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June 5, 2009 — Economic reports which suggest that the recession is moderating served to firm up mortgage rates this week. Although it may be hard to convince refinancers or homebuyers of it, this is actually a very good thing overall. Investor money formerly stuffed into the safe haven of Treasury bonds is beginning to filter out into other areas of the economy, and the sooner that normalization takes place, the quicker the economy will experience actual recovery.
HSH’s Fixed-Rate Mortgage Indicator (FRMI) — a measure of the overall cost of mortgage credit since it includes conforming, jumbo and “high-limit” conforming data — rose by 18 basis points (0.18%)to 5.82%, the same increase as we saw last week, and the highest it’s been in three months. The FRMI’s 5/1 hybrid counterpart rose by nine basis points to land at 5.24%.
Conforming 30-year fixed rate mortgages have suffered somewhat more than private-market jumbos, rising from a flat 5% for the week ending May 22 to 5.45%. Jumbos have risen by only 16 basis points over a comparable period.
One impetus for the rate spike was the release of May’s better-than-expected unemployment report, which prompted investors to sell off longer-term bonds, including the all-important 10-year Treasury. Its yield spiked on Friday, and mortgage rates followed.
While we’re seeing some signs of improvement from awful levels in various sectors of the economy, it’s worth noting that no economic recovery can build forward momentum without improving employment prospects. Given the numbers so far, we have yet a long way to go, since present conditions continue to worsen, although to a lesser degree than earlier this year. For example, a measure of announced layoffs tallied by the outplacement firm Challenger, Gray and Christmas recorded 111,182 terminations in May; this was down from 132,590 in April and the lowest number since last October but is still on a deteriorating path.
Still high, but just possibly improving, are weekly claims for new unemployment benefits. During the week ending May 30, some 621,000 new applications for benefits were filed, down from a revised 625,000 the week prior. If this trend continues, as it has for several weeks — and that’s a fairly imposing ‘if’ — it might just mean that the labor sector might be ready to consider thinking about turning the corner, as economists say. Also encouraging was the first drop in continuing claims — down 15,000 to 6.735 million — since January, although that number will remain lofty for quite a while.
The broad national employment picture brought some mixed news, with some better than expected. The bad news: the national unemployment rate rose a full half percent to 9.4% in May, the highest level since 1983. The better news: job losses totalled 345,000, far less than the half-million-plus that had been expected. The slowing pace of layoffs — evident since January — could be interpreted either that job losses are slowing in anticipation of better times ahead, or that employers have cut jobs pretty much to the bone and can’t cut much more. Taken in conjunction with the weekly claims discussed above, let’s hope it’s the former.
It helps to keep in mind that employment, as an indicator, lags other economic gauges. That’s primarily because businesses are quick to lay off help when times get hard, but are more reluctant to re-hire until they see solid signs of economic improvement. The unemployment rate is likely to increase, and may well hit double-digit figures before it improves. We have more to say about the employment picture in our blog.
While we won’t catch the first glimpse of second-quarter GDP until late July, its a fair bet at this point that it will still be solidly negative. Even if the first quarter’s 5.7% estimated decline was halved, the resulting number would still be reflective of a considerable economic downturn, if one of waning severity. That said, some of the numbers gathered in April and May do have a warmer feel to them.
The Institute for Supply Management’s report of present business conditions among its members managed a little improvement in May, ticking up to 42.8 during the month, a 2.6 point gain. In the ISM surveys, readings of 50 or above indicate expanding economic activity, and the present level still points to considerable retraction. However, at least one sub-index did break into the positive side of the ledger, as new orders climbed to 51, the first such above-par reading since November 2007.
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That optimism probably came as a result of a 0.7% increase in Factory Orders in April. While somewhat less than expected, two of the last three months have sported a positive number, a much improved pattern when contrasted against the deep declines seen in August 2008 through January 2009. Still, final demand remains a tenuous thing, and so-called “core” orders — spending by businesses — declined by 2.4% for the month.
Those gains may also be tempered by lackluster consumer spending. While Personal Incomes rose by 0.5% during April, outlays declined by 0.1% as consumers preferred to bank those gains. The national saving rate rose to 5.7%, the highest level since 1995. While incomes are being boosted by lower federal taxes, wages and salaries failed to increase during the month. Still, the zero-percent gain in wages was the best showing since last September, when they also showed no change. With the recent rise in gasoline prices certain to sap at least a portion of any income improvement, a boost from rising consumer spending doesn’t seem in the immediate cards.
That’s borne out by the latest Fed report on Consumer Credit, which sported another impressive decline in April; both revolving and non-revolving credit fell as consumers shrank their debt burden by $15.7 billion, far exceeding expectations and accelerating the pace seen over the past several months.
Of course, while this is good news, it’s also not. The economy isn’t likely to grow very quickly if consumers aren’t borrowing, even if paying down outstanding debts produces more solvent and stable households. It wasn’t so long ago that Americans were scolded for not saving enough; now the problem is that we’re not spending enough. This will, naturally, resolve itself once we believe, deep down, that the economy really is improving.
Uncertain economic times continue to haunt automakers. However, there was a fair increase in auto sales during May, where some 9.9 million (annualized) sales of cars and light trucks took place, according to AutoData. GM and Ford both increased their sales, Chrysler held firm. Sales have moved off their February bottoms, but remain well below levels believed to ensure profitable, sustainable companies. The emergence of Chrysler and eventually GM may find very different cost structures and operating environment for at least two of the “big three”, but it’s by no means clear that even the new companies will be fit for long-term survival.
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Sources: FRB, OTS, HSH Associates.
April’s Construction Spending report revealed a brighter outlook. The 0.8% rise in outlays was the second half of the first back-to-back increases since last Aug-Sept, and better still, revealed a 0.7% lift in spending for residential dwellings, the first in about eight months. Spending for commercial projects rose by 1.8%, but with stimulus spending not yet available, cash-strapped local governments continue to pull back on public outlays, which declined by 0.6% for the month. “Shovel-ready” projects — road repaving and such — will probably get underway fairly soon, providing some additional lift.
The ISM’s non-manufacturing index edged higher during May, as service-oriented businesses reported marginally better conditions. Like its manufacturing index above, the reading here of 44.0 represents not growth but a still-declining sector of the economy, even if there was a 0.3 lift in the reported level. The 44 was the highest such mark since last October.
The rising gas prices noted above seem to be putting the damper on Consumer Comfort levels. The latest ABC News/Washington Post poll stepped back again during the week ending May 31, its third decline after hitting recent highs. The -49 reading is closer to it’s bottom (-54) and the recent April peak (-42) and this indicator is trending in the opposite direction of other measurements of consumer moods.
The economy may or may not have turned a corner, or may simply be in an upward trend amid a longer downturn. It’s way too early to call an end to the recession, or declare it to be in a “V” shape as opposed to a “W”. What is clear is that a lot of money, once stashed in Treasuries to hide from market storms, is starting to move out to different — and hopefully more productive — areas of the economy. That’s a very good sign, and a trend of firming/rising mortgage rates are, sooner or later, going to be one of the prices we pay for an improving economy. If you’re a loan shopper, take note: they’re called historically low rates for a reason.
Even the recent improvement in the tenor of economic activity is only offputting pretty poor levels seen just before last October and November’s capital markets crash, and, to be honest, things weren’t all that good then, however improved from the depths they may be. Mortgage rates have firmed along with the better news in the economy, but there’s little certainty that the improvement is lasting. Our bet is that mortgage rates will find at least some reasons to decline a little as we wander closer to summer, as markets become antsy for signs of real improvement, not just that the body is still warm.
Rates may even ease a little next week.
What lies ahead? Read (and hold us to) our new, just-posted two-month forecast.
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