November 6, 2009 — The Federal Reserve re-committed to keeping the short-term interest rates it controls at “exceptionally low” levels for an undefined “extended period of time.” Along with the extension and expansion of the homebuyer tax credit, these important supports should help the housing market to continue to stabilize, and may even serve to promote some refinancing activity, too. However, the job market remains troubled enough as to warrant concern that there just may not be all that many people who are eligible to refinance or purchase a home in the months ahead.
The overall average for mortgage rates, measured by HSH’s Fixed-Rate Mortgage Indicator (FRMI), eased back by four basis points this week, as the average price of all loans — conforming, jumbo and agency jumbo combined — slipped to 5.41%. The overall average for 5/1 Hybrid ARMs dipped by three basis points, and conforming 30-year FRMs closed the survey at 5.13% at a quarter-point fee level.
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The nation’s unemployment rate rose to 10.2% in October, the highest in some 26 years. Although the double-digit number will of course grab headlines, the employment report actually noted that “only” 190,000 jobs were lost during the month, and that the August and September figures were ratcheted downward as well. Over the last three months jobs are still being shed, but at a pace less than one-third that seen in the Jan-Mar 2009 period. Still, even though the rate of new layoffs has eased, there are no new jobs to be found for those who lost them. The all-inclusive unemployment rate which factors under-employed and those who have stopped seeking work is actually about 17.5% of the total eligible population.
Although output has turned upward over the past few months — witness the 3.5% rise in GDP for the 3rd quarter — at least part of the reason that new hiring remains punk is that those with jobs are covering those increases in production. Worker productivity rose an eye-popping 9.5% in the quarter, a six-year high and way above both expectations and the second quarter’s solid 6.6% increase. Workers cranking out more can be paid more overall without undue effect on the final cost of goods, and the measure of labor cost per unit produced declined by 5.2% for the period. That drop means that inflation pressures due to labor costs are not even close to forming, and that in turn helps keep the Federal Reserve’s monetary policy in an accommodative stance. Another reason for weak hiring is the uncertainty surrounding new and expensive government initiatives for health care and corresponding tax burdens on businesses. Until these get squared away, they will remain an impediment to job creation.
For its part, the Federal Reserve closed their two-day meeting this week with a statement which seemed to have a little something for everyone. For those seeing economic improvement, they noted “economic activity has continued to pick up;” for those whose glass is more on the half-empty side, they proffered that “economic activity is likely to remain weak for a time.” Folks interested in continuing Federal Reserve support for weak markets got the Fed’s pledge to “continue to employ a wide range of tools to promote economic recovery” and those seeking exit strategies found a $25 billion reduction in a (yet unused) GSE debt purchase program. Even those who might shrug their shoulders when asked their opinions of the present environment got a nod, as the Fed noted that “conditions in financial markets were roughly unchanged” since the last meeting some six weeks ago.
Although there was no specific clarity to the statement, the one thing that is clear is that the Fed is in no real hurry to signal its intentions anytime soon. There are many support programs and policies (like the one above) which can be wound down even before short-term interest rates might need to be adjusted, and it’s worth noting that a Federal Funds rate anywhere below 1% or thereabouts would be considered “exceptionally low.”
Daily FRMI rates are available on HSH.com.
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What we’ve described as a “technical recovery” — largely inventory rebuilding and other factors contributing to growth after an absolute shutdown last year — is being reflected in the latest figures from the Institute for Supply Management. Their indicator of factory activity moved to a reading of 55.7, its best showing since April of 2006, and even the measure of employment in the report moved to the positive side of the ledger, the first time it’s been there since July of 2008. The upswing in manufacturing over the last few months has been aided by a weak dollar, which helps promote exports, cash-for-clunkers and inventory levels coming into closer alignment with final demand.
That demand — increases in sales — continues to help wholesalers clear out overstocks. September saw another decline in inventories, the latest in a long string. The 0.9% drawdown in stockpiles was produced by a 0.7% gain in sales, and the ratio of goods on hand relative to sales is now at a level which should support more orders to factories going forward. Buttressing that argument was a 0.9% increase in overall factory orders during September, better than expected and a nice turnaround from the 0.8% decline seen in August. In normal times, this indicator is typically erratic, swinging from positive to negative and back, and seems to again be exhibiting more normal behavior over the past few months following a long string of negative readings.
Along with factories, service businesses are seeing some expansion, too, according to the ISM’s survey of non-manufacturing concerns, although on a less-robust month-to-month basis than its manufacturing brethren. A small decrease in activity left the indicator at 50.6 for October, just above the breakeven threshold of 50 which signals expansion or contraction.
With regard to the now-gone CARS program, sales of new autos rebounded a bit after a considerable crash in September. A 10.4 million annualized rate of sale was a little better than expected and well above the September ‘hangover’ from the CARS party, where just a 9.2 million rate was noted by AutoData. Even if they have improved from the year’s worst levels, sales remain too low to promote any kind of vibrant auto industry in the US.
September saw a gain in spending on Construction Projects. The 0.8% increase was sparked by a 3.9% rise in residential projects, the third positive figure in a row, and was also boosted by a 1.8% rise in outlays for public projects, most likely those fostered by the Federal stimulus program. Commercial construction caved another 1.8% for the month, as troubled loans and a glut of property depress this sector of the market.
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Sources: FRB, OTS, HSH Associates.
Weekly claims for new unemployment benefits slipped back to 512,000 during the week ending October 31, coming almost full circle from last year at this time. During the week ending November 8, 2008, some 516,000 apps were filed, but were on a strong upward swing at that point; thankfully, we’re on the downside of the slope now. It would be nice if the velocity to the downside was the same as that to the upside, but we’ll have to endure a painfully slow diminishment in job losses. That said, the minor decline in claims was accompanied, perhaps not coincidentally, by a small improvement in the weekly ABC News/Washington Post survey of Consumer Comfort, which moved two ticks higher for the week ending November 1.
Concerns about jobs and incomes (not to mention tight credit conditions) continue to serve to dry up consumer borrowing. In September, outstanding revolving and installment accounts declined by 7.2%, a record eighth straight contraction. Consumers have pulled back on borrowing in favor of saving and paying cash, and while the realignment of household balance sheets is a healthy sign, the economy needs more borrowing (or at least more spending) in order to get more fully up to speed. That doesn’t seem like it will be happening anytime soon, as the economic crash and the collapse in home prices may be changing spending habits in a more durable way.
There does seem to be some unevenness to the collective tenor of the economic indicators. That’s to be expected; things have improved, but the economy is by no means firing on all cylinders, and may not for a while yet. The key linchpin is getting to a place where we stop bleeding jobs and at least start to get some folks back to work. Present forecasts suggest that isn’t likely to occur until mid-2010 at the soonest. However, it could be said that the unemployment report today actually gave some credence to the stance that perhaps the worst will come sooner than expected, and that recovery will come more quickly, too.
We’ll see about that in time. For next week, we expect rates to be pretty flat, possibly taking back the small decline seen this week, if that.
Looking at the longer term? you’ll need to read our latest two-month forecast.
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