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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Economic reports continued to create a good news-bad news dialectic in November, appending “yes, but” caveats to positive reports, and challenging downward trends with evidence of recovery in other indicators. The fairly even distribution of pluses and minuses has kept optimists from getting too carried away and prevented pessimists from becoming too discouraged – or perhaps just confused everyone about what’s happening in the economy.

The biggest surprise – and an unambiguously positive one – was the November employment report. Employers added 203,000 jobs for the month, pushing the unemployment rate down from 7.5 percent to 7 percent – its lowest level in five years. The gains for September and October were both revised upward, adding another 8,000 jobs to the annual total. One particularly encouraging indicator in the jobs data: The unemployment rate fell even though the participation rate expanded, indicating that it is the addition of new jobs and not the withdrawal of discouraged workers that is responsible for the statistical improvement.

The stronger-than-expected report buoyed the stock market initially, but it also fueled fears that the Federal Reserve will accelerate the timetable for “tapering” its support of the financial markets, leaving optimists and pessimists to debate whether they should be relieved by evidence that the job market is healing or concerned that higher interest rates following the Fed’s tapering will choke off the recovery.

Downs and Ups

That’s just one example among many of the mixed messages the economy is generating and the varied conclusions analysts are drawing from them. To note only a few more, first on the down side:

  • Retail sales early in the holiday season disappointed;
  • Durable goods orders declined for the second consecutive month; and
  • The Institute of Supply Management’s (ISM’s) services index fell 4 points below October’s 56.2 reading and below the consensus forecast anticipating a decline of less than 1 percent.

On the up side:

  • ISM’s manufacturing index rose at its fastest pace in two years;
  • The Index of Leading Economic Indicators for October increased barely, but the scant 0.2 percent gain was still better than the flat reading analysts were expecting; and
  • The third quarter economic growth rate was a stronger than expected 3.6 percent, revised upward from the 2.8 percent reported initially.

That unexpected strength in the GDP, which some economists viewed as a good sign, led others to slash their 4th quarter growth forecast, arguing that growth was spurred entirely by a build-up in inventory levels that is unlikely to be duplicated in the final months of this year.

The leading consumer confidence indexes moved in opposite directions. The Conference Board’s index fell to 70.4 compared with October’s upwardly revised 72.4 reading, while the University of Michigan/Thomson Reuters’ sentiment index rose to 75.1 from 70.3. But even that seemingly positive reading contained a downer: Most survey respondents agreed the economy is still operating below its potential ─ a view Richard Curtin, chief economist in charge of the poll, characterized as “economic stagnation.” It is “like purgatory,” he explained in a press statement, “neither heaven nor hell.”

Mixed Bag for Housing Too

The housing market, which has been generating a fairly consistent stream of positive news, also fell into the same good-some-bad pattern with the November reports. Existing home sales declined for the second consecutive month in October, following a nearly 2 percent decline in September. Pending sales also slipped in October for the fifth consecutive month , falling to their lowest level in more than a year and slipping below the year-ago pace for the first time since the recovery began to gain steam two years ago.

Industry analysts blamed the dips in sales and pending sales on the government shutdown in early October, which slowed loan approvals for many buyers, suggesting that the numbers should improve going forward. But the market “still faces headwinds,” Lawrence Yun, the chief economist for the National Association of Realtors, cautioned, noting particularly declining affordability rates and limited inventories.

While existing home sales sagged a bit in October, new home sales surged, increasing more than 25 percent compared with September for the largest one-month gain in three decades. The year-over-year gain was more than 20 percent, confirming the views of analysts who have predicted that higher mortgage rates won’t kill the housing recovery.

Permits for new home construction – an indicator of future sales – hit their highest level in 5-1/2 years in October, rising 6.2 percent above the September level, which was up more than 5 percent compared with August. However – spoiler alert – here comes another one of those ‘yes, but’ qualifiers. Most of the increase was in the multi-family sector; permits for single-family homes increased by less than 1 percent.

Home prices are still rising, but at a moderating pace. The Case-Shiller home price index posted a 13.3 percent year-over-year increase in September – the biggest gain in this closely watched barometer since February, 2006. But prices increased less than 1 percent between August and September, continuing a pattern of slowing month-over month appreciation rates. Although 13 of the 20 cities in the index reported year-over-year price increases, all but 1 reported much slower monthly gains, leading some analysts to suggest that the price gains owe more to shrinking inventories than to increasing buyer demand.

Another possible cause for concern: Cash purchases accounted for nearly half the September sales nationally, raising questions about whether the housing recovery can be sustained without more participation by homeowners as opposed to investors. Adding to that concern: First-time buyers continue to represent less than 30 percent of the market – below their historical average – limiting the demand for entry-level homes that enables existing owners to sell their homes and move up the housing ladder.

But if there are negative indictors at play, can a positive offset be far behind? Here it comes: The percentage of homeowners with negative equity, which has been declining steadily as home prices have recovered, fell to 21 percent in the third quarter; the percentage with at least 20 percent equity in their homes increased to 60.8 percent. That means many owners who have been unable to sell their homes will now be able to afford to do so.

“Hone sales will [begin] to pick up nicely,” Neal Soss, chief economist at Credit Suisse Group, predicts. “There’s a magnifying effect on sales,” he told Bloomberg News. “People are able to list and sell their homes, and odds are, they’re going to go on and buy another one.”