Are We There Yet?

Are we there yet? Children ask that question endlessly on a long car trip. Federal Reserve officials are asking it about their drive to curb inflation.

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Anyone looking for clarity or consistency in the March economic data will have to look hard and will likely be disappointed. If there is a pattern, it is disjointed – a tug-of-war between competing narratives, one suggesting a confident upward trajectory and the other cause to question it.


Presiding over the first Federal Open Market Committee (FOMC) meeting of his tenure as Federal Reserve Chairman, Jerome Powell announced a widely anticipated one-quarter percent increase in the Fed’s benchmark Federal Funds rate – the sixth the Fed’s policy-making committee has approved during this ongoing economic recovery. Powell also indicated that the Fed remains on track for at least three more rate hikes this year - -also in line with predictions.

But analysts did not know quite what to make of the apparent conflict between the FOMC statement that “the economic outlook has strengthened in recent months,” and Powell’s acknowledgement that the impact of tax cuts on which that forecast is based is “very uncertain.” Powell’s observation that wage increases have been “only modest” also seemed, if not at odds with the Fed’s upbeat forecast, then certainly less enthusiastic. Asked about concerns that the labor market may be overheating, Powell told reporters, “We will know the labor market is getting tight when we see a more meaningful upward move in wages."

Wage growth, elusive throughout this recovery, surfaced at least mildly in the March labor market report, which charted a 2.7 percent annual increase in hourly earnings, providing a positive counterpoint to the mediocre addition of only 103,000 jobs for the month. The increase, well below the torrid pace of January and February (which analysts agreed was unsustainable), was also short of the consensus forecast of 185,000, but strong enough to keep the unemployment rate unchanged at 4.1 percent.

Emphasizing the positives in the March report, Ryan Sweet, an economist at Moody’s Analytics, told Bloomberg News, “There’s no reason to be depressed” about the anemic job gains. The overall picture, he said, is still “pretty much steady as she goes.”

But outplacement firm Challenger, Gray and Christmas identified employment clouds that may bear watching with its report that employers were planning to cut 60,357 jobs in March – double the total for February. "The growth and job creation we've seen over the last few months may be coming to an end,” Challenger analysts said, predicting that “as wages grow and the labor market tightens, companies are going to switch to a no-risk strategy and potentially begin contracting.”


The University of Michigan consumer sentiment index, which had seemed on track to hit a new post-2004 high in mid-March, slipped in the final survey at month’s end, reflecting the increasing concern of higher-income households about the threat of a trade war, and their uncertainty about the impact of Trump administration economic policies. Still, the index remained near its recovery peak, bolstered by the increasing confidence of households in the lower third of the income spectrum.

Hinting at growing concern about the economic outlook, consumer spending, which had surged in in the fourth quarter of last year, tapered off in January and February. Although household income increased by 0.4 percent in both months, spending rose only 0.2 percent. Savings, meanwhile, totaled $487.4 billion in February, the highest level since August of last year.

Analysts attribute the spending constraint in part to tighter credit standards, reflecting lender concerns that consumers may be getting over-extended. The Federal Reserve reports that aggregate household debt balances, which have been rising steadily for the past year, now total $473 billion – above the pre-recession 2008 peak.

“There are warning signs out there,” said Kevin Morrison, senior analyst at the Aite Group, told CNBC.


Mortgage rates and home prices continue to rise, delivering a one-two punch to the housing market that is landing most heavily on first-time buyers, who accounted for 29 percent of home sales in February, down from a below-historical trend 31 percent a year ago. Housing demand overall has remained high, buoyed by a strong economy and an improving labor market, but undercut by inventory levels, which increased slightly in February, compared with January, but remained more than 8 percent below the year-ago total.

"The expanding economy and healthy job market are generating sizeable homebuyer demand” Lawrence Yun, chief economist for the National Association of Realtors (NAR), said. “But the miniscule number of listings on the market and its adverse effect on affordability are squeezing buyers and suppressing overall activity."

Existing home sales managed a small, 3 percent increase in February, reversing two consecutive monthly dips, to land a scant 1 percent above the February 2017 total. Pending sales, measured by an NAR index, also rebounded in February, but the 3.1 percent increase still fell below the year-ago reading.

New home sales, which tanked in January, fell again in February, but only by 0.6 percent. The annualized 622,000 pace for the month was slightly above the year-ago rate. Although homebuilder confidence has been rising, their optimism was not reflected in home starts and permit levels, both of which declined in February.

“After a third bad month in a row, the haltingly progressive, two-steps-forward, one-step-back pattern the new home sales market has been in for much of the past year is in danger of reversing itself,” Aaron Terrazas, senior economist for Zillow, told Housing Wire. “There’s no doubt that builders are keenly aware of just how much the housing market overall is starving for new housing supply, and of the huge role they play in helping to feed demand…. Unfortunately, building conditions right now just aren’t cooperating,” Terrazas said. “Buildable, desirable land is scarce and expensive. Competition for skilled labor is high. And materials costs, in particular, keep rising – made worse by the shifting winds of international trade politics.”

There was some hope that the labor component might be improving when construction employment increased by 85,000 in February. But construction payrolls declined by 15,000 in March, reversing a large chunk of that gain
Although builders themselves continue to predict that new home starts and sales will improve this year, indicators so far this year have not been encouraging. “The fall in housing starts in February is a movement in the wrong direction,” the NAR’s Yun noted. “And even if new home construction starts picking up at a faster pace this year, as expected,” he told Housing Wire, “existing sales will fail to break out if these record low supply levels do not recover enough to meet demand."