Concerns about the economic impacts of the government shutdown were overstated, as it turned out, but not entirely without foundation.
Uncertainty in the weeks preceding the 16-day shutdown took a bite out of consumer confidence, sending the October indexes to nearly two-year lows, curbing consumer spending and pushing the savings rate to its highest level this year.
But the employment market weathered the storm with no obvious ill effects at all. Employers added 204,000 jobs in October, surprising most analysts, who were predicting a much weaker performance, and beating even the most optimistic estimates. Adding a dollop of whipped cream to the labor report, the totals for August and September were revised upward. Furloughed government workers nudged the unemployment rate upward to 7.3 percent from 7.2 percent, a result analysts had predicted and expect to be temporary.
“The labor market is actually quite healthy, regardless of what people may think,” Brian Jones, senior U.S. economist at Societe Generale told Bloomberg News. “The economy is doing better,” he insisted.
Among other indicators supporting that view, Gross Domestic Product (GDP), measuring overall economic growth, increased by 2.8 percent in the third quarter, blowing past the consensus forecast and beating both the second (2.5 percent) and first quarter (1.1 percent) growth rates.
A Foggy Lens
The major near-term impact of the government shut-down appears to have been delaying the release of several economic reports, (including the jobs report, which was posted two weeks late), depriving analysts of the tea leaves they read to assess economic trends.
With data lacking and economic lenses blurred, the Federal Reserve decided to delay the “tapering” of its Quantitative Easing program and continue purchasing Treasury and mortgage-backed securities for a foreseeable future that remains difficult to foresee.
“Taking into account the extent of federal fiscal retrenchment over the past year, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy,” the Federal Open Market Committee said in a statement following its October meeting. “However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the committee said, explaining its decision not to decide when to begin the tapering process.
Apart from the surprisingly strong economic report, most key economic indicators for September and October were flat or weaker than the prior month. A small business lending index declined by 6 percent compared with September and a subset of the Purchasing Managers Index fell below 50 (separating growth from contraction) for the first time in four years.
But housing, again, provided a positive an exception to weaker economic trend lines. Apparently shrugging off concerns about what was happening, or not happening, in Washington, prospective home buyers resumed their search with gusto in October. Redfin, an on-line brokerage, reported a 58 percent year-over-year increase in the number of buyers contacting their agents the week after the shut-down ended.
Construction spending posted its fifth consecutive monthly gain in August, with housing responsible for most of the 0.6 percent increase. Higher interest rates created something of a headwind, resulting in a 2 percent monthly decline in existing home sales from a very strong August level, but sales for the month were still 11 percent higher year-over-year, continuing 27 consecutive months of annual gains.
With the Commerce Department’s new home sales report delayed for a month, the only current indicators of this sector of the market came from private companies, and their reports were not entirely positive.
Nearly one-third of the sales managers responding to a Wells-Fargo survey reported demand for new homes weaker than expected in October. This survey also found more home builders paying buyers’ closing costs and fewer reporting increases in their asking prices for newly constructed homes. “[These results] suggest to us that demand is fragile and affordability may be becoming an issue in some markets,” Wells Fargo analyst Adam Rudiger wrote in a research report.
Price Gains Moderating
The Case-Shiller 20-city index of home prices for September was nearly 13 percent higher year-over-year, but 16 of the 20 cities tracked reported slower appreciation rates than in August, confirming a growing consensus that price gains are moderating enough to negate concerns that a new housing bubble might be forming.
“If home values continued to rise as they have, relatively unchecked, we would almost certainly be headed into another bubble cycle, and nobody wants that,” Stan Humphries, chief economist for Zillow, told Bloomberg News. “This is more proof that the market recovery is entering a new phase, transitioning away from the bounce off the bottom we’ve been experiencing and finding a more sustainable level,” he added.
The longer-term outlook for the recovery seems to have lost a bit of its luster in recent weeks, as higher rates, flat income growth and growing affordability concerns have crept into an increasing number of forecasts.
Many recent forecasts have noted with concern that pending sales fell to their lowest level in nearly a year in September, failing to top the year-ago figure for the first time in 29 months.
Recovery Uneven but Unbowed
Although the housing recovery has been notable, it has also been “uneven,” Lawrence Yun, the chief economist for the National Association of Realtors, noted recently, setting a torrid sales pace in some markets while leaving others still struggling with depressed demand and an overhang of foreclosed homes. Even so, the NAR is predicting that sales will be 10 percent higher this year than in 2012, holding near that level next year, with prices continuing to rise through 2015, although at a slowing rate.
Most analysts share Yun’s view that the housing recovery will slow next year, but won’t stall.
"The housing recovery keeps chugging along despite a constant barrage of disruptions to the broader economy," Frank Nothaft, Freddie Mac's vice president and chief economist, wrote in a recent report. Rising interest rates and declining consumer confidence will slow the recovery, he said, “but won’t shut it down.”
Fitch Ratings analysts share that restrained but relatively upbeat view. Although affordability measures have declined and interest rates have increased, they note in a regular monthly housing report, both prices and mortgage rates remain “well below former highs in most markets, [suggesting] that affordability is still attractive….Recent government struggles, negative equity and challenging mortgage qualification standards appear to be little more than short-term headwinds restraining the housing recovery,” the report concludes.