The recession concerns that have been humming quietly in the background grew louder this month as the hiring pace slowed and some key economic indicators slid. Employers added 136,000 jobs in September and the unemployment rate (3.5 percent) hit a 50-year low.
Although the Department of Labor report was positive overall, analysts differed on whether it reflected a glass half-empty or half-full. Reflecting the latter (half-full) view, the Wall Street Journal reported that employment grew “at a steady pace [continuing] to provide opportunities for Americans in search of work…” The Journal report also emphasized that though average hourly earnings increased more slowly than in recent months, the year-over-year gain (2.9 percent) was still above the inflation rate.
Taking a less upbeat view of the data, the Washington Post described the September job gains as “modest”—significantly below the average monthly gains recorded last year and “likely to be interpreted as further evidence that the country is headed for a slowdown.”
Signs of Weakness
That evidence has come from several indicators. An Institute for Supply Management gauge of manufacturing activity has fallen into negative territory for two consecutive months. The services sector, measured by a separate ISM index, is still growing, but at the slowest pace in three years. Economic growth overall, measured by the GDP, remains positive, but the second quarter’s 2 percent gain was well below the first quarter’s 3.1 percent annual pace.
Consumer spending also slowed in August compared with the previous month, but the 0.4 percent increase still beat the consensus forecast and remains strong enough, analysts believe, at least thus far, to largely offset the negative impact of the now 15-month-old trade war with China.
Concern about the trade war and the increasing risk of a global economic downturn led the Federal Reserve to slash interest rates for the second time this year, reducing the benchmark overnight lending rate by 25 basis points, to a range of 1.75 percent to 2 percent.
Another Rate Cut
In a press conference following that announcement by the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, Fed Chairman Jerome Powell indicated that while future rate cuts are possible, they are not baked into this decision. “We took this step to keep the economy strong,” he told reporters.
But he also noted that the labor market remains strong, inflation is nearing the Fed’s target, and the economic challenges the Fed sees can be managed “with moderate adjustments to the federal funds rate. We ae going to be highly data-dependent,” he added. “We are not on a pre-set course. We are going to be making decisions meeting by meeting.” If the economy weakens, “a more extensive series of rate cuts could be appropriate,” Powell acknowledged. “But we don’t see that. We don’t expect that.”
The quarter-point rate reduction disappointed some analysts, who had been predicting a steeper cut, and infuriated President Trump, who has been pressing the Fed to lower rates more aggressively to offset the impact of the trade war with China. “No guts, no sense, no vision” Trump said of the Fed and Powell in a series of angry tweets following the FOMC decision. Post-meeting comments also revealed a rare split on the committee, with two members opposing any reduction and one favoring a steeper reduction.
Housing industry analysts don’t expect the Fed’s move to have much impact, if any, on mortgage rates. The expectation of a rate cut was already reflected in long-term rates, Ruben Gonzalez, chief economist of Keller Williams, told DS News. “Unless we see an increase in uncertainty around Fed policy decisions,” he added, “we don’t expect to see a lot of movement in mortgage rates as a result of Fed policy announcements.”
Spurred by lower interest rates, existing home sales increased for the second consecutive month in August, notching their strongest pace in more than a year. Sales reached an annual rate of 4.9 million in unit in August, nearly 3 percent higher than the same month a year ago. New home sales were even stronger. The annualized rate of 666,000 units was 18 percent higher than the same month a year ago.
Pending sales, an indicator of future activity, also increased, beating the year-ago annual pace by 2.5 percent. “Just perhaps we may have turned a corner for good in terms of home sales,” Lawrence Yun, the NAR’s chief economist, told the Journal “Having the mortgage rate low for several consecutive months is enticing buyers back into the market,” he added.
New home sales also benefited mightily from lower mortgage rates. The annualized rate of 713,000 sales in August was more than 7 percent above the year-ago pace and close to a 12-year high.
“Finally, some clearly good news in home building, with August building permits and housing starts topping the numbers in July by 12.3% and 7.7% respectively,” Robert Frick, chief economist of Navy Federal Credit Union, told Housing Wire. “These are the best numbers in more than a decade and show a great jobs situation combined with good raises, high consumer optimism and low mortgage rates for the foreseeable future have spurred the home building industry.”
But the inventory of available homes continues to shrink, falling to a 4.1 month supply of existing homes, down from 4.2 months in July. New home inventories are also shrinking. The National Association of Home Builders reports that inventories in the nation’s largest 25 markets declined by 3.7 percent in July, falling into a negative range for the first time this year.
“Sales are up, but inventory numbers remain low and are…pushing up home prices,” said Lawrence Yun chief economist of the National Association of Realtors, who has been urging home builders to ramp up new construction in the face of increasing demand.
Builders are responding to the increased demand. Single-family starts increased by 4.4 percent in August to 919,000 units – the best performance for this sector since January. Single-family and multi-family starts combined were 6.6 percent above the year-ago level. Single-family permits, an indicator of future starts, increased by 4.5 percent to a seasonally adjusted annual rate of 868,000 units.
But most of the new home sales and most of the new construction have been at the upper end of the price range, with relatively little in the starter-home category, where, analysts stay, the need is greatest. With home prices still rising nationally (albeit at a slower pace than in the recent past), affordability is a major concern, keeping many prospective first-time buyers in rental units and on the home ownership sidelines.
“The area of the market that most needs the homes is still not getting it and is why renting/multi family will remain strong,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, told the Journal.
ATTOM Data Solutions has calculated that average wage earners can’t afford a median-priced home in 74 percent of the nation’s housing markets, this despite a strong labor market, rising wages and low mortgage rates. “Buying a home continues to be a rough road to navigate for the average wage earner in the United States.” Todd Teta, chief product officer at ATTOM, said in a press statement. “Prices are going up substantially faster than earnings in 2019 without any immediate end in sight,[and that] continues to make home ownership difficult or impossible for a majority of single-income households and even for many families with two incomes.”