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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The December employment report was a good news-bad news-good news story. The good news:  Employers added nearly 50,000 jobs and the unemployment rate fell, after remaining essentially flat for the previous two months.

The bad news: Employment growth was anemic, following a stomach-churning loss of 140,000 jobs in December.  And the decline in the unemployment rate, to 6.3 percent from 6.7 percent, was attributable more to a technical adjustment in the calculation than to any underlying improvement in the job picture.  At this point, the U.S. has recovered only about half of the 20 million jobs lost since the pandemic.  According to some estimates, nearly 18 million Americans are currently receiving some form of unemployment assistance.

The good news in that bad news:  The Biden Administration has cited the weak labor market recovery as one of the primary arguments for the $1.9 trillion pandemic aid bill it  is proposing.  A stronger jobs report could have undermined that argument.

Many analysts are predicting that the economy will strengthen later this year, as the vaccine rollout continues and pandemic restrictions ease.  The Congressional Budget Office, for example, recently upgraded its forecast, because the downturn was not as severe as expected and because the first stage of the recovery took place sooner and was stronger than expected.”

“Not Out of the Woods”

But for now, most key economic indicators reflect weakness.  Although the GDP – the broadest measure of economic growth – increased unexpectedly at an annual rate of 4 percent in the fourth quarter, growth declined by 3.5 percent for the year, the first annual contraction since the Great Recession, and the largest decline since 1946. 

“There has been a broad recovery, but economically speaking, we’re not out of the woods yet,”  Ben Herzon, executive director at IHS Markit. told the Washington Post.

Consumers seem to be growing more confident  at least relatively so.  The Conference Board’s Consumer confidence index increased in December after two consecutive monthly declines, but at 89.3, the reading is still below the post-pandemic peak of 101.4 in October. And while consumers became more optimistic  about the economic outlook in December, their assessment of present conditions slumped again, weighed  down by pandemic concerns.

Reflecting those concerns, the savings rate has increased, but consumer spending has declined, bruising an economy that is heavily dependent on consumers.

Viewing what is still a cloudy economic landscape, the Federal Reserve is keeping its foot planted firmly on the monetary accelerator, leaving  the  fed funds rate at zero and doubling down on its promise to retain easy money policies until the economy is firmly settled on a stable growth course -

“The economy is a long way from our monetary policy and inflation goals, and it’s likely to take some time for substantial further progress to be achieved,” Fed Chairman Jerome Powell said following the December meeting of the Federal Open Market Committee (FOMC). Fed policy will remain “highly accommodative as the recovery progresses,” he added. “We think it’s going to be a struggle,” he added. “The pandemic still provides considerable downside risks to the economy.”

Housing:  The Upside

If you’re looking for an upside, you can still find it in the housing market, which continues to resist the pandemic’s downward drag.  Record-low mortgage rates propelled existing home sales to their highest level since 2006, while scant inventories pushed home prices for the year up by 9.5 percent for the year ending in November, the highest annual growth rate since February of 2014.  Both performance markers exceeded analysts’ predictions.

New home sales, though less robust, did manage a small (1.6 percent) increase in December following three months of losses including a substantial downturn in November.  But even that scant monthly increase pushed the annual sales rate more than 15 percent above December of last year. 

Both the new and existing home markets seemed to be picking up steam at year-end, and “that momentum is likely to carry into the new year,  “What’s even better,” according to Lawrence Yun, chief economist for the National Association of Realtors, who predicts that progress combating the pandemic and a strengthening economy will pull more buyers into the market.

Inventories Still Problematic

Those buyers will be competing for a limited supply of listings. The NAR reported that inventories in December were more than 23 percent below the year-ago level, creating a skimpy 1.9 -month’s supply at the current sales pace ─ an all-time low, according to the NAR.  Reflecting the continuing mismatch between supply and demand, pending home sales declined  for the fourth straight month in December, the NAR reported.  Before that downward trend began, pending sales had increased for four consecutive months, pushing the NAR index to its highest level in more than a year – more than 21 percent above the year-ago reading. 

The dip in pending sales doesn’t suggest that buyer demand is sagging, the NAR’s Yun said. It means those willing buyers can’t find homes to buy,  and the imbalance is pushing prices higher.

The new home market is dealing with the same dynamic.  “While demand is robust, supply is not, and the imbalance will inevitably harm affordability and dissuade buyers from buying,” .    John Pataky, executive vice president at TIAA Bank, told Housing Wire.  “Unless we get more existing sellers in the market, I foresee this shortage to continue well into the new year,” he added.

Holding out hope for some measure of relief, single-family construction starts reached an annualized rate of 1.4 million units in December, almost 28 percent above the 2019 pace and the strongest performance in 15 years.  Single family permits ended the year more than 20 percent above the year-ago total.  

Those year-end statistics represented the "biggest bang since 2006" for home construction, Yun said, possibly indicating an end to what has been a chronic housing shortage.  But he also cautioned against a  premature conclusion that the housing market’s problems may be ending.  "For 13 straight years prior, homebuilders have been underproducing below historic norms,” he noted.  “It [is going to require] robust home construction this year and next, at a minimum, to fully supply the market to properly meet the demand.”