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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Will they or won’t they? No one, possibly including Fed officials themselves, knows for certain whether the Fed will increase interest rates in September. The consensus had been leaning very much in that direction until China’s weakening economy, and the ham-handed governmental efforts to bolster it, roiled international financial markets, sending stock markets on a stomach-churning roller-coaster ride, with no clear indication of when and where — up, down, down a lot, somewhere in between — the ride will end.

That is just one of the questions complicating the Fed’s rate-move decision. Labor market conditions, one of the factors Fed Chairman Janet Yellen has said will weigh heavily in the rate calculus, aren’t providing the clear direction Fed officials might like. Employers added 173,000 jobs in August, below the 220,000 gain economists were expecting and the smallest increase in five months of consistently positive employment reports.

Further muddying the picture: August employment reports are notoriously off-the-mark and almost always adjusted upward. Underscoring that point, adjustments added 44,000 jobs to the June and July totals. Additionally, the unemployment rate fell to 5.1 percent from 5.3 percent, reaching its lowest level in more than 7 years and wages, a continuing source of concern for the Fed, posted the largest increase since January. The relatively robust (3.7 percent) growth rate in the second quarter also suggests that the economy may have more momentum than the headline figure in the August employment report reflects.

Analysts see in this mixed bag of economic data evidence to support a September rate hike and to argue against it. Some economists still think the Fed will act in September; others say the rate hike won’t come until the end of the year and a few think it will be well into next year before the Fed can assume comfortably that a rate hike won’t further destabilize the markets.

Federal funds futures, which had rated the odds of a September increase above 50 percent in mid-August, were predicting only a 30 percent chance of a hike at the end of August, after the stock markets had begun to gyrate, but before the employment figures were released.

Alan Ruskin, global head of currency strategy at Deutsche Bank in New York, probably came closest to reflecting the consensus view, telling Reuters, "The payrolls data is certainly good enough to allow for a Fed rate hike in September. The big question is still whether financial market volatility will scupper the plans."

Muted Impact on Housing

While analysts differ on the likely timing, most seem to agree that the rate hike, when it comes, won’t have an outsized impact on the housing market. Because the Fed’s moves are likely to be small and gradual, they will have a “moderating but not devastating” impact on housing demand, Mark Fleming, chief economist at First American Title Insurance Company, predicts.

Selma Hepp, chief economist at Trulia, agrees. Mortgage rates, now below 4 percent, “would have to exceed 11 percent before renting becomes cheaper than buying a home nationally,” she told Housing Wire in a recent interview. Zillow has calculated that housing costs nationally are averaging 30.2 percent of income for renters compared with 15.1 percent for home buyers.

The housing market’s overall strength (at least, in relative terms) also will help insulate it from the effects of modestly rising rates, many analysts believe. Plummeting foreclosure rates, the continuing decline in cash purchases and strengthening sales of existing and new homes all indicate that housing “is successfully transitioning from an investor-driven recovery to one that is [attracting] traditional buyers, as a good foundation for sustainable growth going forward,” Daren Blomquist, vice president of RealtyTrac, said in a recent report.

Len Kiefer, deputy chief economist for Freddie Mac, says Freddie’s Multi-Indicator Market Index – combining national and local market information – indicates that housing markets “are the strongest they’ve been in years,” with all key indicators “heading in the right direction.”

Solid Housing Reports

The July housing reports generally support these optimistic assessments. Recovering from their June swoon, new home sales rebounded, rising 5.4 per cent; sales for the first half of the year are running more than 20 percent above the year-ago pace. Housing starts inched up by only 0.2 percent over the June rate, but the totals were depressed by a steep drop in the volatile multi-family sector. Single-family construction increased by almost 13 percent to the highest level since December of 2007.

Permits, a key indicator of future activity, went in the opposite direction. After an impressive combined 28.8 percent surge between April and June, permits plummeted in July, falling 16.3 percent compared with June for the largest monthly decline in seven years. But again, the multi-family sector created most of the drag. Single-family permits fell by only 1.9 percent compared with June and were running more than 6 percent ahead of the previous year. Builder confidence, measured by a National Association of Home Builders (NAHB) index, reached its highest level in a decade.

Existing home sales posted their third consecutive month-over-month gain, rising 2 percent over the June total, which was revised downward. Although pending sales increased by a scant 0.5 percent compared with June, that still put this index 7.4 percent higher year-over year, producing the eleventh consecutive month of year-over-year increases.

The static pending sales report suggests that the robust sales gains recorded in the past several months may not continue into the fall, “but we see no reason to expect an extended decline,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, told clients in a research note. Given likely interest rate trends and signs that credit conditions are easing, he said, “the existing homes market looks to us to be in pretty good shape.”

Slowing appreciation rates are contributing to this generally positive housing picture, moderating the frenzied edge in some markets that had shown signs of becoming overheated. Case-Shiller’s widely-watched index showed prices rising at a 4.5 percent annual pace in June and that looks healthy to Svenja Gudell, chief economist for Zillow. Even slightly negative appreciation rates would have “mostly positive impacts on housing,” she told Forbes, reducing affordability pressures and “leading eventually to more housing inventory and more stable growth.”

A close look at appreciation trends produces a less comforting reading for Allan Weiss, who monitors trends through a repeat sales index of his own. And his index shows that in some major markets (New York and Washington among them) nearly half of the homes are losing value, indicating to him that higher prices are taking a large bite out of buyer demand.

"If you have a market where every house is rising and you hear the news that the housing market is up, you're correct in applying it to your own home," Weiss told reporters. "However, if you are in a market where 60 percent of houses are rising, you have a 40 percent chance of misunderstanding what's going on with your house."