WEEK OF DECEMBER 31, 2007—THE JOBS REPORT

Just 18,000 ‘seasonally adjusted’ payroll jobs were created in December, and the unemployment rate rose from 4.7 to 5 percent. But seasonally adjusted means just that—payrolls were steady, there were 18,000 more jobs than the norm in December. So in fact it is good news, both because the economy is still creating jobs and the Federal Reserve will have to drop interest rates another notch in January with little fear of inflation.

The 5 percent jobless rate also concerned some, but in fact it was at 5.4 percent in 2005, 4 years after the end of the last recession. The winners were service-related jobs in professional, technical, health-care and food services. The losers were in manufacturing and construction, which continued to shrink payrolls, according to the Labor Dept.

It is really how quickly the Fed drops its rates that will determine how soon the housing market recovers. The Fed’s 17 consecutive rate increases over 2 years are what precipitated the current credit crunch, and that is why it is providing almost unlimited lines of credit to member banks.

The current easing has caused some of the ARM indexes to drop, which will help those in the most trouble. The most common Libor and MTA ARM indexes have fluctuated wildly—from as low as 1 percent in July 2004 to 4.5 percent today. The increase of 3.5 percent—over the same period that the Fed raised their rates 4.25 percent—is the main cause of the rising ARM default rate.

The rest of the week’s data was mixed. November’s existing-home sales rose slightly to 5 million annualize units. Existing sales have been stable for three consecutive months with inventories down slightly to 10.3-months’ supply, signaling a possible bottom. New-home sales are still falling, but have a smaller 9.3-month inventory of homes for sale.

MANUFACTURING AND SERVICE SECTORS-- The December purchasing manager’s index (PMI) for manufacturing activity declined for the first time since January 2007, while the service-sector’s PMI continued to expand fairly robustly. This is in line with the unemployment report that showed a continued shift away from manufacturing to more service sector jobs.

CONSUMER SENTIMENT—The consumer outlook on business conditions, employment, inflation and stock prices “improved marginally”, according to the Conference Board. “Declines in recent confidence measures are comparable to those in the aftermath of hurricanes Katrina and Rita in 2005,” said one economist, when energy prices last surged as much.

Real estate will revive when the credit markets revive. Interest rates are trending downward, with the 30-year conforming fixed rate now at 5.5 percent for an approximate 1-point origination fee. Jumbo rates are still higher than normal—about three-quarter percentage points higher. It is when jumbo rates drop to within one-quarter percent of conforming rates that the credit crunch will have disappeared. But declining interest rates have already stabilized existing-home sales. Another rate drop by the Federal Reserve at their January 30 FOMC meeting should help to bring down jumbo interest rates as well.

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