September 7, 2012 — Although the collective tenor of the economic data released this week was fair, it was capped by a disappointing employment report for August. At a time of global economic troubles beyond its direct influence, and with the U.S. economy holding onto modest growth, how compelled is the Federal Reserve to make a move, especially a substantial one?
Mortgage rates retreated again this week, taking back another bit of the mild August rise.
HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages declined by another three basis points (0.03%) to 3.86%. The FRMI’s 15-year companion also decreased by three basis points, sliding to 3.14% and matching its record low. Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages eased back down to 3.46%, while the overall average rate for 5/1 Hybrid ARMs finished the weekly survey at 2.74%, down three hundredths of a percentage point from last week, establishing a new record low.
Slow growth (if any) in the economies of many trading partners continue to take its toll on our manufacturing base. The Institute for Supply Management released its August report on factory activity, and for a third consecutive month found manufacturing hanging in sub-par territory. The index value of 49.6 for the month was little changed from July’s 49.8 or June’s 49.7, indicating a stalled manufacturing sector. In the ISM reports, the breakeven level between growth and contraction is a reading of 50, so we have been literally teetering on the line for a couple of months now. Importantly, though, things don’t seem to be worsening.
See this week’s Statistical Release and Trend Graphs.
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Auto sales were stronger in August then they have been since the beginning of the recovery. According to AutoData, an annualized 14.5 million sales of new vehicles occurred during the month, and firm sales are in turn providing important support to manufacturing. An aging fleet of cars and trucks on the nation’s roads needs to be replaced from time to time, but there is also likely some benefit happening here as a result of the freeing up of cash flow from first mortgage refinancing over the past year or so. Sales remain well above the low water mark of the recession and are closer to pre-recession highs than not.
There was a little fall off in construction spending in July. After being driven upward solely by residential spending over the past few months, homebuilding paused. The overall effect was to cause a 0.9% decline in outlays for construction projects, but residential (-1.6%), commercial (-0.9%) and public (-0.4%) all eased during the month. Although softer compared to June, all the components were measurably higher compared to a year ago, and the new home market has record-thin inventory levels, so some pickup after this pause seems likely.
In August, there was a mild strengthening in the service sector, the largest component of the economy. The ISM survey which covers non-manufacturing businesses saw a 0.7 uptick in its gauge, which rose to 53.7 for the month. The small increase moved the needle back to May levels and continues a slight uptrend since a recent nadir in June. Notably, employment rose from a sub-par 49.3 to a much more reassuring 53.8 for the month, so prospects for hiring new employees have improved.
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.
Employers are shedding fewer workers, at least as part of mass layoff actions. The outplacement firm of Challenger, Gray and Christmas noted that just 32,239 firings were tallied in August, the lowest figure since December 2010. Although not hiring much, firings are diminishing and that is also good news for keeping the economy expanding, even if it is only at a modest clip at the moment. To that end, weekly unemployment claims continue to hold in a fairly narrow band, with the latest report showing another 365,000 applications for benefits being processed at state windows during the week ending September 1. If this isn’t revised upward, it will be the lowest figure since early August.
Those with jobs are working harder, according to the latest productivity report. In the second quarter of 2012, output per worker rose a stout 2.2%, above expectations and a sharp turnaround from the -0.5% seen in the first quarter. High levels of productivity mean that businesses need to add fewer workers to meet production goals, but also that those workers can be paid more without any inflationary impact. Strong productivity is a healthy thing, but at this stage of a still weak recovery, somewhat less strength would tend to support more hiring.
The economy needs more hiring to be able to pull away from stall speed, but that doesn’t seem in the cards, at least not imminently. Aside from overseas troubles, business are said to have a number of concerns about adding employees at the moment, including uncertain demand from a weak economy here and compounded by the coming “fiscal cliff” of tax increases and new healthcare mandates. In addition to that, monetary policy may change, since the Fed’s present Operation Twist comes to a close at years’ end. With so many headwinds and concerns, not to mention a political battle being pitched as the election season fully kicks in, it is unclear what might spur more hiring.
One thing is for certain, though, is that more hiring didn’t happen in August. The latest employment report found just 96,000 new hires took place during the month, dashing hopes for a stronger showing. Earlier in the week, payroll-service company ADP reported a number about double the labor department figure, and some analysts marked up their expectations for turn. Making matters a little worse were downward revisions in the numbers reported in July and June, so the pattern — while considerably better than that seen in the Spring — didn’t improve all that much during the summer. The nation’s official rate of unemployment retreated to 8.1% for the month, but that was largely due to another decline in the number of folks actively seeking a new job. Perhaps the lure of a lazy end of summer kept folks from pounding the pavement looking for work.
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Consumer moods did improve a little bit during the week ending September 2, with the Bloomberg Consumer Comfort Index rising by 0.8 points to close the period at minus 46.5, as a string of declines which ended two weeks ago has given way to a slight improving trend.
European Central Bank head Mario Draghi pledged this week that the ECB would embark on an unlimited program of buying sovereign debt from any member of the Euro community. The pledge did come with several catches, though; any country who wants the cash and the ability to drive its borrowing costs down below what the market would price them at will need to come to heel in terms of aligning their fiscal policies toward better management of their massive debts. For countries such as Spain and Italy, this may require unpalatable changes in social programs and more. If nothing else, an all-else-has-failed safety net of sorts is in place, but we’ll need to see how it goes.
Into this fray comes the Fed. The Federal Reserve has a meeting planned for next week, a two-day affair culminating with updates to projections for economic growth and inflation from Fed members. After Fed Chairman Bernanke took pains to reiterate the Fed’s willingness to support the economy in a speech last week, there is some speculation that a grand new program will be announced at the meeting’s conclusion. Despite the weak employment report, we’re not fully convinced that a huge move is in the offing. Usually, the Fed tries to avoid major policy moves just prior to a presidential election, and although there is another meeting in late October, this one is pretty close.
The Fed could choose a less radical path than a new bond-buying spree, at least for the interim, by extending or modifying Operation Twist, lowering the rate it pays banks for holding excess deposits or explicitly lengthening the period it expects to hold interest rates at low levels. The fact that the economy is holding onto moderate growth despite considerable headwinds is weak cover for the Fed, but it might just be sufficient to keep them from moving much at the moment. It’s worth remembering that the Fed does not need to make a change at the close of a meeting; it can change policy any time it believes it is warranted.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
As noted here last week, low interest rates have no doubt helped the economy find some footing, but there is a question of how much additional benefit if any can be had by the Fed engineering even lower record lows for rates. Low rates on their own are useful, but not a cure-all, and valuable only to those looking to borrow money. A business won’t borrow to expand its operations and hire more people in a highly uncertain climate such as this; however, they will try to refinance existing debt and pocket the improvement in cash flow. We already have a lot of this sort of thing in place, and more isn’t necessarily better.
We also have already had a lot of mortgage refinancing, with at least some unsated demand yet to go, but as with the above, there are limits. There are also plenty of consumer rates seemingly immune to the Fed’s machinations, including credit cards and more, so the full benefit of lower interest rates becomes muted for many.
So, will the Fed hold their fire? Odds are probably 50-50 at the moment; a stronger employment report on Friday might have made that perhaps 60-40 in favor of holding steady. Equity markets have had a very good time of it over the past few months, and major indexes are close to or at four-year highs. A huge change in policy might signal that the Fed is gravely concerned about prospects for the economy in the near future, and that might have unintended consequences, even causing a stock market selloff. Lifting asset prices (”inflation” of a sort) is one of the Fed’s goals and they would be loath to see stock prices get battered at this point. An interesting note, though: Fed inaction might disappoint the market, too, but that would tend to see money slosh from stocks into bonds… which would tend to lower rates, so the Fed might get some desired results by doing nothing, too.
One thing to keep in mind, too: Any actions by the Fed take time to work their way through the economy, including low interest rates. Regardless of anything the Fed may or may not do, mortgage rates remain at unbelievable levels, and we will probably not see much change in that next week.
For an longer-range outlook for rates and the economy, one which will take you up to early November, have a look at our new Two-Month Forecast.