Good news this month: There was no need to wait for the release of the September labor market report before posting this economic update. The bad news, of course is, that’s because the employment figures, a key economic benchmark – weren’t published. The Department of Labor, which publishes the report, was just one of the government agencies closed by the Congressional impasse that has shuttered most federal offices, furloughed more than 800,000 government employees and threatens to shave 1.4 percent off the fourth quarter economic growth rate, according to some estimates.
A relatively short shut-down, lasting less than four weeks would do “significant damage,” Mark Zandi, chief economist for Moody’s Analytics, told a Congressional panel a few weeks ago. A shutdown lasting more than two months “would likely precipitate another recession,” he warned.
Those warnings did not encourage the compromise most had predicted – approval of a short-term “continuing resolution” that would have kept government functions funded while Congressional leaders continued to shout at each other across a seemingly unbridgeable partisan divide. Now, the budget impasse will be followed soon by a battle over the debt ceiling that will be harder to resolve and potentially more devastating if it is not.
Default “Catastrophic”
“If the government should ultimately become unable to pay all of its bills, the results could be catastrophic,” Treasury Secretary Jack Lew warned in a letter to Congress, highlighting the likely fall-out from what would be a first-ever default on U.S. obligations.
Against the chaotic back story unfolding in Washington, the month’s economic reports may be almost beside the point, because it is the political winds more than the economic ones that are driving the economy, at least for now.
The possibility that the Congressional budget stalemate might end, as it did, with the first government shut-down in more than 20 years, had already taken a toll on consumer confidence before the lights went out. The Conference Board’s consumer confidence index posted its second consecutive monthly decline in September, falling more than 2 points to 79.7 ─ the lowest reading in four months. The Thomson-Reuters/University of Michigan survey, which often runs counter to this one, followed the same downward trajectory, falling to 77.5 from 82.1 in August.
The measure of present conditions was unchanged in the Conference Board survey, but the gauge of expectations for the next 6 months sank to 84.1 from 89, with only 15.4 percent of respondents expecting their income to rise (compared with 17.5 percent in the August survey, and 16.9 percent predicting that jobs will become more plentiful, down from 17.5 percent the previous month.
Lagging Job Growth
Although the September employment report wasn’t a factor in the confidence surveys, preliminary indicators suggested that it probably wouldn’t have done much to improve the prevailing mood. ADP’s private payroll survey, which precedes the DOL report each month, indicated that employers added 166,000 workers in September, not much better than the 159,000 in the August report, which was revised downward.
Mark Zandi, chief economist for Moody’s Analytics, blamed “fiscal austerity” for the darkening consumer mood. Rising interest rates, he noted, “might also be doing some damage.”
Interest rates began rising several weeks ago when Federal Reserve Chairman Ben Bernanke indicated that strengthening economic indicators would allow the agency to begin “tapering” the $85 billion-per-month bond-buying program that has been keeping rates low and underpinning the housing market’s recovery.
But as prospects for a government shut-down, which had seemed remote, became more likely, and economic jitters spread throughout the financial markets, Fed officials backtracked, deciding at their September meeting to delay the tapering plans.
“Conditions in the job market today are still far from what all of us would like to see,” Bernanke said, explaining the delay. His statement had an immediate impact on the stock market, which rebounded from several days of consecutive losses, and on mortgage rates, which reversed their upward climb, falling by more than 7 basis points in less than a week and easing (but not completely eliminating) concerns that the housing market recovery might stall.
Conflicting Views
The housing sector, which has been generating consistently positive numbers, continues to do so, but with less consistency and less clarity. Assessments of market conditions, as a result, have become less uniform and in some cases, contradictory. For example:
- The number of consumers who think this is a good time to buy or sell a home declined slightly in Fannie Mae’s September housing market survey, the first blip in a trend line that has been rising steadily this year. Consumers were also less confident that prices would continue to rise. But more than half the respondents to a in a Bankrate.com survey said they were confident prices will continue to rise, with only 9 percent predicting a decline.
- A Lending Tree study found that “accessibility scores” have been increasing steadily since June, indicating that mortgage credit is becoming more accessible as lenders relax their underwriting standards. But a Zillow study reached the opposite conclusion, reporting that 3/10 Americans are still unlikely to qualify for a mortgage because lenders continue to insist on higher minimum credit scores in determining both eligibility for the best mortgage rates and the ability to qualify for a mortgage at all.
Home sales statistics for August and September were positive, overall. After sliding in July, new home sales rebounded in August, rising by nearly 8 percent for the month and by 12.6 percent year-over-year. Housing starts increased by less than 1 percent, but excluding multi-family starts, single-family starts, which had plunged in July, increased by 7 percent; single-family permits also increased by about that much, reaching their highest level since May, 2008.
“This is the kind of signal we’ve been looking for, with single-family starts and permits up or holding steady across every region in the nation,” David Crowe, chief economist of the National Association of Home Builders (NAHB), said in a statement.
Other industry analysts, less persuaded by the monthly numbers, questioned whether the momentum in the new home market could be sustained in competition with “a massive supply overhang” of existing homes.
Uncertain Forecast
Existing home sales held up well, rising nearly 2 percent in August to reach a 5.48 million annual sales pace that was the highest since 2007. But some analysts are cautioning that rising interest rates and rising home prices, which, most agree, pushed some hesitant buyers into the market, could begin to erode affordability, reducing the pool of buyers able to purchase homes.
The National Association of Realtors, which is genetically programmed to see glasses as half-full, sees “uncertain” sales ahead, largely because of affordability concerns.
Home prices, which have been on a tear for most of this year, cooled a bit in July, still rising but at a slower (1.8 percent) monthly pace, with 15 of the 20 cities tracked in the Case-Shiller home price index reported slowing appreciation rates for the month.
The year-over year 12.4 percent gain “may be the most eye-catching part of today’s Case-Shiller house price report,” Capital Economics analysts noted in a recent research report. “But the real story is a welcome slowdown in the underlying rate of house price gains in recent months.”
While some see the slowing appreciation rate as a “nail in the coffin” of the economic recovery, cementing the negative effects of lagging job creation and political turbulence, others, taking the opposite view, emphasize the positive impact on housing affordability that would otherwise be threatened by a continuing surge in prices.
Moody’s analysts are predicting that steady but more moderate price gains and favorable economic trends will buoy the housing market for the next two years, “ignit[ing] a virtuous cycle” in which homebuilding spurs economic growth which in turn stimulates home sales.
That forecast came before the Congressional impasse that has shuttered the government and is now threatening the first-ever default on the federal debt. The combined effects of those developments must now be factored into economic forecasts that, until recently, had viewed the shut-down as unlikely and a default as unfathomable. No one really knows what the impacts will be, but no one is using the term “virtuous” to describe them.
