October 8, 2010 — After a two-quarter decline down to a 1.7% GDP, the economy may have stopped skidding in September. This deceleration has left growth at a place where there is insufficient demand to create many job opportunities, and without an expanding labor market, inflation remains tomorrow’s problem. No growth in demand or in labor markets means interest rates can continue to tick downward, as they again did this week. It also means that there is an increasing likelihood that the Federal Reserve will re-start its program of purchasing Treasury securities before too much more time has passed. At present, the size and scope of the program is unknown — and so is the ultimate benefit to the economy.
HSH’s overall mortgage monitor — our weekly Fixed-Rate Mortgage Indicator (FRMI) — saw the average rate for 30-year fixed-rate mortgages decline by four basis points (.04%), finding new territory at 4.66%. FHA-backed loans are available at an average rate of 4.33%, but there isn’t much homebuying activity going on at the moment. Hybrid 5/1 ARMs lost three basis points (.03%) to close the week at 3.58% HSH.com’s public data series include rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public.
News from August continues to trickle in, and each report reinforces the picture of a fairly poor economic climate. In August, overall orders placed at factories declined by 0.5% for the period, a little less than what was expected, but the headline number was dragged down by a fairly steep decline in orders for transportation-related items. Leaving that off the tally revealed a 0.9% rise in other orders, and “core” business related orders moved up by 1.7% for the month.
Want to get Market Trends as soon as it’s published on Friday? Get it via email — subscribe here!
Stockpiles of goods increased at the nation’s factory-to-retail intermediaries, as wholesalers built their inventories by 0.8% for the month, a rather larger build than was forecast. During the expansion, very lean inventories led to strong rises in production, powering the economy ahead. And while the inventory rebuilding process has not yet completely run its course, the rate of rebuild has cooled considerably over the last few months as there has been little improvement in final demand to warrant ordering more goods. The ratio of goods on hand relative to sales still remains low, but caution remains the order of the day since no one knows when demand will return to pre-recession levels.
Demand can be stimulated in a number of ways, but the most common include expansions of income which promote spending, or expansion of borrowing which has the same effect. However, the first represents a commitment against present income, and can be limited by immediate cash on hand, while the second represents a commitment against future income — which represents an expression of confidence about future prospects. Both expressions have been impacted by the severe downturn; income growth is slight and consumers are paying off previous loans as fast as they can, impeding new spending.
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.
A case in point is the report covering consumer credit for August. Overall borrowing declined again, this time by $3.3 billion dollars. Consumers retired outstanding revolving balances by $5.0 billion for the month, but did manage a $1.7 billion increase in installment lending (think car loans and such) to partially offset the decline. In the past two years, there have been only two months which saw an increase in consumer borrowing; both were mild expansions at best and neither had any momentum.
While borrowing is more affected by future concerns, out-of-pocket spending is based more on immediate need, and generally requires an increasing income — or at least some form of income. Unemployment claims have remained elevated for months; although improved over the depth of the recession, we have not even found a way to test the 400,000 level in the expansion. During the week ending October 2, another 445,000 new applications for benefits were filed at state unemployment offices. While still elevated, it was the best number since July and comparable to the best numbers of this year. Still, we have a long way to go before we’re back to normal.
The news that announcements of mass layoff events have lessened is a bright spot. The outplacement firm Challenger, Gray and Christmas reported 37,768 involuntary separations in September, continuing a fairly flat trend for the past six months. However, a lessening of firing is by no means the same as an increase in hiring.
Perhaps some improvement will come as we wander deeper into the fourth quarter of 2010. As we noted last week, the September data seemed to us less bad than August’s did, and that could be seen in the September report from the Institute for Supply Management. The ISM’s report on non-manufacturing (service-related) business did note a flare higher in activity during the month; the 53.2 reading was a nice increase from August’s 51.5, and importantly, the employment component moved back over the breakeven mark. With a reading of 50 indicating flatline, the 50.2 value for the job component is a bare increase, but an increase nonetheless, and the third one over the past five months.
The mid-term elections are coming fast, bringing airwaves filled with negative political advertising. This cannot possibly add optimism to the public’s moods, and all measures of consumer optimism have moved downward of late. Another such example could be seen in the latest ABC News/Washington Post poll of Consumer Comfort, which gave up two points to land at negative-47 for the week ending October 3. That figure is the lowest in about two months, and is now trending toward lows for the year.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
|ARM indexes, APOR rates, Libor, usury ceilings, & more — all available from ARMindexes.com.
Email and webservice delivery are available.
Sources: FRB, OTS, HSH Associates.
Without employment growth, the economy will go nowhere fast. In September, the economy lost another 95,000 jobs, largely due to government cutbacks at the Federal and especially the state level. Those declines overwhelmed a meager 64,000 new private hires and was the weakest showing in three months. Hourly earnings nudged up by a slight 0.1% and average hours worked remained steady. The nation’s official rate of unemployment held at 9.6% for the month, a number certain to cause trouble for the party in power in the upcoming elections.
Even with some slight signs of improvement, the economy is in soft shape. The Federal Reserve next meets literally on Election Day, and unless there is a fair uptick in the economic data between now and then, it is believed that some announcement will come with regards to the next Quantitative Easing (QE) program, which would see the Fed purchasing Treasury obligations.
Banks and investors have shown great appetite for these kinds of investments, even with record low yields, because they provide a guaranteed (if meager) return. By driving those interest rates down, the Fed would force investors to consider other options for their cash if they hope to find any yield. In turn, that demand for other assets — primarily corporate bonds, mortgage-backed securities, and municipal bonds — would influence those interest rates downward, hopefully spurring companies and others to borrow cheap money to invest in factories and projects and such and, by so doing, spur the economy.
There is no guarantee that this will be the case. Investors may still prefer safety over risk, low yield or no. There are already trillions of dollars on the sideline of the economy which are already waiting for a place to go and ready to be lent and spent — but no comfortable place to go, thanks to an uncertain economic, tax and regulatory environment. The economic benefits of such a program are expected to be slight, and accumulating billions more in assets will make the Fed’s extrication from the markets considerably more tricky, producing concerns about inflationary effects down the road from here.
Cheap interest rates mean little if no one wants to (or can qualify to) borrow.
With the potential for Fed involvement growing, at least some of the effects are happening already. Treasuries are getting bid up, driving yields down, as investors try to grab today’s firmer yields before any Fed-influenced downturn in them tomorrow.
Mortgage rates are at record lows, again, and without clarity on the direction of the economy, seem likely to continue this sideways drift. Perhaps the economy will show more firmness in the coming weeks, and perhaps the election will provide greater clarity on the direction of regulation, taxes and economic policy. Here’s hoping so, but until them, it is more of the same for rates next week.
P.S. If you missed it over the last few weeks, you should have a look at our plan to help responsible homeowners who are underwater. Unlike the “FHA Short Refi” idea, the concept doesn’t penalize homeowners or investors… and there might even be no cost to taxpayers, either. Curious? Read HSH.com’s Value Gap Refinance idea, and be sure to let us know what you think.
Looking down the road toward Thanksgiving? Take a look at our just-posted-today Two-Month Forecast.
Have you seen HSH in the news lately? (We’re read all over!)
Want to comment on this Market Trends? Post it here — add your feedback, argue with us, or just tell us what you think.
Popularity: 2% [?]