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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Let’s get the employment numbers out of the way first, because they weren’t all that good – certainly not as good as analysts had expected.

Employers added 162,000 jobs in July, falling short of optimistic estimates in the 185,000 – 195,000 range that seemed to be supported by two very upbeat reports preceding it: ADP’s nearly exuberant report that private sector employers had added 200,000 workers in July, handily beating a consensus forecast calling for about 180,000; and the unemployment report for the week ending July 27, indicating that initial filings had declined to the lowest level in more than five years.

But the Department of Labor’s unemployment report – the one that drives the markets and substantially pushes the Federal Reserve’s monetary policy – told a less encouraging story. Although the unemployment rate inched down a notch – to 7.4 percent from 7.5 percent – analysts pointed out that the decline could be attributed as easily (and more likely) to discouraged workers leaving the market rather than to unemployed workers finding jobs.

Moreover, more than half of the new jobs added were in retail, food services and health care ─ generally low-paying jobs that are unlikely to do much to spur consumer spending. The downward adjustment to the employment figures for the previous two months only deepened the disappointment.

“Not a Disaster”

About the most positive comment analysts could muster was the assessment of Julia Coronado, chief economist for North America at BN Paribas, who said the labor market report wasn’t “a disaster.”

But the less than robust employment gains do seem to reduce the likelihood that the Fed will move quickly to “taper” the bond-buying program aimed at keeping interest rates low, and that qualified as good news for housing industry executives, who fear that upward movement in mortgage rates will derail a recovery that has been gaining ground steadily for the past year.

Fed Chairman Ben Bernanke has been working overtime to reassure nervous industry executives and analysts that, notwithstanding his recent comments indicating that could begin before the end of this year, the Fed will not take any dramatic or precipitous actions that would unsettle the housing market specifically or the economy as a whole.

“I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Bernanke stated in testimony before the House Financial Services Committee.

The statement issued by the Federal Open Market Committee – the Fed’s policy-making arm – after its July meeting, underscored that point. The committee “reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

Cause for Housing Concern

Concern that rising interest rates would slow the housing recovery have been confirmed, moderately so far, by recent reports. Following a run-up in mortgage rates triggered by Bernanke’s ‘tapering’ comments, existing home sales declined by 1.2 percent in June.

Despite that decline, sales still remained more than 15 percent ahead of the year-ago pace, at what is the second-highest level in 3-1/2 years. Pending sales also took a hit, declining by 0.4 percent ─ a smaller dip than analysts had expected, but still a move in the wrong direction.

New home sales, on the other hand, increased more than expected in June, coming in just shy of an annualized rate of 500,000, nearly 40 percent above the year-ago figure (the biggest one-year jump in two decades) and the highest level in five years.

Reflecting those significantly improved sales figures, the National Association of Home Builders confidence index has jumped 13 points in the past two months, reaching a 7-year high in July.

New home starts and permits for new construction both declined in June, but the weakness was largely confined to the multifamily sector, where starts and permits declined by 26.2 percent and 21.4 percent, respectively. Single-family starts fell by less than 1 percent and permits actually increased by 0.6 percent for the month.

Sizzling Home Prices

Home prices, which have been hot for much of this year, continued to sizzle in May. The closely-watched Standard& Poor’s/Case-Shiller index posted an overall 12.2 percent year-over-year increase, with prices in two cities (Dallas and Denver) exceeding their pre-bust highs.

Other positive housing indicators, among many:

  • The inventory crunch, that has been driving price gains some analysts feared were approaching bubble territory, has begun to ease in many markets.
  • Delinquencies and foreclosure filings are both declining, as is the number of homeowners with negative equity.
  • Homes.com’s Local Market Index shows 19 of the nation’s top 100 housing markets now “fully recovered” and 38 at the half-way point in their recovery.

The housing reports weren’t universally upbeat. A CoreLogic survey found that only half of the 9.7 million buyers currently under water on their mortgages would be interested in buying again if they get out from under the homes they own. Add to that another 11.2 million “under-equitied” owners, who would not clear enough from the sale of their homes to afford another, and you have a large enough chunk of the prospective buyer market to cast a sizable shadow over future home buying demand.

A Mixed Bag

But even with that hint of an impending drizzle on the housing parade, there is no question that good reports continue to outweigh the negative ones in the housing sector. In other segments of the economy, reports have been more mixed.

The slow pace at which the labor market is absorbing unemployed workers and new job-hunters is the biggest concern, but the “disappointing” retail sales report for June also made many analysts frown, raising questions about the consumer spending outlook for the rest of the year.

On the other hand, factory activity hit a two-year high in July and durable goods orders, reported by the Commerce Department, increased by 4.2 percent, triple the median forecast.

Mood Swings

Consumers, whose spending drives 70 percent of the economy, appear to be suffering from mood swings, judging by differences in the two key confidence surveys. The Thomson/Reuters final confidence survey in July reached its highest level in six years (85.1 vs. 84.1 in June), beating the consensus forecast and improving on the preliminary survey, which had indicated a decline to 83.9 from the June level. Respondents to this survey were feeling considerably better about current conditions (98.6 for this component of the index vs. 93.8 in June) than they were about the outlook for the next six months, which slipped a bit to 76.5 from the June reading of 77.8.

The Conference Board’s survey, released a few days later, found consumers less upbeat: The July reading fell to 80.3 from an upwardly revised June reading of 82.1. But like the Thomson/Reuters survey, this one showed consumers more optimistic about current conditions (which increased to 73.6 from 68.7) than about the future outlook, which slid to 84.7 from 91.1.

Leading economic indicators were unchanged in June and the second quarter growth rate, at 1.1 percent, was stronger than expected, indicating that most segments of the economy are at least holding their own against the downdraft crated by the sequester-mandated cuts in government spending.

A Better Half

The Federal Reserve’s Beige Book analysis of economic conditions reported “modest to moderate” growth in most regions, predicting that growth will accelerate in the second half of this year. That reflects what appears to be a growing consensus among private sector economists and business executives.

More than 70 percent of the small business economists responding to a recent survey predicted that the economy will grow more than 2 percent in the next 6 to 12 months compared with only 50 percent who held that relatively upbeat view a year ago.

Jeff Fettig, chief executive officer of Whirlpool, thinks an improving outlook for consumer spending justifies that view. “We are seeing, we think, sustainable, profound demand recovery in the U.S. Marketplace,” he told reporters during a recent earning call. Based on what it perceives as broadly favorable trends, the company is expecting demand for its products to increase by 8 percent this year, up from 6 percent projected a few months ago. “We continue to see very positive trends in U.S. housing,” Fettig said, “[but we’re] seeing a pickup in demand really in all segments of the market.”