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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If the June employment report calmed jittery analysts, the July report had to make them smile and maybe even grin. Employers added 255,000 workers to their payrolls, beating far more conservative estimates and providing strong evidence that the labor market is churning along at a steady and sustainable pace. Revisions to the May and June reports added another 18,000 jobs to the three-month total, providing more good news in a report that contained a lot of it.

Wages and hours worked both increased more than predicted and the crucial labor force participation rate increased as well, to 62.8 percent from 62. 7 percent, as the unemployment rate held steady at 4.9 percent.

There was one sour note in the Department of Labor report: The underemployment rate (reflecting workers who have part-time jobs but would prefer full-time employment) climbed to 9.7 percent and the number of “discouraged” workers, who have given up on finding employment, hit a five-month high.

Eclipsing Slow Growth

But the second consecutive month of robust job growth eclipsed those negatives and pretty much buried news of the anemic (1.2 percent) second-quarter growth rate, as well.

“The labor market is firming up. Wages are starting to pick up. It’s a positive for consumer spending. This will reinforce the Fed’s view that improvement in the labor market is likely to continue,” Jesse Edgarton, an economist at J.P. Morgan Chase, told Bloomberg News.

Most analysts seem to agree that the strong July report increases the odds that the Federal Reserve will increase interest rates before year-end – possibly at the next Federal Open Market Committee FOMC) meeting in September.

Uncertainty about the impact of England’s decision to leave the European Union (the BREXIT vote) was among the factors that kept the Fed from pulling the interest rate trigger in July. But even in announcing their decision to hold off, Fed officials noted signs that the U.S. economy was strengthening.

Boost for Housing

The primary impact of BREXIT here, to date, has been to increase investor demand for long-term Treasury bills ─ a boon for the housing market, which has benefited from an extended period of exceptionally low mortgage rates.

Existing homes in June sold at an annualized rate of 5.57 million units – 3 percent above the year-ago level and the strongest pace in nearly 10 years. First-time buyers, largely missing from the housing recovery until now, drove that gain, accounting for more than one-third of the June purchases – the most in nearly four years. The share of investor purchases, meanwhile, declined to 11 percent – its lowest point since 2009, according to data compiled by the National Association of Realtors (NAR).

New home sales were even stronger, reaching an annualized rate of 592,000 – an eight-year high for this sector.

Redfin analysts described the June market as “the most competitive since 2009,” based on the speed with which homes were sold – an average of 41 days nationally. Sales totals would be even higher, Redfin’s chief economist, Nela Richardson believes, if not for the inventory constraints that “continue to crimp overall activity. There would be more sales if there were more people selling,” she told the Wall Street Journal.

Inventory Constraints

Skimpy inventories are also keeping upward pressure on home prices – up 5 percent in June year-over year according to the Case-Shiller index. “Until inventory conditions improve markedly, far too many prospective buyers are likely to either be priced out of the market or outbid on the very few properties available for sale,” Lawrence Yun, the NAR’s chief economist, warned in a recent statement. Given those constraints, he cautioned, ‘we may just have hit peak levels.”

Underscoring that concern, pending sales, an indicator of future activity, eked out only a tiny 1 percent gain in June after falling by nearly 4 percent in May, compared with the prior month. Depressed inventory levels have held this index below the year-ago figure for 13 consecutive months.

Hone construction activity provides some hope of inventory relief: New home starts jumped by nearly 5 percent in June according to the Census Bureau ― the best showing since February — with single-family construction, up 4.4 percent for the month and more than 13 percent for the year.

But even with that improvement, analysts point out, new construction continues to lag demand. “Nationally, new housing supply relative to demand is about 15 percent below the historical average,” Ralph McLaughlin, chief economist for Trulia, notes in a recent statement.

Matthew Pointon, an analyst with Capital Economics, shares that concern. “The bigger picture” in the construction data, he told Housing Wire,” is that there has been no sustained upward progress in homebuilding activity for over a year now.”

Even with those underlying concerns, most analysts think the near-term outlook for housing remains positive, with a strengthening labor market and rising wages likely to provide ongoing support for a “grinding” recovery if not a spectacular one. “The fundamental underpinnings are still really supportive for housing,” Brett Ryan, a U.S. economist at Deutsche Bank Securities Inc., told Bloomberg, so the housing sector, he said, “should be a steady contributor to growth over the next year or so.”