Anemic Employment Report Reflects Pandemic’s Continuing Drag on the Nation’s Economy

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.

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Better, worse and worrisome. That pretty much summarizes the January and February economic and housing reports.

The February employment report fell solidly and impressively in the “better” column, as employers added 295,000 workers to their payrolls. The strong performance beat both more conservative estimates and the January jobs total, which was revised downward. It also marked the 12th consecutive month in which payrolls increased by 200,000 or more. The unemployment rate, which had ticked up in January, ticked down again, falling from 5.7 percent to 5.5 percent.

Wage growth, the critical missing ingredient in the economic recovery, continued to disappoint, however, with earnings increasing by a scant 0.1 percent. Analysts concerned that anemic wage growth will short-circuit the housing recovery and undermine economic growth became more concerned.

Hidden Strength

But some economists see evidence of underlying strength not yet reflected in the earnings data. Among them is Mark Zandi, chief economist for Moody’s.com, who thinks demographics rather than structural weakness explains the slow growth in wages. He points specifically to the shift resulting as retiring baby boomers, at the top of the earnings scale, are replaced by younger workers several rungs below them.

Zandi also sees indications that the wage freeze is beginning to thaw. For one thing, he notes, turnover is increasing – a sign that workers are optimistic about their ability to find new jobs; and employers are beginning to feel pressure to increase wages in order to hold on to workers. Walmart and TJMax recently announced increases in their minimum wage and other companies are expected to follow, Zandi and other similarly optimistic analysts are predicting.

Wage gains will ease concerns about economic growth, but they will also stoke inflationary fears, increasing pressure on the Fed to begin raising interest rates – as early as June, some analysts are predicting. Those who view inflation as the greatest economic threat are pushing for a near-term rate increase; those who fear a premature move will derail the recovery are opposing it.

No Rush to Raise Rates

While Fed Chairman Janet Yellen has lauded the employment gains, she has also indicated that the Fed is in no rush to alter its supportive monetary policy. Testifying recently before the Senate Banking Committee, she acknowledged, “There has been important progress. However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective” The Fed won’t move on rates, she said, until it is “reasonably confident that inflation will move back over the medium term toward our 2 percent objective.”

Doves on the Federal Open Market Committee (the Fed’s rate-setting arm) can point to recent declines in manufacturing output, construction spending and consumer confidence to support their arguments against a near-term rate hike. The housing market’s still erratic and less than robust recovery may strengthen those arguments.

Industry analysts have been predicting that home sales will strengthen this year, but January reports reflected what most agreed was a “disappointingly weak” start on that path.

  • Existing home sales declined by 5 percent compared with December, falling to their lowest level in 9 months, although remaining about 3 percent ahead of the year-ago pace, according to the National Association of Realtors (NAR).
  • New home sales also declined, although only slightly (by 0.2 percent), suffering less than analysts had feared from the severe winter weather that crippled some parts of the country. However, single-family starts and permits both declined, closing the door on expectations that sales will improve in the near term and leading some analysts to predict another imminent downturn.
  • “The housing recovery is faltering,” David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, told Housing Wire. “The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence. Before the current business cycle,” he noted, “any time housing starts were at their current level of about one million at annual rates, the economy was in a recession.”

Inventory Concerns

In a more hopeful sign, the NAR’s pending sales index jumped in January, reversing a December slide to reach a level last seen a year ago. While that improvement reflects the underlying demand for homes, analysts agree, shrinking inventory levels suggest cause for concern about the market’s ability to meet that demand. The supply of homes for sale fell to 4.7 months in January — the second consecutive year-over-year decline ― keeping inventories well below the 6 month-supply the NAR describes as a “balanced” market.

Skimpy inventories create two concerns: They limit the purchase options for buyers and they put upward pressure on prices, pushing homes beyond reach, especially for first-time buyers. “We are not seeing enough growth in inventory to support recovering demand,” Jonathan Smoke, chief economist for Realtor.com, said in his January National Housing Trend Report.

Although appreciation rates slowed considerably last year, home prices continue to rise. The closely-watched Case-Shiller 20-city index recorded a 4.5 percent year-over-year gain in January; CoreLogic pegged the annual increase at 5.7 percent.

Despite those price gains, mortgage rates, hovering around 4 percent, are creating highly favorable conditions for buyers. That they are not responding in large numbers is disturbing, Stan Humphries, chief economist for the Zillow Group, believes. “Anyone looking to see how far from truly ‘normal’ the market remains need look no further than the red-hot rental market, and its implications on the broader housing market going forward,” he told HousingWire. “Many current renters could likely realize significant monthly savings by buying a home now and taking advantage of terrific affordability driven by low mortgage rates and home prices that remain below peak in most areas." he noted.

Rising rents and stagnant incomes are blocking their way, Humphries said, keeping many would-be buyers “stuck in rental housing, writing ever-larger checks to their landlords instead of saving for a down payment. Real growth in wages and more rental supply will help ease [that] crunch,” he said. “But don’t expect either overnight.”