December 6, 2013 — Indications are starting to accumulate that not only was the economy not seriously disrupted by the October government shutdown, but that it wallowed though that mire comfortably and perhaps has begun to accelerate.
Although we are by no means rocketing ahead, the more solid nature of the latest set of data does, to a degree, put a “taper” of QE purchases by the Federal Reserve back on the December table. That’s not to say that there’s a huge chance of this occurring at the moment, but the chance is no longer zero. The Fed meets next in about ten days’ time, when a decision to make a change (or not) will come. Taper or no, the firmer economic news means firmer mortgage rates are in the market.
HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages increased by another eight basis points (0.08%) to 4.49%. The FRMI’s 15-year companion also saw a rise of eight basis points (0.08%) from the prior week’s value, increasing to 3.59%. The popular FHA-backed 30-year FRM leapt by a larger amount, climbing by 12 basis points to 4.17% for the week. Meanwhile, the overall 5/1 Hybrid ARM moved by the least of the bunch, adding just four hundredths of a percentage point (0.04%) to 3.07%.
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The Fed’s own regional survey of economic conditions, called the “Beige Book” for the color of the report’s binder, again reported a “modest to moderate” pace of growth, the fifth consecutive use of that language to describe the economy. Only one of the eight reports in 2013 failed to include “modest” in its characterization, so the pattern has been reliably firm for much of the year, and the economy has expanded more quickly over that time.
The latest look at Gross Domestic Product output confirms this. The second estimate of third quarter GDP was ratcheted up from 2.8 percent to a 3.6 percent rate, which is now the strongest quarter since the first one of 2012. Much of the upgrade from the initial estimate made last month was in the form of inventory accumulation, where goods are being stockpiled in anticipation of improving final demand. However, this may “borrow” some growth from the future, and it may be that that fourth quarter will fail to keep this pace. That said, while faster growth is of course welcome, there is nothing wrong with a pace somewhere around the 3 percent mark, arguably a more sustainable level.
The labor market is also starting to show more reliable gains. In November, 203,000 new hires took place, a figure on par with October and the third time in the last four months that hiring has reached the 200K mark. Perhaps more important is that the unemployment rate declined by three tenths of a percentage point to a flat seven percent, and not from a decline in the labor force. Instead, the decline this time came despite an increase in the number of people looking for work. That rise in job seekers may suggest that some formerly disenfranchised folks are again joining the fray; whether that’s due to a change in the likelihood of actually finding work or simply folks finishing re-training and looking for new careers remains to be seen.
Sales of new hopes jumped by an eye-popping 25.4 percent in October. While a great headline figure, the reality is that the 444,000 annualized rate of sales during the month was only on par with levels seen earlier this year, and that sales revived from very low levels over the summer when interest rates spiked, which had curtailed demand; mortgage rates since settled in October. Even with the increase, sales are still well below pre-recession levels, so there is plenty of room to grow here, provided conditions remain favorable. Builders will have more to do, too, as the present level of available inventory was depleted during the month, and now stands a 4.9 months of supply. As such, we should expect more homebuilding to help push the economy forward in 2014.
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Consumers may be becoming more comfortable with their situations, too. One of the hallmarks of the expansion has been the regular paring of outstanding debt, especially the revolving debt found on credit card balances and the like. Installment debt for things like cars and education financing have been pretty firm for a while now, but consumers actually added $4.3 billion to revolving accounts in October, the largest such increase since May. Taking on debt — at its core, making a commitment against future income streams — requires a certain amount of confidence in the future, and growing confidence would certainly tend to help the economy. Of course, it may just be that the record-setting stock market, and perhaps rising home prices, are promoting some of the so-called “wealth effect” which helps people to feel more comfortable in their spending, since beneficial forces beyond their control are generating asset strength, if not outright cash.
Buying a new car is one such expression of confidence, and sales of new cars and trucks powered to a 16.4 million (annualized) rate of sale in November, a considerable jump from October 15.2 pace. According to AutoData, November’s monthly rate was the highest such figure since 2007, and car manufacturers continue to find support for their wares after a disastrous period at the onset of the last recession.
With demand for these and other goods picking up some steam, it’s little wonder that the Institute for Supply Management report covering factory activity bounced higher in November. Forecasters were actually expecting a decline in the index value from October’s 56.4 mark, so the increase to an even better 57.3 for the month was a bit of a surprise to the upside. Production, orders and even employment sub-indexes notched gains; this points to a November rebound of sorts, since the Census Bureau noted a 0.9 percent decline in factory orders for October.
That was less the case over on the service side of the economy, which may have experienced a little hangover from the Federal shutdown in October. The ISM’s non-manufacturing gauge slipped by 0.5 points to land at a still-fair 53.9 for November, where a slight cooling of orders was accompanied by a fallback in employment, backing the indicator down somewhat. Taken together, the two ISM surveys point to an economy that is certainly holding its own and then some.
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It may also be the case that the economies of our trading partners are gaining some slight traction, too. The nation’s imbalance of trade declined in October when compared with September, but that’s not because we imported fewer goods, but rather that we exported more. The $40.6 billion differential was narrowed by a $1B gain in imports and a $3.4B rise in goods and services headed elsewhere. The increase in outgo does suggest that perhaps exports will add some to growth in the fourth quarter.
That spending on new construction projects rose in October isn’t especially newsworthy, as homebuilding has been occurring on a regular basis for some time. However, what is worth noting is that the 0.8 percent gain in October didn’t come from residential construction (which declined by 0.6 percent) nor commercial outlays (-0.5 percent) but from a 3.9 percent rise in public works spending, which has now contributed to the total for five of the last six months. State budgets have been recovering after the devastating downturn, and there are plenty of neglected roads, buildings and bridges that need attention.
Personal Incomes declined by the barest possible amount in October, slipping by 0.1 percent. The figure was considerably lower than was expected, and gains in wages cooled to just a 0.1 percent rise for the month, the smallest such increase since a negative July reading. Despite not much coming in, personal consumption expenditures rose, climbing by 0.3 percent for the month, spread amongst both durable and non-durable goods. With more outgo than income, the nation’s rate of saving slipped back to 4.8 percent after spending the two prior months over the 5 percent mark. Annualized income gains have tread backward somewhat since mid-summer, as has consumption spending, but the October curtailment might have been influenced by uncertainty surrounding the shutdown.
That interruption in the normal course of government may not have done a lot of economic damage, but it definitely crushed consumer spirits. Fortunately, we are a resilient bunch, and moods are again on the rise as that fiasco fades behind us. The monthly University of Michigan survey of Consumer Sentiment preliminary report for December sported a gaudy 7.4-point rise, with the indicator landing at 82.5 for the beginning of the month. If it holds, it would be the indicator’s highest reading since August, before that whole fiscal mess began to dominate the headlines, and both current and expected conditions were assessed to have improved considerably.
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|Current Adjustable Rate Mortgage (ARM) Indexes
That’s also seen in the weekly Bloomberg Consumer Comfort Index. The CCI had been moving higher since a recent nadir for the week ending November 3, with the present reading of minus 31.1 the best showing since the first week of October, just before the shutdown kicked in. Moods are of course helped to rise by what appears to be an improving job market, even if weekly unemployment claims are again being distorted by seasonal adjustments. The 298,000 new applications for benefits filed in the week ending November 30 of course include the Thanksgiving holiday, and so may exaggerate the recent downward trend somewhat. Regardless, the hiring above (and the trend in place prior to the latest week) do point to an improving labor market.
Which brings us back around. While the above represents a lot of data to digest and evaluate, it collectively points to a solid and perhaps strengthening economy. It’s true that we’ve had our share of fits and starts in this recovery and expansion, what with strong quarters of growth met with weaker ones, and the economy has certainly seemed very unsteady at times. That said, the grind forward away from the recession could be, finally, finding some reliable traction, and even if there is no pronounced acceleration, the importance of the confidence in both consumers and businesses that reliable and fair growth engenders cannot be overstated.
In the end, it’s about trust. If folks can again begin to trust their economic situations and outlooks, can again start to trust that the economy won’t necessarily take away hard-won gains of jobs, performing investments, home equity and more, they will have the confidence to more fully engage the economy, helping to grow it. Without this confidence, we’ll no doubt slump back again.
That goes for fiscal and monetary policy, too. The Fed spooked the market earlier this year, which has since kept a wary eye. Since then, the Fed has move cautiously, reliably and taken great pains to let everyone know its intentions. Taper or no taper, the Fed needs to present a consistent, reliable, believable message if it wants to foster confidence in the stock and bond markets. That confidence — the belief that the Fed is in control and knows what it is doing — serves to keep adverse and damaging reactions at a minimum (one-plus percent spike in mortgage rates, anyone?)
We’ll have much to consider for our next Two Month Forecast, out at the end of next week. Until then, the firmness of the data has spilled over into mortgage rates, which have now nudged upward to about two-month highs, approximating those seen during the first full week after the Fed decided not to tinker with the QE program in September.
Next week features a much lighter calendar of data to consume, and rates will probably be content to hold around these levels, perhaps ticking a little higher.
For a longer-range outlook for rates and the economy, one which will take you up until mid December, have a look at our new Two-Month Forecast.
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