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 two indicators currently creating the most angst for economists and policy makers (employment and housing) produced some moderately encouraging signals at the end of the month - sufficiently positive to ease concerns about a recessionary double dip (a little), but not enough to eliminate those fears entirely.

The positive employment indicator was a better-than-expected gain of 67,000 private sector jobs in August following an upwardly revised increase of 107,000 jobs in July. Separately, the job placement firm Challenger, Gray, and Christmas reported that the number of employers planning to slash their payrolls fell by 17 percent in July to the lowest level since June 2000.

“Every other job market indicator seems to be stuck in first gear,” CEO John Challenger told CNNMoney.com. “[But] the layoff picture has improved so significantly that we are at pre-dot-come collapse levels when it comes to monthly job-cut announcements.”

Perversely Positive

The August employment reports brought some additional positive news, although somewhat perversely so. Worker productivity declined by almost one percent in the first quarter, reversing five consecutive quarterly gains. While the reversal will squeeze corporate profits, it will also increase pressure on employers to begin hiring additional workers, possibly providing the long-delayed labor market boost analysts agree is needed to keep the recovery on track.

The housing market, which has been buried in bad news, also generated a ray of tepid light, as pending home sales increased by 5.2 percent in July, surprising analysts who had predicted a decline of at least 1 percent, and suggesting to some analysts that the flailing housing market may finally be finding its floor. The increase – the first in three months – followed devastating July sales reports for both existing and new homes.

Existing home sales declined by a stunning 27 percent in July compared with June - the largest monthly decline since 1968 - leaving sales 25 percent the year-ago pace, according to the National Association of Realtors (NAR). New home sales fell by 12.4 percent for the month to an annualized rate of 276,000 units, 32.4 percent below the year-ago volume and the lowest level in 40 years. Inventories of unsold homes have now reached more than 12 months for existing homes and more than 9 months for new construction.

Home prices, tracked by the Standard& Poor’s/Case-Schiller index, increased by 1 percent in July and by 4.2 percent year-over-year, but analysts attributed the gain entirely to the tax credit, warning that the positive trend won’t be sustained in the face of the dismal July sales reports.

Most analysts had expected sales to dip following the expiration of the federal tax credit for home buyers, the depth of the declines rattled analysts and policymakers alike. “Gut-wrenching” is how one market analyst described the July sales figures, warning that the evidence of seriously clouds prospects for a significant sales rebound this year.

Worse than Expected

“The numbers were worse than we expected, worse than the general market expected, and we are concerned,” HUD Secretary Shaun Donovan acknowledged. In response, the Obama Administration has announced plans to provide an additional $3 billion in aid to bolster housing - $1 billion in the form of zero-interest loans to help owners who have lost their jobs or suffered reduced incomes make their housing payments and another $2 billion in financing for housing assistance programs in the states with the highest unemployment rates.

Foreclosures remain a major concern. While the number of delinquent borrowers declined overall in the second quarter, the number of newly distressed borrowers (with loans 30 days past due) increased, according to the Mortgage Bankers Association’s (MBA’s) most recent report.

Separately, CoreLogic reported that fewer homeowners were underwater in the second quarter, but that wasn’t because price gains increased their equity the company emphasized; it was because foreclosures relived them of their homes as well as their underwater loans.

“Up to 4 million households could still lose their homes,” Paul Dales, an economist with Capital Economics, said in a recent note to investors. “Aside from the considerable social costs,” he noted, “this does not bode well for consumer spending, bank profits, or the housing market.”

Dales and other analysts say foreclosures will continue to put downward pressure on home prices, sidelining prospective buyers, who remain uncertain about their own economic outlook and concerned that the homes they purchase today will depreciate tomorrow. Despite the unexpected increase in pending sales for July, most analysts remain concerned that not only won’t the housing sector lead the nation out of recession, as it has in the past, it may actually tip the economy into the double-dip some economists have been predicting.

Double Dip Fears Persist

The double-dip drumbeat had been growing more insistent before the positive pending sales and employment reports, and it hasn’t receded much since. Following those reports, Nouriel Roubini, the New York University economist who was almost alone in predicting the economic meltdown, puts the chances of a double-dip at 40 percent.

Speaking at a recent international economic conference, Roubini noted, “The U.S. has to create 150,000 jobs every month in the private sector just to stabilize the rate and prevent it from rising. We'd have to create 300,000 jobs every month for the next three years just to bring back the level of employment to before this recession started," he added, “and nobody ... believes the U.S. is going to create any time any amount of jobs like that."

Still, some recent economic reports have been positive. For example: The leading economic indicators increased a little in July, following a 0.3 percent dip in June; the Institute for Supply Management’s factory index, which was widely expected to fall in August, actually increased to 56.3 compared with 55.5 in July; and the Federal Reserve reported that the nation’s largest banks eased their terms for small business loans “modestly” in the second quarter, the first such easing since late in 2006.

But those reports were generally obscured by a parade of negatives, a 1.6 percent second quarter decline in the nation’s growth rate and persistently gloomy consumer confidence ratings primary among them.

Persuaded that the economic recovery is losing steam, the Federal Open Market Committee decided to maintain the existing target rate (zero) for Fed funds, and to reinvest in mortgage securities, to keep mortgage rates low. Additionally, Fed Chairman Ben Bernanke has promised “additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.” Bernanke did not specify what those additional measures might be, however, telling a Congressional committee that “at this juncture, the [FOMC] has not agreed on specific criteria or triggers for further action.”