rate below 6 percent for the first time since 2008.  The job gain beat expectations and countered most of the gloom surrounding the disappointing 142,000 gain reported for August – the first month this year in which the hiring pace fell below the 200,000-mark.  It turns out that the August report wasn’t as grim as it seemed; an upward revision put the month’s gain at 180,000.

“A very muscular report,” is how Eric Lascelles, chief economist at RBC Global Asset Management, described the September Labor Department data.  “It’s showing powerful job creation, no matter how one cares to slice it,” he told the Washington Post.

Looking below the headlines, however, analysts found cause for concern in several areas, among them:

  • The labor force participation rate is still declining.  At 62.7 percent, it is near a 40-year low.
  • Hourly earnings are stagnant.  They were unchanged from August and have increased only 2 percent over the past year.  
  • The number of long-term unemployed remains stuck at an uncomfortably high 3 million workers. 

“The labor market is much healthier today than at any point since the Great Recession,” economists Jackie Odum and Michael Madowitz, acknowledge in a report published by the Center for American Progress. “But beneath the top-line numbers,” they caution, “it still has a long way to go before it returns to historically healthy conditions.”