August 6, 2010 — The first week of the month has rolled around again, and although it’s a brand-new month it seems we have the same old economic story we’ve had for the past few: Slow growth, no jobs and low mortgage rates.
From the depths of a pretty significant recession, the economy recovered to run at a 5% rate during the last quarter of last year, but has lost considerable momentum since then. Prospects are not improving for a speedy return to quicker growth, but that is serving to keep mortgage rates at fantastic levels.
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Each week for some 30 years, HSH has produced an overall mortgage monitor — our Fixed-Rate Mortgage Indicator (FRMI). The FRMI includes rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public. After a two-basis point uptick last week, the FRMI declined by five basis points (.05%) to 4.87%. An alternative to a cheap fixed-rate mortgage comes in the form of a Hybrid 5/1 ARM; these solutions for shorter time-frame borrowers can be had at an average rate of just 3.85%.
Expanding factory production led us out of the recession, but is losing steam. According to the Institute for Supply Management’s survey of manufacturing activity, the recovery’s peak culminated in a reading of 60.4 in April 2010, but we have stepped down each month since to the latest 55.5 mark for July. This settling down to what is hopefully a sustainable pace comes after a near-steady upward trend which began in January 2009. However, given the nascent slowness in the economy, and sluggish growth for our trading partners, production may be easing to a level where it provides insufficient strength to improve the overall economy very much.
HSH has several lengthy series of statistics dating back to the 1980s for FRMs and ARMs, Conforming, Jumbo and FHA products. These can be licensed for use — interested parties should inquire here.
Factory orders tell much the same tale, slumping after a fairly long string of positive news. In June, orders for goods declined by 1.2%, a steeper drop than was expected, and hardly better than the 1.4% dip for May. Although there have been a couple of one-month blips, this is the first back-to-back decline in orders since the December 2008 to January 2009 period.
There is some hope that the transition from a production-led recovery to a consumer-led one will happen before too long, as well as discussions of growing concern about a double-dip recession. The economic lull we are experiencing is because that handoff hasn’t taken place yet, but there are some signs that the service sector of the economy, vitally important to resuming employment growth, is starting to come into its own. The ISM’s survey of non-manufacturing business activity was slow to gain traction — it only broke into positive territory in January — but has generally firmed up every month since. July’s 54.3 level tells of stabilizing expansion, but perhaps more important than that was that the survey’s employment sub-index moved to the positive side of the ledger for the just the second time since April 2008, and twice in the past three months. If even modest hiring is starting to happen, that’s very good news for a recovery which desperately needs jobs.
Not only are jobs hard to come by, remaining employed is difficult, too. During the week ending July 31, another 479,000 new applications for unemployment assistance were filed, the highest level of the last couple of months and much closer to the top of 2010’s range than to the bottom.
As is to be expected in such a climate, the unemployment rate remains high. In July, the official rate of unemployment was an unchanged 9.5%, while the economy shed another 131,000 jobs last month, almost all from the public sector. The loss of jobs over the last two months has offset all the gains from January through March, leaving only strong Census hiring in May and June as positives for the year. Private payrolls expanded by 71,000 during the month and there is little by way of an upsurge there, even though it was the best showing in the past three months.
With weak employment comes weak gains in personal income… well, none to be exact. In June, personal incomes were unchanged from May, and given consumer aversion to borrowing today, it’s little wonder that personal consumption expenditures were flat for the month as well. A distaste for borrowing has been evident for almost two years, with regular retirement of outstanding obligations over that time. Since October 2008, there have been exactly two increases in aggregate borrowing, both during the month of January. More recently, consumers retired debt at a smaller $1.3 billion pace in June, with falling revolving balances offset by a $3.1 billion gain in installment loans.
Those installment loans are often to purchase high-ticket items, such as autos. According to AutoData, vehicle sales rang in at an 11.5 million (annualized) rate of sale, perhaps a slight bit better than the average level for much of this year.
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Sources: FRB, OTS, HSH Associates.
While spending for new construction projects declined by 0.1% in June — led downward again by a 0.8% dip in residential spending and a 0.5% falloff in commercial — a spurt of ARRA (aka “stimulus”) money goosed public construction spending by 1.5% for the month. Paving on roads and rebuilding bridges should provide some economic uplift for a while, but there won’t be much effect on hiring.
Consumer moods continue to darken. The weekly ABC News/Washington Post poll covering Consumer Comfort fell back again during the week ending August 1, landing at minus-50 for the week and matching its 2010 lows. The again-stumbling economy is clearly having an effect on consumer moods which contributes to more conservative spending patterns, even if a household does have money to spend.
And so it goes. What might spark cheer, and promote growth? Jobs, which are hard to find and will remain so for some time yet to come. That said, we (and many others) long ago identified jobs and underwater mortgages as the two most pressing problems in today’s economy. A rumor floated around this week that the administration was readying a plan to offer mortgage principal reduction for certain underwater homeowners. That rumor was quickly quashed — “a bailout for main street” was one characterization — but some serious minds need to start considering how to best approach this problem before too much more time passes.
As has been the case for months, mortgage rates are great. If you can get access to the market, it is a great time to buy or refinance. If you’re thinking of buying a home with a small down payment, or if you have a middling credit score, you should know that the FHA announced this week forthcoming changes which will affect how much you’ll need to put down and how much your mortgage insurance will cost you. Given the gap in underwriting standards between the GSE-backed market and the FHA-backed one, these are relatively minor tweaks, but tightening nonetheless.
The Federal Reserve Open Market Committee meets on Tuesday to discuss what, if anything, to do about the present state of affairs. While the economy has slowed over the past couple of quarters, it is in better shape than last year and a short period of soft but stable growth would be acceptable in the Fed’s eyes. Aside from “extraordinary policy measures” — quantitative easing like buying Treasuries or MBS again — there is little the Fed can do immediately, and so an expression of concern and vigilance is all that is likely to come at the meeting’s close.
Enjoy the low rates. The downward pull of a poor economy will likely show mildly lower rates next week, too.
Looking down the road toward September? Take a look at our latest Two-Month Forecast.
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