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 home sales alone were an indicator of economic health, you might conclude that the economy has rebounded smartly from the pandemic-induced recession and is on a path for steady growth. 

But the housing market has emerged as more an outlier than an indicator, seemingly breaking free of the downward pull the pandemic continues to exert on other critical gauges of economic health.

New and existing home sales both posted 14-year highs in August, as low interest rates unleashed pent-up demand, pushing would-be buyers into heated competition for sparse listings. 

Existing home sales sold at an annualized rate of 6 million units in August, according to the National Association of Realtors (NAR), nearly 12 percent above the year-ago level. Pending home sales, a marker for future activity, increased for the fourth consecutive month, rising to 132.8 on an NAR index, up from 122.1 in July and almost 25 percent higher year-over year.

Posting their sixth consecutive monthly gain in August, new home sales blew well past what had been fairly upbeat projections, increasing to an annual rate of more than 1 million units – nearly 5 percent above the July rate and 43.2 percent (that is not a typo) higher year-over-year.


Robust Demand – Skimpy Listings

“Home sales continue to amaze,” Lawrence Yun, the National Association of Realtors’ chief economist said.  With mortgage rates still hovering at or below 3 percent and “plenty of buyers in the pipeline ready to enter the market,” he predicts that demand will remain strong through the end of this year.

Many of those buyers will be hard-pressed to find homes to purchase, however.  The NAR tallied 1.49 million homes on the market at the end of August, 18.6 percent fewer listings than were available the same month last year.  That represents a three month’s supply of homes, well below the six months industry experts  view as a “healthy” market balanced reasonably between buyers and seller.

“Housing demand is robust but supply is not,” Nun noted, “and this imbalance will inevitably harm affordability and hinder ownership opportunities.” 

Home prices, measured by the closely-watched Case-Shiller index, increased by nearly 5 percent year-over-year in July, reflecting the pressure created by too many buyers chasing too few homes. 


New Construction

New construction – the prescription for scarce inventories - promises some relief, though not nearly enough to close the current gap, analysts agreed.  At an annualized rate of about 1 million units, August single family starts were 4.1 percent higher  than in July, beating the year-ago rate by almost 12 percent.  Permits for new construction increased by 6 percent compared with July and by more than 15 percent year-over-year.

Not surprisingly, given the strength of new home sales, the National Association of Home Builders’ confidence index hit a new high in September for the second time in as  many  months, rising 5 points to 83 after gaining 6 points in August.

Although generally buoyed by strong buyer demand, many builders are becoming concerned that rising prices for materials (especially lumber) may undercut affordability, while a shortage of skilled labor could impede efforts to increase the construction pace. 

Some industry executives also question whether housing can continue to thrive if the economic recovery falters.  Employment growth is a growing concern. Employers added 661,000 jobs in September, down from the 1.5 million jobs gained in August and below the 800,000 analysts had projected. 


“Illusion of Progress”

“This report is an illusion of progress at a time when we needed accelerating gains in the labor market,” Nick Bunker, economic research director at Indeed, a job placement site, told CNBC.  The economy has now regained roughly half of the 20 million jobs it shed after the pandemic struck in March.  But “that is not nearly enough,” Bunker said. “This report is massively concerning,” he added. “We are not where we need to be, nor are we moving fast enough in the right direction as we head into fall.”

Among the indicators that are unsettling Bunker and other analysts:

  • Although employers continue to add job, weekly claims for unemployment remain stuck above pre-pandemic highs. Averaging between 800.00 and 900,000 for the past four weeks, claims are tracking higher than in any previous recession since 1967.
  • Many unemployed workers who had been saying their job losses were temporary are now saying they think the losses are permanent. More than half the economists responding to a recent Wall Street Journal survey agreed that between 10 percent and 20 percent to of the jobs lost during the pandemic won’t return.
  • Several large companies, Disney and Allstate among them, have recently announced significant layoffs, airlines are beginning to furlough workers, and small businesses are warning that they may close if Congress doesn’t approve another round of financial assistance for businesses and consumers.

Highlighting that concern in recent testimony to Congress, Federal Reserve Chairman Jerome Powell said the Fed “has basically done all the things we could think of” to support the economy, including holding interest rates near zero and buying bonds to pump cash into the financial  system.  “The path forward,” he said, “will depend on keeping the virus under control and on policy actions taken at all levels of government.”

Efforts to control the virus continue to fall short, however, with many states reporting increases in infections and hospitalization rates.  Near-term approval of a stimulus plan, meanwhile, appears unlikely, as Congressional Republicans, Democrats and the Trump Administration remain far apart on the details of what it should include.

“If we get more aid and stimulus, we could mitigate virus-related losses and have a stronger recovery,” Diane Swonk, chief economist at Grant Thornton, told the Wall Street Journal. “If not, all bets are off and downside risks dominate.”