September 3, 2010 — The economic news has certainly been nothing to cheer about over the last month or two, but at least some important indicators don’t suggest that any double-dip recession is imminent.
HSH’s overall mortgage monitor — our weekly Fixed-Rate Mortgage Indicator (FRMI) — dipped back by another two basis points, closing our survey at an average 4.76%, a new low. 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. For borrowers who don’t need a long-term, fixed rate mortgages, a viable choice might be a Hybrid 5/1 ARM, which ended the week at an unchanged average rate of 3.73%.
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The Federal Reserve released the minutes of its August 10 meeting, and most clearly identified perhaps the chief reason the economy cannot seem to get out of its own way, economic “stimulus” and low rates or not. Whether you’re a consumer or run a business, it all comes down to confidence.
From the minutes: “A number of participants reported that business contacts again indicated that uncertainty about future taxes, regulations, and health-care costs made them reluctant to expand their workforces. Instead, businesses had continued to meet growth in demand for their products largely through productivity gains and by increasing existing employees’ hours.” (Emphasis added)
Faced with such concerns, is there any wonder why job growth has been nonexistent in this recovery? On Friday, the latest employment report for August was released. While revisions to the June and July data made recent declines more shallow than those initially reported, the 54,000 decline in jobs for August can’t be considered an improvement by any means. The unemployment rate ticked up to 9.6% for the month as the labor pool increased by about a half-million job seekers, most probably those who saw their unemployment benefits come to an end, rather than any expression of optimism about finding a new job. Private employment expanded by just 67,000 jobs during the month, so there are few new openings available but plenty of applicants.
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.
Productivity gains have slowed, with the latest estimate for worker output sliding by 1.8% in the second quarter of 2010. If worker output has “maxed out” — that is, workers can no longer keep pace with demand — at least some hiring will be sure to occur before too long. However, the productivity decline could be more related to a falloff in required output than any limit of available output. As such, and since the economy has slowed from the spring, there remains the influence of uncertain and perhaps diminishing demand.
The Fed took note of this, commenting that “Other participants cited business surveys and reports from business contacts indicating that slow growth in sales and uncertainty about the strength and durability of the recovery likely were more important factors [in their decision whether to hire].” (Emphasis added)
Consumers and businesses have been reluctant to spend or borrow money, and each are expressions of confidence about future prospects. By most accounts, the Fed has done a good job of getting low interest rates into the marketplace — but if no one wants to (or is able to) borrow, the economic benefit is minimal.
Personal income growth has been meager, but households are using what little there is of it to buttress savings and pay off debt. Incomes rose by 0.2% in July, a little less than expected, with wages increasing 0.3%. For the first time in a couple of months, personal spending rose more than incomes, rising by 0.4%, so the nation’s saving rate eased to 5.9% for the month.
The high (by recent standards) savings rate represents a bit of a conundrum for the Fed. That esteemed body remains undecided whether the high rate of savings means that folks are rebuilding their finances faster than previously thought (which could allow for faster consumer spending in the months ahead), or whether it means that consumers are trying to stockpile assets and reduce debts more quickly, which could lead to lower consumer spending than hoped as we move forward. To us, it seems the latter is more likely, given the present climate. It also means that low rates or not, there’s less borrowing needed to support current spending habits.
Sales of autos in August came in at about the same level as they have each month of the past six. AutoData reported that 11.5 million (annualized) vehicles were sold during the month, a level which seems hard to break and may simply represent a natural rate of replacement for vehicles which have reached the end of their service life. Whatever the reason, the figure remains well below levels which would promote expansion of hiring up and down the auto supply chain.
The Fed again: “Some participants observed that small businesses continued to find credit hard to obtain. However, several participants noted recent survey evidence indicating that most small firms that requested credit were able to borrow, and that relatively few small firms thought that access to credit was their most important problem.”
The credit crunch hasn’t yet ended, but loan demand remains weak, given the uncertainties noted above. Even if businesses can borrow, most see little need to, so low interest rates have little effect.
While June’s and July’s numbers have certainly not looked very good, more recent data for August does seem somewhat better, at least enough to assuage fears of another impending recession. For example, the number of announced layoffs tracked by Challenger, Gray and Christmas was just 33,768 in August, a 10-year-low reading. While few folks are getting hired, it is nonetheless encouraging that there may be few people left who can be fired, too.
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The August survey of business conditions from the Institute for Supply Management did surprise to the upside, ringing in at a 56.3 figure for the month. A 2.5-point decline was expected, but a 0.8-point gain came instead, prompting a bit of a relief rally in the stock market. The employment index noted in the survey came in at a value greater than 60, it’s strongest one-month showing since 2004, indicating that some hiring in manufacturing may be in the offing should the economy find a way to at least stabilize amid the shifting financial, regulatory and consumer sands.
Back in July, and possibly informing the ISM August data, Factory Orders nudged upwards by 0.1%. Although not much to talk about, it represented a turnaround of sorts as it was the first positive number here in the past three months.
In contrast to the ISM manufacturing survey, not quite as sanguine was the ISM’s report which covers service-business activity. The indicator here moved back toward the break-even line of 50 during the month of August, where its reading of 51.5 represents barely perceptible growth. The employment index in this gauge barely made it past flatline at two intervals this year, but again slipped back under, indicating a mild contraction in hiring again in August.
Construction spending in July declined by 1%, which wasn’t surprising, given the falloff in home sales and little state money for public-works projects. The decline was spurred by a 2.6% dip in residential spending and a 1.2% decline in public outlays, but was supported to some degree by a 0.8% lift in private non-residential projects. Given the glut of commercial and office space (not to mention ongoing losses in commercial loans) it is a curious increase, to be sure.
After a brief flare over 500,000 a few weeks ago, initial unemployment claims have settled back somewhat. During the week ending August 28, another 472,000 new applications for benefits were filed. While improving from the recent high, the decline still leaves claims far closer to the year’s high than to its low.
Lacking expressions of confidence, the recovery cannot power forward, especially if this caution is preventing any beneficial cycle of hiring from taking hold. It would stand to reason that steps should be taken to create clarity and certainty in the economy, and to the extent that they can, the Federal Reserve has done a pretty fair job. Not so those who control the fiscal portion of the program, where any number of new bureaucracies and regulations have injected uncertainty at perhaps the least opportune time for the recovery, changing the business landscape in unknown and costly ways. Where clarity and certainty are needed, little can be found.
Consumers, for their part, keep trying to find reasons to be cheerful, but it remains hard to generate much enthusiasm with so many troubles so evident. The weekly ABC News/Washington Post poll of Consumer Comfort ticked back one notch to -45 solidly in the middle of a terrible range which has persisted for better than a year now.
That much could also be said for the Conference Board’s measure of Consumer Confidence, but it did manage to report a small increase in August. After making it all the way up to 62.7 in May, the index dropped sharply in June and somewhat more in July, but recovered 2.5 points of that fall in August, inching up to 53.5 for the month. All of the small increase came from the expectation that things would get better in the future, even as assessments of today’s conditions fell.
If we haven’t been before, we are truly at a crossroads for the recovery. Low rates exist, benefiting the limited number of those who want to (or can) borrow, but hurting those who save, and the stimulative effect of even lower rates is uncertain. Meanwhile, the inventory-rebuilding portion of the economic expansion has largely run its course, and probably doesn’t have enough strength to get growth much above present levels, and even growth moving back to more solid ground — 2.5% to 3% GDP — is unlikely to spark much hiring on its own.
Many of the headwinds the recovery faces are due to fiscal and regulatory engineering, even leaving out for the moment the considerable overhang of tax cuts which are slated to expire before too long, bringing higher tax bills far and wide. That onrushing train needs to be not only avoided, but — since monetary policy is running nearly full tilt at the moment — may very well need to be accompanied by substantial and widespread payroll-tax reductions. That would need to be something far greater than the roughly eight-dollar-a-month cut from Spring 2009. People with jobs need to spend more, and — with incomes limited and debt levels high — this may be the best chance there is to kick-start a weak economy. More private spending will create more private jobs, and getting more money into private hands to make this occur should be the focus as we enjoy the Labor Day holiday on Monday.
Mortgage rates remain great, both favorable and at or near historic lows. We see no reason for any great change next week, excluding any grandiose plans to get the economy rolling. Anyone?
Looking down the road toward September? Take a look at our latest Two-Month Forecast.
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