June 4, 2010 — As the economy slowly drifts away from the recession, we continue to look for the kind of employment gains that will produce a self-sustaining and durable recovery. The latest employment reports signal that while we’re on the right path, it’s still looking somewhat rocky. Given the number of job losses in the downturn — part of what the Fed considers “resource slack” — we may not see mortgage rate increases generated solely from labor market improvements any time soon.
That doesn’t mean that rates won’t move without them, but simply that rates are more likely to stay low the longer that too many people remain out of work. A shrinking labor pool means that wages rise more easily, and that can influence prices, contributing to inflation pressures. Inflation pressures (even merely concerns about inflation pressures) can push interest rates up. A lack of them has an opposite effect, although to a lesser degree.
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HSH’s market-spanning Fixed-Rate Mortgage Indicator (FRMI) rose by three basis points (.03%) to finish HSH’s weekly survey at 5.21%. Calculated by including rates for conforming, jumbo, and the GSE’s “high-limit” conforming products, the FRMI includes covers a broad swath or the mortgage-borrowing public. The FRMI’s companion — the overall average for a hybrid 5/1 ARM — came in at an average interest rate of 4.28%.
Production-related businesses — factories and such — have generally begun hiring again. Even though these make up a much smaller portion of the economy and have less overall effect on economic growth than they once did, such businesses still wield significant clout. It’s thus encouraging to find that the US manufacturing base grew again in May, according to the Institute for Supply Management. Their activity indicator eased slightly during the month, slipping from April’s 60.4 reading to 59.7 in May, a number which still denotes considerable strength. As well, new orders remained a a high level and the employment-focused portion of the report continues to firm. The ISM moved into positive territory (a reading of 50+) last August and has been in a good pattern ever since.
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Factory Orders for April brought another hopeful signal for this positive trend. New orders for manufactured goods rose 1.2% last month, somewhat less than expected, but helps to demonstrate that manufacturing is on firm ground. The accompanying news — that durable-goods inventories rose again — signals that demand is expected to rise in the near future.
Some additional production gains should result from the nice uptick in Construction Spending seen in April. An overall 2.7% rise was goosed by a 4.4% lift in spending on residential projects, a surprising increase in commercial projects, and even a 2.4% kicker from the public sector. It would seem that some of the “shovel-ready” stimulus money may finally be wending its way through channels; cities, counties and states remain strapped for cash, but even that situation has probably improved modestly relative to the depths of the recession. Some credit, as it were, may be due to the recent expiration of the homebuyer tax credit, since all the signed home-sale contracts signed before then have to be closed by the end of this month.
While the pickup in the manufacturing portion of the economy is encouraging, the services sector counts for far more activity — and, happily, it is also improving. The ISM Nonmanufacturing Index, the Institute’s service-business report, has been at a moderate if flat level for the last few months. In May, the index held steady at 55.4; this was unchanged from April and marked the fifth straight month of growth. The employment component of the index rose for the first time in nearly two and a half years, topping the 50 mark which signals expansion.
While rising output per worker is a usually healthy signal for the economy, it can have a perverse effect in that it reduces the need for new hiring. That, in turn, can keep the economy from building a much-needed head of steam, but those who have jobs can be paid more without any undue effect on inflation (or ultimately, interest rates). It’s natural to see output per hour worked rise sharply at the end of a recession, and we’ve certainly had that, as monster-sized gains in the last three quarters of 2009 gave way to more typical figures in the first quarter of 2010. Once a given worker reaches capacity (can’t produce any more output), another worker needs to be hired to meet production goals. That’s good for getting folks off unemployment assistance, but also means that the cost of labor per unit produced has to rise, which contributes to inflation concerns.
That’s not an issue yet, according to the final first-quarter Productivity figures, as per-unit labor costs were revised to a 1.3% drop from 1.6%. In addition, worker output was revised downward to 2.8% from 3.6%, according to the Bureau of Labor Statistics. Taken together, these signs point to still-strong but slowing productivity, suggesting that businesses may soon need to start some hiring activity.
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Sources: FRB, OTS, HSH Associates.
But that didn’t happen in May, according to Friday’s release of the much-anticipated Employment Situation report. Much expectation preceded its release; based on the outsized gains we saw in March and April, we saw extremely optimistic estimates of as many as 600,000-plus new hires for May. After all that, the government reported that 431,000 new jobs were created; while that’s a sizable figure, over 95% of them were due to temporary hires at the Census Bureau, while only 41,000 private-sector jobs were added. The unemployment rate did fall to 9.7 percent from 9.9 percent in April, but that was a result of more wanna-be workers who ceased looking for jobs and thus weren’t counted.
The hiring picture will continue to improve, as the other employment indicators signal, but this report shows that progress will come haltingly. It’s likely that businesses will hold off on hiring until they’re more confident that the economy is on a sure track to recovery, which means they’ll want to see better indicators than the recent 3% GDP figure, as well as some reassurance that they won’t be socked with additional and/or higher taxes by a revenue-hungry Congress.
It’s hoped that more hiring will make folks happier. That would be helpful, since the weekly ABC News/Washington Post poll of Consumer Comfort seems stuck. During the week ending May 30, a reading of minus-44 was noted in the indicator, a one-tick improvement for the week and just a bit nearer to the year’s high of minus-41 back in January.
The unofficial start of Summer is now past. With the spring ‘homebuying season’ winding down, the mortgage market usually gets lulled into a daze, most notably as we approach July 4 and beyond. This year, given the euro-zone troubles which have so influenced interest rates, it’s our sense that there will be somewhat less quiet than in years past, as market participants try to digest the solutions offered to some quite intractable problems abroad. There are enough concerns about parallel paths for the US to allow for much comfort, with questions about how we will manage our own commitments in the coming years.
Last week’s forecast of slightly higher rates came to pass (perhaps unsurprisingly, given their record lows last week). Mortgage rates are probably more likely to rise a little bit in the coming days than fall. A crisis prompts a panic response, and we’ve certainly had that in recent weeks, but the market eventually seems to become accustomed to whatever conditions may exist, good bad or indifferent. It’s the certainty of the condition which matters most, since one can plan for improving, declining or steady conditions, as long as they can be expected to persist for at least a while.
Figure on a few basis points higher for next week.
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