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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Industry executives and analysts who have been holding their breath for the Federal Reserve to begin raising interest rates haven’t exhaled yet. The Fed opted in September to delay that long-anticipated move, as concerns about the international financial climate – weakness in the Chinese and European economies in particular – trumped concerns that keeping the Fed Funds rate at zero for too long risks igniting inflationary pressures.

Announcing the decision to stand pat after the Federal Open Market Committee’s (FOMC’s) September meeting, Fed Chairman Janet Yellen said “heightened uncertainties abroad” persuaded policy-makers to wait for new economic data that might “bolster its confidence” in the economy’s ability to absorb a rate hike.

But Yellen also moved quickly to counter speculation that the Fed would not act until next year, stating in a subsequent speech that “it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.”

That assertion seemed to assuage critics, who have been demanding a rate hike for most of this year, but it came before the Labor Department reported that employers added only 142,000 jobs in September, falling short of the most conservative predictions. The unemployment rate remained unchanged at 5.1 percent, while the August tally was revised downward to 136,000 from the lackluster 173,000 gain reported initially for that month.

Analysts generally agreed that the disappointing September employment report vindicated the Fed’s September decision to delay a rate move, but it hardly provided the assurance policy-makers seek that the labor market and the economy generally are on solid ground.

Looking for Reassurance

“It would be more reassuring if we could see a point where the economy is truly firing on all cylinders for a change,” Diane Sown, chief economist at Mesirow Financial, observed in a client note.

Other economic indicators were more confusing than reassuring. Although gauges of manufacturing activity plummeted in September, consumer spending was relatively robust. The GDP for the second quarter also surprised on the upside, at a healthy 3.9 percent growth rate.

Consumer confidence readings were contradictory. The University of Michigan’s index for September fell to 87.2 compared with 91.9 in August, as respondents expressed concern that the weakening Chinese and European economies will affect their own employment and income prospects. Consumers responding to the Conference Board survey, apparently, didn’t share those concerns. This index rose to 103 in September, two points higher than the August reading and considerably better than the 97.0 reading economists surveyed by the Wall Street Journal had predicted.

The Conference Board’s overall confidence measure for September was the second highest since the recession ended, and its present-situation component reached an eight-year high, despite continuing volatility in the financial markets and steady declines in equity values.

Sprinkling a bit of cold water on these results, Lynn Franco, the Conference Board’s director of economic indicators, noted that “while consumers view current economic conditions more favorably, they do not foresee growth accelerating in the months ahead.”

Mixed Indicators for Housing

Housing market indicators, like the consumer confidence readings, have been mixed. Existing home sales declined by nearly 5 percent month-over-month in August, but that was against a July sales pace that was the highest in more than eight years. The trajectory has been positive for most of this year, putting sales to date more than 6 percent higher. In another encouraging sign, the percentage of first time buyers has been increasing (32 percent in August compared with 28 percent in July). That’s still below the historical average of nearly 40 percent, but inching closer to it.

Skimpy inventories continue to limit the choices for prospective buyers, accounting for most of the September decline in existing home sales, industry executives say. But all things considered, “The U.S. housing market is still in good shape,” Jennifer Lee, an economist at BMO Capital Markets, said in a client memo.

Purchases of new homes seem to support that view. The annual sales rate in August reached 552,000 – nearly 22 percent higher than a year ago and the strongest performance in seven years.

Home starts, a key indicator of future sales activity, declined in August, but that was compared with a July total that was the highest since 2007. Year-over-year, starts were up by more than 11 percent and permits, another future indicator, increased by 3.5 percent, with gains in both the single-family and multi-family sectors. The decline in starts was “a mere blip on the radar,” Tom Wind, executive vice president at EverBank told CBS News. “The housing market’s underlying fundamentals remain on pace for continued recovery.”

Sweet Spot for Prices?

Home price appreciation rates, which have triggered concerns that some markets might be overheating, continue to moderate. The Case-Shiller index increased 4.7 percent year-over year, not much changed from the 4.5 percent rate reported in June.

Price gains seem to have found something of a sweet spot, pulling more underwater homeowners into positive equity positions without seriously impairing affordability for prospective buyers. On the first point (negative equity), CoreLogic reports that 759,000 properties moved from negative to positive equity in the second quarter; if prices rise 4.7 percent next year, as the company is predicting, another 800,000 properties would move into the positive equity column.

On the affordability issue, RealtyTrac’s Daren Blomquist reports, “Buying an average-priced home in the first quarter of [this year] was the most affordable it’s been in two wears, and nearly twice as affordable as it was in the second quarter of 2006, when affordability was its worst in the past [decade.]”

Digging a little more deeply into the statistics, Allan Weiss has found that the steady rise in median prices industry analysts have reported may mask serious weakness in some markets. His analysis shows that 24 percent of the homes in 10 of the largest housing markets lost value in the past year, compared with only 6 percent a year ago. In some cities (New York, Washington, DC and Chicago among them) more than a third of homes are losing more than 2 percent or more of their value annually, although median prices overall are rising.

“Home buyers and sellers should be careful not to rely on median home prices to guide buying and selling decisions in today’s environment in which trends are fragmenting and generalizations can be misleading,” Weiss cautions.

Svenja Gudell, Zillow’s chief economist, agrees that apparently contradictory trends in home prices, new and existing home sales and other indicators can be “confusing and even frustrating.” But she sees those disparities not as cause for concern, but as evidence of a “healing” market that is “finding its footing in a new environment ― an environment in which highly local factors…matter more in local markets than national trends.”