May 7, 2010 — A wild week in global markets overshadowed some good news about the American economy. The ensuing rush to safe-haven investments, including gold and US Treasuries, has provided considerable benefit for mortgage shoppers. Ten-year treasury yields dropped sharply this week, pulling mortgage rates back down.
After a long runup over the past couple of months, stock markets have been a little uneasy in the last few weeks due to growing concerns about the Greek debt market crisis. Worries that these debt-default troubles would spread to Spain and Portugal, and possibly beyond, have all been permeating under the surface — but with some benefit to US Treasury issues.
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Thursday seemed like it would be a “normal” day, relative to the recent pattern of weaker equity markets, although into the typical mix was thrown an UK election and discussions on Capitol Hill about financial market reform. Fear and concern have certainly been a component of the marketplace of late, but no one could have been prepared for a nearly-1,000-point drop in the Dow Jones Industrial Index, apparently triggered by one (or more) incorrect ‘program’ trades. That cascade created outright panic, at least for a time, and wariness remains the order of the day today.
HSH’s market-spanning Fixed-Rate Mortgage Indicator (FRMI) declined by four basis points (.04%) to close the weekly survey at 5.32%. The FRMI includes rates for conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation and so covers a wider audience than other surveys. The average 5/1 Hybrid ARM — presently the most popular alternative to the traditional fixed-rate mortgage came in at an average interest rate of 4.38%, down three points from last week’s 4.41%.
Conforming 30-year FRMs sported a daily average interest rate of 5.01% for Friday.
Daily FRMI rates are available on HSH.com.
Check out our weekly Statistical Release here (and archives here).
An accumulation of good news about the economy would normally have caused interest rates to flare higher, but not in this kind of climate.
Perhaps the best news is that, after three quarters of fairly solid economic improvement, job growth has finally emerged. April’s employment report found that some 290,000 new employees were added to payrolls, with the Census making up just 66,000 of them. Perhaps better still was the upward revision to March’s figure, now gauged at 230,000, and that the last four months are all now reported to have at least some improvement in hiring. While the April figure is barely enough to cover new entrants into the labor force, that the trend is strengthening is very encouraging about the sustainability of the recovery.
After a recession, an increase in hiring or the availability of jobs can cause disaffected workers to jump back into the labor pool. This in turn can cause an increase in the nation’s unemployment rate as it did in the latest report, where the headline figure bounced from 9.7% in March to 9.9% in April. This occurs due to a quirk of the “household survey” which produces the unemployment figure. Essentially, participants are asked two questions: “Are you working?” and if the answer is “No”, then “Are you looking for work?” If the respondent answers “no” to both, then that person are considered out of the workforce — and is excluded from the unemployment rolls. If the answer is “Yes, I’m looking,” then they are included in the unemployment calculation. As hiring prospects improve, these folks will come out of the shadows and tend to influence the unemployment rate upward until all the job seekers have found work.
Worker productivity has eased back from outsized levels, and this also may bode well for workers. The 3.6% increase in per-hour output for the first quarter of 2010 was a steep decline from the 6.3% gain at the end of 2009. If the decline in productivity is because workers simply can no longer meet production needs by ramping up output or expanding hours, then more workers will need to be hired to satisfy demand. Measured against the total costs of producing a given good, labor costs continue to decline, albeit at a slower pace. The 1.6% decline in per-unit labor costs should serve to enhance profits for business even as it helps keep inflation from forming.
While weekly unemployment claims remain stubbornly high, there were fewer announced layoffs in April. According to Challenger, Gray and Christmas, just 36,326 announced job cuts took place during the month. It was the smallest figure since 2006, well before the recession started, and government and nonprofits accounted for 40% of the reductions. At the same time, new claims for unemployment benefits came in at 444,000 for the week ending May 1, not much different than we’ve become accustomed to over the last several months. We’ll know the labor market has turned for sure when we are regularly closer to or below the 350,000 level (lower would be better, of course).
Some of those jobs seem likely to come from manufacturing, which continues to show surprising strength. Factory Orders for March kicked 1.3% higher than February, making March the eleventh month of the last twelve which has featured a gain. Given that backdrop, it’s little wonder that members of the Institute for Supply Management reported solid conditions. The ISM manufacturing survey for April rang in at 60.4, its highest reading since 2004. With production, new orders and the employment indicator in the report all moving higher, prospects are improving for the economy as a whole.
Should some jobs return, there is considerable upside for certain sectors of the production-based economy. Sales of new autos were an annualized 11.2 million in April, eased somewhat from March by the expiry of extraordinary sales incentives related to Toyota’s troubles. Aside from that, sales are stable at better than recession levels, but remain a far cry from the 16 million plus levels seen before the downturn. If more folks find jobs, it stands to reason that more cars will start to be sold, which should hopefully lead to more jobs.
That would also be the case for the building trades. Construction spending gained 0.2% in March, but that was solely related to spending on public projects such as road and bridge rebuilding, and probably mostly at the Federal level. Most states, counties and towns are hurting for money and don’t have the cash needed to undertake large projects at the moment beyond repairs. Spending on residential projects has been spotty over the last couple of months, but turned negative in March, sliding 1.1% despite a flare in new home sales. Spending for commercial buildings has more recently begun a downturn, and there is plenty of existing space available going wanting for tenants at the moment, let alone building new.
Service-related businesses are showing some signs of life, too, although not nearly as robust as manufacturing. The ISM’s survey of non-manufacturing businesses in April sported a reading of 55.4, exactly the same as March. The largest portion of the economy is expanding, but at a moderate pace, and there is still a net loss of jobs coming from this sector. The employment sub-index of this survey still hasn’t made it over its breakeven point despite nine months of GDP growth; many services are more discretionary and with income and wages still meager, it may be a while until this piece of the economy gets rolling again.
Personal Incomes did rise a bit in March, climbing by 0.3%. Wages rose by a more muted 0.2% and are still quite soft. However, spending outlays have ticked up somewhat in recent months; the 0.6% lift in March came on the heels of a 0.5% rise in outgo in February. However, since outgo outstripped income again this month, the additional spending came from savings, and the nation’s rate of thrift decelerated to 2.7%. After a long pullback during the recession, consumers appear to be cautiously spending again, at least for needed replacement items if nothing else.
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Sources: FRB, OTS, HSH Associates.
For the most part, consumers are spending without borrowing. Consumer borrowing expanded by a meager $2 billion in March, driven higher only by installment lending, largely for autos. Outstanding balances in revolving accounts — credit cards — continued their long decline, shedding another $3.2 billion during the month but are declining at a slower pace as households realign their balance sheets. As taking on new debt is an expression of confidence about one’s future present and prospects, it’s safe to say that we’ve not fully turned the corner in the economy just yet.
That can be seen clearly in surveys covering consumer moods. As noted last week, there has been little improvement in this regard despite more solid GDP readings. Although the weekly ABC News/Washington Post poll of Consumer Comfort did move two ticks higher during the week ending May 2, it remains mired near historic bottoms.
The latest Senior Loan Officer opinion survey regarding lending conditions for the second quarter of 2010 pointed to improving circumstances for some of those who need to borrow money. Overall, a slight loosening in credit terms and availability was noted, concentrated largely in the medium-to-large business sector. However, important to the fortunes of the housing market, just 1.9% of respondents reported tightening of standards for residential mortgages. Last year at this time, some 50% of banks polled were still tightening underwriting standards, itself a considerable improvement over the worst of the credit squeeze. Before credit easing can start to happen, tightening must cease, and we appear to have come to that crux point. Hopefully, it will come in time to help provide new support for the housing market, which has recently been set adrift on its own by the expiry of federal supports.
While we’re not in a position to evaluate out how this whole Greece-and-more mess will ultimately work out, there are a few considerations which will probably come to bear. The first is that any sort of austerity plans which need to be enacted by troubled governments will necessarily mean that those economies will grow more slowly than they otherwise would. To the extent that those plans affect trade, other economies will be affected to a greater or lesser degree, and the worldwide recovery would be diminished to some extent. Slower growth may mean a less-robust recovery for the US, at a time when it is struggling to catch fire.
The second consideration is that, at least for a time, the US will benefit from this global fiscal unrest… at least until the spotlight turns upon our own debt-fueled recovery. The initial beneficial effects may wear off when questions about how we will repay the trillions of dollars of debt we are issuing come to the forefront, should concerns about our ability to repay come into question. These crises can be useful or even benevolent things, for some, like potential homebuyers or refinancers looking for rock bottom interest rates.
That said, it’s also worth saying that these panic-fueled downdrafts in rates are untrustworthy things, subject to even faster turnarounds than the declines they enjoyed. This being the case, it’s an excellent idea to lock the rate for any mortgage you may be considering.
We didn’t expect a catastrophe-induced decline in rates this week. Rather, we thought the tenor of economic reports would be good (they were) and that rates would tick a little higher. Given that they went in the other direction, we cautiously expect a small increase next week as some clarity comes to the marketplace.
For a longer view, don’t forget to check out the latest Two-Month Forecast.
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