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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After triggering a bad case of economic jitters in May, the employment report brought a measure of relief in June as employers added 287,000 workers to their payrolls. That stronger—than-expected performance, following a dismal increase of only 38,000 workers in May, tempered fears that the economy might be losing ground, but left uncertain the timing of the interest rate increase the Federal Reserve has been eyeing, but deferring, for most of this year.

The June Department of Labor report was almost entirely positive: The unemployment rate inched up to 4.9 percent from 4.7 percent, as more job-seekers entered the market; new claims for unemployment benefits remained near their post-recession bottom; and employers reported nearly 6 million available but unfilled job openings, suggesting that wages, which increased for the fourth consecutive month, may continue to rise in a tightening job market.

“No Smoking Gun”

Analysts shaken by the May employment plunge were encouraged by the robust June rebound. “When I look through all the data, there is no smoking gun that the U.S. economy is pulling into a recession now,” Andrew Chamberlain, chief economist at Glassdoor Economic Research, told the New York Times.

The strong labor market profile no doubt reassured Fed officials, too, but it is unlikely to persuade them that the risk balance has shifted away from economic uncertainty (arguing against a rate hike) and toward inflationary fears, arguing in favor of one.

With Britain’s Brexit vote (to leave the European Union) and economic growth slowing abroad, “the economic fog is thick outside [Fed Chair] Janet Yellen’s window, and in those conditions central bankers walk instead of run,” a Bloomberg News report noted. According to that analysis, investors now see no chance the Fed will increase its benchmark rate when the Federal Open Market Committee meets next (July 26-27) and only a 12 percent chance of an increase before the end of this year.

Brexit a Boon for Housing

After plunging on the unexpected outcome of the Brexit referendum, U.S. stock markets have recovered, flirting again with new highs. The primary impact here, at least thus far, seems to have been to push interest rates to record lows, stimulating a surge in refinancing activity and a more modest increase in home purchases.

In the week following the vote, the Mortgage Bankers Association’s Refinance Index jumped by 21 percent, while the purchase index rose by 4 percent.

“Lower rates produce lower monthly payments and greater buying power—those who are well qualified can afford a home that’s 8 percent more expensive than at the beginning of the year,” Jonathan Smoke, chief economist for realtor.com noted in a recent market commentary. “That’s more than enough to offset the rise in prices during that time.”

The rate decline is proving to be something of a double-edged sword, however – boosting housing affordability, to be sure, but also eroding lenders’ profit margins, making many of them more risk-averse and more inclined to tighten credit standards.

“Many homeowners who bought 10 or more years ago wouldn't qualify for a similar mortgage today,” Smoke observed in his commentary.

Lawrence Yun, chief economist for the National Association of Realtors, pointed out that while Brexit’s impacts have been largely positive for the housing market thus far, “any prolonged market angst and further economic uncertainty overseas could negatively impact our economy and end up tempering the overall appetite for home buying.”

No Negatives Yet

Those negatives haven’t surfaced yet, however. Despite his concerns about tightening credit standards, Smoke is predicting “the best summer for residential real estate in a decade.” Recent sales figures tend to support that view.

Existing home sales hit an annual pace of 5.53 million in May, 2 percent higher than April and 4.5 percent above the year-ago level, representing the best showing in nearly nine years. New home sales were less robust – 6 percent below a downwardly revised April total – the fourth consecutive downward revision in this report, which is almost always revised.

Although single-family starts increased by 0.3 percent in May compared to April (and were up more than 10 percent year-over-year), permits, an indicator of future activity, fell 2 percent below the April pace.

The NARs pending sales index, the future indicator for the resale market, also declined in May, posting its first year-over-year decline in two years.

Inventory Shortage Persists

“Total housing inventory at the end of each month has remarkably decreased year-over-year now for an entire year,” Yun said in a press statement. “There are simply not enough homes coming onto the market to catch up with demand and to keep prices more in line with inflation and wage growth.”

Echoing that concern, Nela Richardson, chief economist for Redfin, noted that the falling interest rates and rising employment are proving to be “no match for the drought in available homes for sale, which [is stifling] buyer demand.”

Rising home prices are adding to those concerns. Although appreciation rates have been moderating all year, prices continue to rise. The 5 percent year-over-year gain reflected in the Case-Shiller/Standard& Poor’s national index represented the sixth consecutive month in which prices have increased by 5 percent or more – outpacing income gains and undercutting affordability for many buyers.

Affordability Headwinds

“Housing affordability continues to be a headwind for homebuyers in many of the country’s largest markets,” Ralph McLaughlin, chief economist for Trulia, told Housing Wire.

Those headwinds are particularly strong for first-time buyers, as the prices of particularly scarce entry-level homes are increasing at double the rate for homes at the top of the market, where inventories are less strained.

“Conditions nationwide and in most large metros are much more forgiving for current homeowners looking to move into a bigger, more expensive home than for younger, entry-level buyers just looking to get a toe-hold in the market,” according to Svenja Gudell, chief economist for Trulia, who sees that “growing divide” as another potential drag on the housing market.

“Given [the Brexit vote] and the ensuing market reaction, it doesn’t look as if interest rates are going to rise meaningfully any time soon, which means it will remain cheap to finance a home for those that can afford one,” she told Housing Wire. “But for many buyers, finding an affordable home to buy in the first place is likely to remain pretty tough.”