April produced a mix of indicators, some stronger than others, but most landing firmly on the solid end of the performance spectrum.
The unemployment rate fell to 3.9 percent, its lowest level in nearly two decades, as the labor market notched its 91st consecutive month of gains. Employers added 164,000 workers to their payrolls, keeping the hiring train moving, although at a slower pace than in previous months. Analysts had predicted a gain of 193,000 positions.
Earnings remained sluggish – up only 4 cents per hour and averaging a 2.6 percent annual rate, barely keeping pace with inflation. Employers continue to resist the wage bump analysts are expecting a declining unemployment rate will bring.
Although analysts were generally pleased with the numbers, they remain perplexed by the stubbornly anemic wage gains. “Overall, , it’s a good report,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., told Bloomberg News. “Slack [in the labor market] is getting absorbed,” he said, “but the process of that translating into faster wages has been slow. Wages are clearly the one disappointing part of the report,” he agreed.
The Federal Reserve, which keeps a close eye on employment trends, stood pat on interest rates in April after increasing them by 25 basis points in March. But members of the policy-setting Federal Open Market Committee (FOMC) indicated that they intend to follow the current course, which calls for at least two and possibly three more rate hikes this year.
Whether that next rate move will come in June, as many analysts expect, “will take into account a wide range of information,” the committee said in its post-meeting statement, “including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
The impact of a threatened trade war, the still uncertain effects of the tax cuts Congress enacted last year, and federal spending levels, analysts say, are the primary factors that will influence Fed policy during the second half of this year.
“The challenge for central bankers is to lift borrowing costs enough to prevent the economy from overheating, but not so much that it tips into recession,” a Wall Street Journal (WSJ) article noted.
Other key economic indicators paint a mostly, but no entirely, positive picture:
Gross Domestic Product (GDP) grew at its slowest annual rate (2.3 percent) in nearly five years, but analysts are predicting that an increase in consumer spending, fueled by tax cuts, will accelerate the pace later this year. Minutes of Fed meetings indicate that policy-makers anticipated the slow start and assume that it will be “transitory.”
Consumer confidence, measured by the Conference Board index, increased in April, reversing a March dip, as Americans’ views of current conditions and their expectations for the future both improved. Only 6 percent of respondents said they expect their income to decline over the next 6 months – the lowest level for that market in almost 20 years.
Consumer spending increased in March (the most current data available), and the core PCE index (a measure of inflation) hit 1.9 percent, almost reaching the Fed’s 2 percent target. “Overall, confidence levels remain strong and suggest that the economy will continue expanding at a solid pace in the months ahead,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.
Housing reports continue to tell a familiar story: Rising inventories and scarce inventories of homes for sale are creating a headwind that is slowing home sales, despite increasing demand created by a growing economy and a strong labor market.
The scarcity of homes for sale will make this year’s prime home-buying season “one of the most competitive ever recorded,” analysts at Zillow predict.
Housing inventories actually improved a bit in March compared with February, but they fell 7.2 percent year-over year – the 34th consecutive month for this negative annual trend. The shortage is most acute at the lower end of the price range, where demand from first-time buyers is strongest.
Single-family home sales for March fell below the year-ago pace by about 1 percent, although sales notched their second consecutive monthly gain. Pending sales, a measure of future demand, fell below the year-ago level for the third consecutive month, as the inventory shortage continues to suck air from the market.
“The broader economic environment remains favorable for home sales,” Len Kiefer, deputy chief economist for Freddie Mac, said in a recent report. “But without new home construction and increased housing supply, home sales in the U.S. will have a hard time growing from current levels.”
New home sales posted a strong 4 percent gain for the month, but analysts caution against putting too much weight on this volatile statistic, which, they note, has a margin of error of more than 18 percentage points.
“Builders are selling homes virtually as fast as they can build them,” Mark Vitner, senior economist at Wells Fargo, told WSJ.
The problem, analysts say, is that they aren’t building them fast enough. Although housing starts increased by nearly 2 percent overall in March, the gain was concentrated entirely in the multi-family sector; single-family starts declined by 3.7 percent.
“It is a step back for single family and a surge forward for multifamily,” said Danielle Hale, chief economist for Realtor.com, told the Wall Street Journal. “For single family, it’s the opposite of what we need to see.”
Construction permits, less volatile than starts and generally viewed as a more accurate monthly indicator, weren’t encouraging either: Single family permits fell 5.5 percent below the February level.
Home prices, meanwhile, continued their upward trek in March, rising 7 percent year-over year according to CoreLogic data. The closely-watched S&P/Case Shiller national index posted a slightly lower 6.3 percent annual gain.
Realtors nationally continue to report strong homebuyer interest, reflected in steady foot traffic at open houses, and that is definitely good new, Lawrence Yun, chief economist for the National Association of Realtors (NAR) reports. The “unwelcoming” news, he said, is that “supply is woefully low and home prices keep climbing above what some would-be buyers can afford.”
If current trends continue and new home construction continues to lag, Yun predicts in a recent report, “sales will remain stuck in this holding pattern and a growing share of would-be buyers, especially first-time buyers, will be left on the sidelines.”
Aaron Terrazas, senior economist for Zillow, agrees. “It’s hard to sell homes in large numbers when there are so few available to buy,” he told Market Watch. “And that raises the question of whether the market has reached or surpassed its peak sales volume given current conditions. It’s not at all clear how long this pattern of lackluster sales volumes but consistently rising prices can realistically be expected to continue.”