May 3, 2013 — A cascade of fresh economic data came out this week, variously reflecting economic conditions in both March and April. A “big picture” look at the data might lead one to an “economy is still troubled” conclusion despite the current 2.5 percent run rate for Gross Domestic Product.
Mortgage and other interest rates had been on a flat to easing trend for much of the week as most of the data did little to dispel the notion that we remain in a rough patch, one even the Federal Reserve implicitly acknowledged at the close of its meeting on Wednesday.
There was plenty of downbeat news available this week to create additional cause for concern, but one or two shining reports took the gloom out of the market, at least for now. Mortgage rates are likely to rise somewhat next week as a result.
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 eased by four basis points (0.04%) to 3.61%, another new low for 2013 and close to “all-time” record lows set last year. The FRMI’s 15-year companion dropped by three basis points (0.03%) to 2.86% for the week, another actual all-time low. FHA-backed 30-year FRMs followed along with a decline of two basis points (0.02%), falling to an average rate of 3.26% (record low by two basis points) and was accompanied by a three-hundredth of a percentage point slip in the overall average rate for 5/1 Hybrid ARMs, which trekked down to an average 2.57% – another new low water-mark for the most popular ARM.
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The Federal Reserve held a regular policy meeting on Tuesday and Wednesday. No changes to interest rates or QE3 came as a result of the get-together, but there was a subtle change in wording about these unusual economic support tactics. “The Committee is prepared to increase or reduce the pace of its purchases to maintain policy accommodation…” noted the Fed. No releases which followed the end of previous meetings since QE3 began have mentioned the possibility of expanding these programs, and recent market buzz has been centered around their demise, whether all at once or though a processing of “tapering” off Treasury and MBS purchases. That the Fed might consider increasing the size of the programs does reveal that they are worried about the slowdown at the end of the last quarter and what seems to be the start of this one.
There would appear to be plenty of reason for concern, too, since April’s numbers so far are coming in little better, if not worse, than March. For example, important surveys from the Institute for Supply Management conducted during April found further declines from already soft levels; the ISM’s survey of manufacturing conditions slipped by 0.6 points to a just-above-breakeven reading of 50.7 during the month. New orders and present production levels did nudge higher from March, so the internals of the report seemed fair, but we are teetering at a nearly no-growth level, regardless.
That was less the case with the ISM’s report covering service-related businesses. The ISM services index eased by 1.3 points to a 53.1 level, its lowest such value since last July, but still in a “modest expansion” stance. New orders were flat and employment prospects dimmed, and the trend for this tracker of the largest component of the US economy is decidedly downward at the moment.
Factories are no doubt struggling due to poor economies around the world and the effects of the federal spending sequestration creating drag. That being the case, it’s a little unsurprising to see a 4 percent decline in overall factory orders in March, a decline which took back the 1.9% rise in February and then some. Demand has even slowed somewhat for new autos, arguably one of the key factors keeping factories moving despite global difficulties. Annualized sales of new cars and trucks eased 14.9 million in April, down from a 15.3 million pace in March and breaking a five-month string of a sales pace of over 15 million. Although still above year-ago levels, the slowdown in sales serves to reinforce the notion that the second quarter may have no more economic strength than did the first by the time we are all said and done with it.
Reflective of a slower world economy of late, the nation’s imbalance of trade shrank considerably in March. The $38.8 billion gap was the result of a $1.7 billion dip in exports and a $6.5 billion slide in imports. Usually, a dip of this size is due to a decline in oil or gasoline prices, but the month-to-month change from February to March was negligible, so almost all of the decline came from demand for goods. Consumer spending here has slowed, and businesses are only cautiously adding to inventories, so the US is lifting the world economy to a lesser degree, at least for now.
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That seems likely to persist, given weak income growth. Personal Incomes rose a scant 0.2% during March, returning to a familiar muted-growth pattern after several months distorted up (then down) by changing tax policies from the fiscal cliff. The small rise was pushed by a like-sized rise in wages, but small gains in income were easily met my the same in outgo, and personal consumption spending rose by 0.2% as well. Treading water for the month, too was the nation’s rate of saving, which held at an anemic 2.7% for a second month. With a year-over-year rise of just 2.5%, personal incomes are only slightly higher than inflation, so getting ahead continues to remain difficult.
Construction spending has been helping to move the economy forward considerably over the last year; in March, though, not so much. Overall spending for new projects declined by 1.7% for the month, with a small (0.4%) rise in residential outlays more than overwhelmed by a 1.5% decline for commercial interests and a 4.1% drop in public works spending. Two declines in total spending out of the first three months of 2013 and a cooled pace for residential doesn’t fill us with confidence that factories or services will see much benefit from new building dollars in the immediate future.
Consumer moods brightened in both last month and the last week of last month. After a smaller than expected decline was seen in the University of Michigan April report out last week, indicating less unhappiness, the Conference Board’s measure of Consumer Confidence rebounded by 6.2 points, rising to 68.1 for the month, taking back all of March’s decline. Most of the recovery came in the “hopes for the future” department, but there was a nudge higher in the present situation component as well.
The “present situation” seemed better to respondents to the weekly Bloomberg Consumer Comfort Index poll too, since the index moved to a post-recession high of minus 28.9, attaining its best level since January 2008. We have suspected that the slide in gasoline prices has served to improve consumer moods of late, and the “personal finances” section of the report held in positive territory for a third consecutive week, but there appears to be more at work improving demeanors here than just cheaper fuels.
It may just well be that moods are improving because employment prospects are improving as well. Claims for new unemployment benefits had popped up to comparatively high levels by the end of March, but that trend has now reversed. In fact, in the week ending April 27, “only” 324,000 new applications for unemployment assistance were filed at state offices around the country; while still rather high, it was the lowest such figure since late 2007. Moods may have improved over the last couple of weeks simply because fewer folks overall lost their jobs.
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Reinforcing that possibility, a measure of layoffs by the outplacement firm of Challenger Gray and Christmas recorded just 38,121 announced job cuts in April, down from almost 50,000 in March and the lowest figure since December.
In addition to the effect of fewer folks losing jobs, perhaps moods have been further elevated by those who gained them, as well. In April, 165,000 new hires took place, according to the Commerce Department. That was above even some optimistic estimates, and perhaps as important, March’s meager 88,000 new hires got ratcheted up by 50,000, and even February’s final revision saw an addition of 68,000 jobs. The two revisions alone added the nearly equivalent of a whole month’s worth of typical hiring rates seen in the recovery, so it was almost like getting a two-for-one employment report. Importantly, the spate of hiring suggests that the economy is less likely to come to a standstill this spring.
To be sure, the 165,000 new jobs filled are still barely enough to absorb new entrants into the workforce, but the unemployment rate (derived from a separate household-based survey) did slip to 7.5%, and for a change that decrease wasn’t due this month to a decline in the labor force participation rate, which held steady at a 63.3 percent. In fact, the labor force actually expanded, as some 210,000 folks joined the fray during the month.
Workers added to payrolls in the first quarter may have invigorated others to work harder. After a 1.7% decline in the last quarter of 2012, worker Productivity rebounded with a 0.7% increase in output in the first quarter of 2013. A decline in productivity may presage a spurt in hiring; if the available workforce can no longer meet production needs, more workers will need to be added, and recent trends may bear this out. Regardless, the gain in output per worker meant that the labor cost per unit produced eased back to a rise of just 0.5% during the quarter, a sharp decline from the 4.4% noted three months ago. More productive workers can be paid more without any effect on inflation, but rising output can obviate the need for more hires.
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|Current Adjustable Rate Mortgage (ARM) Indexes|
The cost of keeping those employees on the books is rising at a very slow rate, too. The quarterly Employment Cost Index rose by a scant 0.3% during the first three months of 2013, down a tick from the last reading. Wages rose by 0.5%, a healthy sign for workers, while benefit costs moved just 0.1% upward, beneficial to workers and business bottom lines alike. Over the past year, the broadest measure of keeping a worker on the books has grown by just 1.7%.
We have waited for some time to say that labor markets are a bright spot in the economy. Although we’ll probably have to wait a while longer to make that claim, there is little doubt that they are the bright spot at the moment. Getting more people into jobs will do more to trim the deficit, more to spur growth and more to set the economy right than all of the government or Federal Reserve efforts combined. More hires mean more inbound taxes from workers, fewer outlays for unemployment benefits and more spendable dollars coursing through the economy, all good things.
However, it’s important to keep perspective. New hiring needs to run at much higher pace over a longer period of time to move the unemployment needle downward. As jobs become available, formerly disenfranchised workers come back into the market (as seen this month) so even when hiring is happening, unemployment may not decline much. The Federal Reserve has a stated goal of 6.5 percent unemployment, and there are millions of jobs which need to be created and filled between now and then.
As far as interest rates go, it took an accumulation of fair economic news over a period of months and some considerable market optimism about the economy’s future to bump them up during the late winter and early spring. That trend did an about face over the last six weeks or so as the economic news turned decidedly darker. Is the employment report the start of a new spate of solid news, or simply a bright spot in an otherwise dim sky? One report doesn’t change the overall trend, buy may be enough to allay concern about a deeper downturn forming.
For the moment, the brighter employment picture on Thursday and Friday was sufficient to cause a reversal in the decline in interest rates. The influential 10-year Treasury bounced upward by more than a tenth-percentage point on Friday, so it’s to be expected that at least some of that will show in mortgage rates as we round into next week. Many popular mortgages have been easing to record (or near record lows) but will move away from them next week, when a 5 or 6 basis point rise in HSH’s FRMI seems most likely.
For an longer-range outlook for rates and the economy, one which will take you up until late May, have a look at our new Two-Month Forecast.