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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 Reflecting the impact of the simmering (trade war with China and the threat of tariffs on Mexican goods, the employment picture darkened considerably in May.  Employers added only 75,000 workers to their payrolls, way below the 180,000 analysts had expected, while estimates for March and April were also scaled back.

The weak report, which broke a months-long stream of good employment news, was “an ominous turn,” according to a CBS MarketWatch analysis, suggesting that the heretofore resilient economy may be slowing. 

Other economic reports added to the growing concern.  Retail sales slid for the month, dragged down by declines in consumer spending on cars, electronics and home improvement goods.  Orders for durable goods also slid, “painting a weaker picture of U.S. factory demand than anticipated,” the Wall Street Journal  reported. 

Consumer confidence remained high, nonetheless,  as spring gave way to early summer.  The Conference Board and University of Michigan indexes, which often diverge, both tracked near 15-year highs in May and April, respectively.   That confidence was not reflected in spending patterns, however. The Commerce Department reported that personal consumption expenditures, measuring spending on just about everything, increased by only 0.3 percent, lagging far behind the robust spending report in March, even though personal income grew by 0.5 percent – the strongest gain so far this year.

Confident, Yes.  Spending, No.

Analysts who marked the disconnect between consumer confidence in the economy and their willingness to fuel the spending that powers it, also noted that previous periods of unusually strong confidence in 2007, 1998-2001, 1994 and 1990 – all preceded steep economic downturns.  

Recession risks, pretty much dismissed until now, have begun to surface in more economic forecasts. The chief economist at JP Morgan has pegged those risks at 40 percent – up from just 25 percent a month ago.  Morgan Stanley’s chief economist also warned recently that the economy could slip into a recession by spring of next year if the roiling trade war between US and China continues to escalate.  The National Association for Business Economists likewise reported a “surge” in recession fears in its recent survey, with 60 percent of respondents predicting a recession by the middle of next year.

Fed Rate Reversal?

The combination of weak economic reports and growing unease about both the political and economic environment have fueled speculation that the Federal Reserve, which has been patiently avoiding further rate increases, may be compelled to ratchet rates downward to prevent an economic decline. 

Fed Chairman Jerome Powell said a few weeks ago – before President Trump’s threat of tariffs on Mexican goods had been added to concerns about the China trade war – that policy makers were “closely monitoring” the trade dispute and would respond “as appropriate” to its impacts on the economy. But some analysts question just how effective the Fed’s response can be. 

“The Fed will do its best t given where the economy is” Nathan Sheets, chief economist at PGIM Fixed Income told CNBC, “but it would take a dramatic easing of monetary policy for them to fully offset these kinds of effects.”

Housing Disappointment

Housing isn’t likely to provide much of a boost, based on its lackluster performance for most of this year.  Despite falling mortgage rates –now at their lowest level in more than 18  months – and a solid string of employment gains (until the most recent one), home sales have continued to disappoint.

Existing home sales fell again in April, slipping slightly below the March total and falling 4.4 percent below the same month a year ago ─ the 14th consecutive year-over-year decline. Industry analysts, admittedly perplexed by this persistent weakness, continue to predict that the market will improve.

“We are seeing historically low mortgage rates combined with a pent-up demand to buy, so buyers will look to take advantage of these conditions," Lawrence Yun, chief economist for the National Association of Realtors (NAR) told the Wall Street Journal.  Slowing appreciation rates and rising inventory levels are improving affordability ratios in many major markets, he noted, and that trend, too, he predicts,  should “spur more home sales.” 

New home sales did improve in April, posting a solid 7 percent increase over April of 2018, but still falling short of the robust numbers posted regularly before the last downturn.  Although housing starts increased from the March level, they fell 2.5 percent below the year-ago pace. Even more concerning for analysts, single-family permits, an indicator of future building activity, slipped to an annual pace of 782,000 units ─ almost 10 percent below April of 2018. 

Although the April housing report was “encouraging overall,” Robert Dietz, chief economist of the National Association of Home Builders, said, the decline in permitting activity was cause for concern, indicating that housing affordability and construction costs continue to impede construction activity.  “Builders continue to focus on managing home construction costs as they try to meet growing housing demand,” he told Mortgage Orb. 

But like the NAR’s Yun, Dietz thinks demographics, low interest rates and a strong economy will offset the negative headwinds, ensuring a “slow, steady climb” for home sales this year.

The people building and selling homes appear to be more optimistic than the people who are supposed to be buying them.  Fannie Mae’s monthly Home Purchase Sentiment Index fell by 3.4 points year-over-year in April, as only 14 percent of prospective buyers said they think this is a “good time” to buy a home – down from nearly 30 percent in the same month last year. 

“Given the broader economic picture, housing should be doing better,” David Blitzer, managing director and chairman of the S&P Dow Jones Index Committee, who oversees the closely watched case Case-Shiller home price survey, observed in a recent report.

Charlie Dougherty, an economist at Wells Fargo Securities, attributes the housing market’s underperformance in part to the “mismatch” between the increasing demand for entry-level homes and the dearth of product available in that category.  With housing starts still trailing last year’s pace and permitting activity seemingly also trending downward, he told Reuters, “A significant breakout in existing home sales is unlikely this year.”