Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

That was the key question following the Department of Labor’s DOL’s) report that employers added only 194,000 jobs for the month, following August’s sub-par addition of 366,000 workers. The unemployment rate fell to 4.8 percent from 5.2 percent – a negative indicator, reflecting the difficulty employers are having filling available positions.

The labor pool had five million fewer workers in February of this year compared to the same month last year, the New York Times  reported, and 2.7 million workers have been unemployed for more than six months. “Yet the number of job openings is at a record high,”  a mismatch that analysts find both perplexing and disturbing.

Delta Disruption

Many  had hoped that with schools reopening and businesses revving up, pandemic-inhibited employment growth would resume. But the continued spread of the Delta variant and supply-chain bottlenecks produced a different result.

“This is quite a deflating report,” Nick Bunker, economic research director at Indeed, an employment service, told NBC News.  “The hope was that August was an anomaly but the fact is, the delta variant was still with us in September. One optimistic interpretation is that Covid-19 case counts are receding, so future months should be stronger. But the reality is that we are still in a pandemic," he added.

The Fed, which has been  maintaining a dovish policy stance (keeping interest rates low and its bond-purchasing activity high), has become increasingly concerned about inflationary pressures. In recent public statements, members of the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, have acknowledged that inflationary pressures they had viewed as transitory are proving to be more persistent than they would like.

”My own view would be that the ‘substantial-further-progress’ test for employment is all but met,” Powell said in a September 22 news conference, noting the post-meeting FOMC statement indicating that “tapering” the bond purchases could begin in November. Speaking before the release of the September labor report, Powell noted that “it wouldn’t take a knockout or super-strong employment report” to keep that tapering plan on course. While the employment report was far from “super strong,” it isn’t expected to alter Powell’s position or the tapering schedule.

Interest Rate Outlook

That doesn’t mean interest rates will necessarily begin to rise in tandem with the decline in bond purchases. The two policy levers are related but separate, analysts explain. In fact, Fed officials have indicated that they plan to exercise more restraint on the interest rate front, giving them flexibility to increase rates if necessary to curb inflation, while allowing them to avoid the risk of acting too quickly and quashing economic growth. Against that policy backdrop, Freddie  Mac economists are predicting that mortgage rates will remain below 3 percent this year and won’t go much above that in 2022.

With mortgage rates running well within the favorable range for home buyers, the housing market has sizzled, seemingly detached from, if not entirely oblivious to, the pandemic and the economic turbulence it has created.  Recent housing reports suggest that the slowing in home sales and price increases that housing analysts have been predicting for months may have finally begun.

Steady price gains – a product of anemic inventories and strong demand  – have sapped buyer confidence. Bidding wars have frustrated would-be buyers while affordability pressures have pushed many first-time buyers to the sidelines. Existing home sales in August fell slightly (1.2 percent) below the previous month and were 1.5 percent below the same month last year.  Redfin reports that new listings were six percent below the year-ago total, the first year-over-year decline in this category since February.

“Clearly the home sales are settling down, but above pre-pandemic conditions,” Lawrence Yun, chief economist for the National Association of Realtors (NAR), said in a statement. “The high home prices are squeezing away the first-time buyers,” he added.

Home Prices Still Rising

Although median home prices continue to rise, the appreciation rate is slowing, Yun noted. But the decline – from an annual rate of 18 percent in July to 14.5 percent in August, provides little relief from the affordability pressures with which first-time buyers are struggling. These buyers, who usually account for 40 percent of home sales, were responsible for less than 20 percent in August – the lowest ratio in almost two years. Pending sales – a  marker for future purchase – rebounded in August after two consecutive monthly declines, but this index is still 8 percent below the year-ago reading. Inventories, meanwhile, remain near historic lows. The September total of available homes for sale was  almost 24 percent below the year-ago level and 55 percent below the same month in 2019.  

August new homes sales were better – they were 2.5 percent above the prior month which also surpassed the June level. Although the improvement was notable, sales were still almost 24 percent below the year-ago level.

Buyer demand and the home builder confidence based on it remain strong, “but the solid improvement in August sales does not meant that builders are in the clear,” Matthew Speakman, a Zillow economist, said in a statement. “Building material supply chain issues and labor shortages are still very real challenges that buyers and builders alike are eager to see resolved,” he added.

August increases in both housing starts and new permits seemed to provide more good news for the new home market – but the increases were attributable almost entirely to the multi-family sector. Single-family starts were 2.8 percent below the July level and permits were only marginally (0.6 percent) higher than the revised July rate.

Construction Gap

Although the NAHB is predicting a continuing increase in new home construction, housing industry economists note that it will take a  lot more new homes than even the most optimistic forecasts predict to close the yawning gap between the supply of housing and the demand for it.

The U.S. Census calculated that 12.3 million new households were created between January 2012 and June 2021, while new construction – running at its slowest pace in more than 20 years – produced  only seven million new single-family homes.

“The pandemic has certainly exacerbated the U.S. housing shortage, but data shows household formations outpaced new construction long before Covid, Danielle Hale, chief economist for Realtor.com, told CNBC.com.  “Put simply, new construction supply hasn’t been meeting demand over the last five years,” she added. “No matter how you frame the scenario, it will take a more meaningful shift in the pipeline to meet demand in the foreseeable future.”