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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If you’re looking for consistency, you won’t find it in recent economic reports, which seem to reflect the oft-heard complaint that economists “point in all directions.”  Underscoring that point, Barron’s reported recently that the International Monetary Fund has scaled back its forecast for this year “as economic pessimism grows,” while a Housing Wire headline announced much more cheerfully that “Recession Fears Diminish as the Nation Approaches a Goldilocks Economy.” 

The Barron’s article cited a survey in which 35 percent of the company executives responding identified an economic slowdown as their primary concern; more than two-thirds of the chief financial officers responding to a “Globe Business Outlook” survey  said they think a recession will begin before the end of next year; 84 percent say a downturn will be under way by the first quarter of 2021.  

But just when it seemed reasonable to begin bracing for the coming economic storms, the Bureau of Economic Analysis  reported that the economy grew at a 3.2 percent annual rate in the first quarter- a much stronger performance than expected, following a tepid 2.2 percent gain in the final quarter of last year.  That report spurred the reference to a “Goldilocks” economy that is neither too hot nor too cold, but “just right” – strong enough to sustain employment and consumer spending at reasonable levels, but not so strong that it could bring growth stalling interest rate hikes from the Federal Reserve.

Patient Federal Reserve

Looking at mixed economic reports – a slight increase in consumer spending, a slight decline in consumer confidence – and with no evidence of inflationary pressure – the Federal Reserve’s Federal Open Market Committee (FOMC) opted for continued patience at its May meeting, leaving interest rates unchanged and indicating that this policy is likely to continue for the foreseeable future. 

Ignoring repeated tweets from President Donald Trump calling for rate cuts to spur economic growth, Fed directors voted unanimously to stay their current course.

“Overall the economy continues on a healthy path, and the committee believes that the current stance of policy is appropriate,” Fed Chairman Jerome Powell told reporters after the Fed’s two-day policy meeting. At least for now, he added, “we don’t see a strong case for moving [rates] in either direction.”

Asked about concerns that inflationary pressures may be too subdued – signaling underlying economic weakness, and possibly justifying the rate cuts President Trump has been demanding, Powell said, “If we did see inflation running persistently below [the Fed’s 2 percent goal], that is something the committee would be concerned about, something we would take into account when setting policy.”

Overshooting the Fed’s 2 percent inflation target would be cause for concern in the opposite direction, potentially pushing the Fed to become less patient and more inclined to ratchet rates upward. 

Employment Strength

On that point, the labor market soared in April. Employers added 263,000 jobs, blowing well past expectations and sending the unemployment rate to 3.6 percent – its lowest level in almost 50 years.  Wage growth was a little slower than projected, but still 3.2 percent higher than a year ago, an indication, the New York Times said, that “ordinary workers are finally sharing in the economy’s bounty.” 

The links between employment trends and home sales are clear, but contradictory.  On the plus side, a strong labor market reflects increased purchasing power for consumers, which is good news for the housing market; but if the Fed reads the much better than expected employment numbers as evidence of an overheating economy, requiring higher interest rates, the news may not be entirely positive. 

Lackluster Home Sales

Despite a low-rate environment that should have eased affordability pressures on buyers, recent housing market reports have been less than stellar.  After posting the strongest performance in almost four years in February, existing home sales reversed direction in March with a 5.4 percent year-over year decline.

The February jump had provided hope that home sales might be regaining their footing after back-to-back declines in December and January; the March swoon dented those hopes, but pending sales restored them, somewhat.  A National Associations of Realtors (NAR) index based on signed contracts for future existing home sales beat the February reading by nearly 4 percent.  The index was still 1.2 percent below the year-ago reading, however – the 15th consecutive month for that negative trend.

Lawrence Yun, chief economist for the NAR, thinks the sales picture will continue to improve this year.  But even with that expected improvement, he thinks the market is underperforming.  "We had 5 million home sales [20 years ago],” he noted in a recent report, “and we are close to that number today, but there are 50 million more people in the country," indicating, he suggests, “pent-up demand” for housing that is not being met by the existing supply.  

Continuing the up-and-down pattern of recent housing reports, new home sales, which struggled for much of last year,  posted their third consecutive monthly increase in March. The seasonally adjusted rate of 692,000 units beat the year-ago pace by 3 percent, with the strongest performance in nearly 18 months. 

Tossing a bit of cold water on what seemed to be reasonably good news, analysts pointed out that the Commerce Department, which crunches these volatile numbers, has revised sales for the previous three months downward.

Builder Confidence

Home builder confidence levels have remained on the high side, nonetheless, as industry executives continue to see strength in housing fundamentals – employment gains, wage increases and mortgage rates primary among them.  Concerns that rising mortgage rates would dampen homebuying demand have been assuaged by the Federal Reserve’s decision to keep patient hands on the monetary controls, at least for a while.  

The new home skies are not entirely clear, however, industry executives acknowledge.  Although builders are reporting strong demand for new homes, Greg Ugalde, chairman of the National Association of Home Builders told Mortgage News Daily, “they are also grappling with affordability concerns stemming from a chronic shortage of construction workers and buildable lots.”

Supply Side “Headwinds”

Robert Dietz, the NAHB’s chief economist echoed that concern. A strong economy, stable mortgage rates and “favorable demographics will help to modestly spark sales growth in the near term,” he said.  “But supply-side headwinds that are putting upward pressure on housing costs will limit more robust growth in the housing market.”    

Those headwinds appear to be affecting construction activity.  New home starts fell to a seasonally adjusted rate of 1.139 million units in March – their lowest level in nearly two years.  Permits, an indicator of future construction activity, also slid for the third consecutive month, to the lowest level in five months. “Waiting for construction activity to pick up after a sharp drop in mortgage rates is like waiting for Godot,” Chris Rupkey, chief economist at MUFG, told Reuters.  “It is hard to know what is ailing the home construction industry.”

The decline in single-family housing starts is a concern, Mark Fleming, chief economist for First American Title, agrees, especially given strong employment and wage growth and “increasing demand from millennial home buyers for this type of construction.” 

Diane Swonk, chief economist for Grant Thornton, sees the negative impacts of “supply constraints” and affordability pressures (exacerbated by student debt) pretty much offsetting the benefits of lower mortgage rates, blocking significant increases in home sales over the next year.  “The canary is still singing [in the housing market],” she told Housing Wire. “But without some major changes in zoning laws and construction costs and changes in how student debt is serviced,” she cautioned, ‘the music could come to an end in 2020.