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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It’s getting harder for pessimists to support their view that the economy is stalling or moving in the wrong direction.

Employers added 321,000 jobs in November, beating expectations and marking the he tenth consecutive month job gains have exceeded the 200,000 mark. Tying a holiday bow on those numbers, the September and October figures were revised upward.

Although the unemployment rate didn’t budge from 5.8 percent, average hourly earnings increased by 0.4 percent, doubling the anticipated gain and adding a crucial positive data point that has been missing from the recovery thus far. Analysts have blamed flat income growth in part for the inconsistent consumer spending pattern and the less than robust housing recovery.

“Spectacular and Believable”

The November labor report made many of those analysts feel much better. “Spectacular and believable,” is how Ian Shepardson, chief economist at Pantheon Macroeconomics, described the report. “We’ve had strong hiring indicators in a number of surveys and lower jobless claims, so sooner or later, we were going to get a blockbuster number,” he told the New York Times.

Former Treasury Secretary Lawrence Summers was more restrained, refusing to back away much from his earlier warning that the economy could be stuck in a prolonged period of exceptionally slow growth, which he described as “secular stagnation.”

“The economy certainly does not appear to be stagnant at the moment,” he conceded in an interview with Bloomberg News. “[But] whether growth can be sustained at rapid rates at normal type interest rates conducive to financial stability is certainly not yet fully established.”

Pluses and Minuses

The strength reflected in the November jobs report wasn’t reflected in the post-Thanksgiving kickoff to the holiday shopping season. Initial sales were generally disappointing. The National Retail Federation estimated that 133.7 million consumers shopped or planned to do so during the four-day Thanksgiving holiday weekend – 5.2 percent below last year’s volume —and they spent 6.4 percent less this year.

Economic growth, measured by the Gross Domestic Product (GDP), on the other hand, was almost as encouraging as the labor market statistics. GDP increased at a 3.9 percent annual pace in the third quarter after a 4.6 percent jump in the second quarter, representing the best back-to-back quarterly gains in more than a decade.

Consumer confidence readings, which have been bouncing up and down and sometimes in different directions, were again mixed in November. The Thomson-Reuters/University of Michigan index increased to 89.4 from 86.9 in October, beating the most optimistic forecasts. But the Conference Board index fell to 88.7 from October’s 94.1 reading, which was a 7-year high for this gauge. Some analysts are predicting that the exceptionally strong November labor market report, if sustained in December, will cement a positive consumer confidence trend and bode well for the housing market, too.

Encouraging Housing Reports

Existing home sales in October were certainly encouraging. The 5.26 million annual sales pace was 1.5 percent higher than the previous month and beat the year-ago pace for the first time in more than a year. Pending sales for November slipped a bit (by 1.1 percent compared with October) but they were still higher than the same month last year. The pace of contract signings remains “healthy,” Lawrence Yun, chief economist for the National Association of Realtors, told reporters.

New single-family home starts reached a 6-year high in October, rising more than 4.2 percent above the September rate and contrasting with a 28 percent plunge in the volatile multi-family sector. Single family permits also increased by nearly 5 percent.

The pace of new home sales increased, as well, but the 0.7 percent gain was below analysts’ expectations, and the September rate was revised downward.

Some industry executives still viewed the overall trend as positive. “The underlying drivers of demand – population growth, job growth, affordability, and household formations – are strong arguments for growth to continue,” one builder, quoted in a National Mortgage News report, insisted. But others noted that most of the purchasing strength has been at the higher end of the market, where buyers are finding credit readily available.

“Even as conditions improve for buyers overall, it remains a tough row to hoe for first-time buyers and lower-income buyers, especially compared to their more well-off contemporaries," Stan Humphries, chief economist for Zillow, observed in that National Mortgage News report.

Housing Forecasts Mixed

Forecasts for next year are trending generally toward the upbeat, but remain mixed. “The U.S. economy appears well poised to sustain about a 3 percent growth rate in 2015,” Frank Nothaft, Freddie Mac’s chief economist, observes in his forecast. And with that underlying growth, he predicts, “the economy will produce more and better-paying jobs, providing the financial wherewithal to support household formations and housing activity.”

Analysts at Clear Capital are less confident. Their major concern: Investors, who have triggered and largely sustained the housing recovery thus far, have largely withdrawn as appreciation rates have slowed, and there is no evidence yet that purchase buyers “are engaged enough to support the recovery,” these analysts believe.

Declines in distressed sales are a good sign, they acknowledge in a recent report to clients. “Yet, should national rates of growth turn to losses as a result, non-investor homebuyer will likely further disengage [and] quarterly loses cold snowball into yearly losses, [creating] a negative feedback loop. At this point,” the Clear Capital report cautions, any sign of weakness in the housing market “is a cause for concern.”

Zillow’s Humphries is counting on the millenials to assuage those concerns and provide the fuel the housing market needs — over time. “We expect more demand to come from the lower end of the market in coming years as millennials overtake Generation X as the largest home-buying demographic. As this happens, builders will be forced to build for these more entry-level buyers, and inventory at the bottom tier should improve, however slowly," he predicts.

In the meantime, Humphries thinks an improving economy and rising rents will both favor the housing market.

“As renters’ costs keep going up, I expect the allure of fixed mortgage payments and a more stable housing market will entice many more otherwise content renters into the housing market,” he told Housing Wire. Low inventories, tight credit and competition from investors have put purchase buyers at the lower end of the market at a disadvantage throughout the recovery, he noted. But next year, he predicts, “we’ll start to see things really turn around.

“More inventory will continue to come on line, putting the competitive pressure on sellers for a change. This more balanced market will be smoother sailing for everyone, both for buyers in search of a competitive advantage, and for sellers who turn around and become buyers themselves.”