More New Homes Needed

 The Mortgage Corner

Higher new home sales and rising homebuilders’ optimism foretells a strong summer sales season if builders and existing-home inventories don’t run out of housing stock. More new homes could also soften what is being termed a rolling recession with some sectors (such as manufacturing) faltering and other sectors (e.g, services ) still growing.

Builders must pick up the pace for that to happen, however.

Sales of new single‐family houses in March 2023 were at a seasonally adjusted annual rate of 683,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

“This is 9.6 percent (±15.2 percent) * above the revised February rate of 623,000, but is 3.4 percent (±12.7 percent)* below the March 2022 estimate of 707,000. The seasonally‐adjusted estimate of new houses for sale at the end of March was 432,000. This represents a supply of 7.6 months at the current sales rate.”

 

Census.gov

Builders remained cautiously optimistic in April, as limited resale inventory helped to increase demand in the new home market. Single-family builder confidence in April rose one point to 45, according to the NAHB/Wells Fargo Housing Market Index.

Currently, one-third of housing inventory is new construction, compared to historical norms of around 10%. More buyers looking at new homes, along with the use of sales incentives, have supported new home sales since the start of 2023. Builders note that additional declines in mortgage rates (to below 6%) will further boost demand.

“A lack of resale inventory combined with many builders offering price incentives helped to push new home sales higher in March,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB). “However, sales are down 3.4% compared to a year ago because of the shortage of electrical transformer equipment and building material price volatility.”

Whereas pending home sales of homes under contract but not closed edged down. The Pending Home Sales Index (PHSI)^* – a forward-looking indicator of home sales based on contract signings – waned by 5.2% to 78.9 in March. Year over year, pending transactions dropped by 23.2%. An index of 100 is equal to the level of contract activity in 2001.

“The lack of housing inventory is a major constraint to rising sales,” said NAR Chief Economist Lawrence Yun. “Multiple offers are still occurring on about a third of all listings, and 28% of homes are selling above list price. Limited housing supply is simply not meeting demand nationally.”

Chief economist Yun believes mortgage rates will improve the sales outlook by continuing to decline below 6 percent into next year. The 30-year conforming fixed rate is even obtainable at 5.75 percent for one origination point in California.

This is while the initial estimate of first quarter 2023 GDP growth was 1.1 percent, close to the consensus by economists. The problem is demand has far exceeded supplies, keeping housing prices and inflation too high and the Fed unhappy.

The lack of existing supply is a problem in all economics sectors, which may mean the Fed will continue to boost interest rates until markets catch up, though they’ve said they will pause for the rest of the year after another May 0.25 percent increase.

So a rolling recession could mean a bumpy ride for consumers who now must choose whether to buy now or wait until interest rates and inflation continue to moderate.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

US Economy Already In Recession

 Popular Economics Weekly

FREDgdp

First quarter 2023 economic growth was not good, after all the conjecture over where US growth is headed. The U.S. economy grew at just a 1.1 percent annual rate in the first three months of this year, as declining business investment offset strong consumer spending causing the slower growth.

Consumer spending kept US economic growth barely positive. So the Fed’s rate hikes are making a difference. But it was businesses cutting back on spending and stocking inventories, not consumers that slowed Q1 growth.

Consumer spending is the main engine of U.S. growth and grew 3.7 percent, the government said Thursday. It was the biggest increase in almost two years. Businesses are now aggravating the inflation problem by not meeting consumers’ needs, reducing investments and production at a time when consumers are still consuming, thus keeping prices from declining more quickly.

What is the Fed to do with one more rate hike scheduled? They are harming future growth six month to a year ahead, while consumers want to spend because they are still fully employed.

One economist believes we are already in a rolling recession, with some sectors still growing while others are shrinking. Consumers still love leisure activities like dining out and travel, for instance, but are buying fewer things like cars and other durable goods.

Businesses like manufacturing see this as recessionary and so have cut back on investments, and hence future growth.

“The strong and healthy job market is one of the reasons we’re not seeing every sector declining simultaneously as we do in a classical recession,” said Sung Won Suhn, an economist at Loyola Marymount University. “This is the bedrock of the economy that’s enabled a more moderate rolling recession,” who was cited in the Washington Post.

We can therefore say the Fed has already induced a recession, but a mild one if the Fed will now pause in its rate hikes. They should pause because the simple fact is regional banks are still in trouble, such as First Republic that has seen another multi-billion dollar withdrawal of deposits that sent its stock plunging 50 percent recently.

So the Fed maintains it is now the job market that is causing stubborn inflation because Americans are still fully employed!

But is it wise for the Fed to now want to put workers out of work at a time when banks are faltering, there is a major European war, and there is still a scramble for available resources?

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Retail Sales Show Consumers Hurting

 Financial FAQs

FREDretailsales

Treasury Secretary Janet Yellen said in a recent Fareed Zakariah interview on CNN that she thought an economic soft landing was possible, despite warnings that the recent bank failures could cause banks to tighten in their lending criteria, contributing to a slowing economy.

That is already happening. Retail sales in March posted the third decline in four months, largely because of lower auto and gasoline sales. Rising interest rates make car loans more expensive, for starters.

Retail sales aren’t inflation adjusted, so it means an even larger drop if inflation is factored in. Restaurants and bar sales also declined, a sign that consumers are spending less on leisure activities.

In fact, the decline in retail sales was widespread. Receipts at auto dealers dropped 1.6 percent. Furniture store sales fell 1.2 percent, while receipts at electronics and appliance stores tumbled 2.1 percent. Sales at building material and garden equipment supplies dealers plummeted 2.1 percent.

It is a sign that consumers are beginning to seriously cut back on spending, which affects other sectors. The Fed showed manufacturing production dropped 0.5 percent in March after increasing 0.6 percent in February. Durable goods lasting more than three years have been down the past two months.

All of this has been hurting consumer sentiment, despite Americans being fully employed and the percentage of working-age adults entering the workforce are back up to pre-pandemic levels. The index, produced by the University of Michigan, rose from 62 in March to 63.5 in April, from a four-month low. 

"While consumers have noted the easing of inflation among durable goods and cars, they still expect high inflation to persist, at least in the short run," said survey director Joanna Hsu.

Inflation is beginning to seriously worry consumers, in other words. One-year inflation expectations increased 4.6 percent in the year ahead, up from 3.6 percent in the prior month, said the Univ. Michigan survey. But in the longer run, expectations were unchanged. Americans think inflation will average 2.9 percent annually in the next five years.

So, when will the Fed pause in its rate hikes? Inflation is now plunging, so effective have been rate hikes from essentially zero percent just one year ago to 4.75 percent today.

In fact, the Producer Price Index for final demand that measures wholesale goods and services declined -0.5 percent in March, as reported last week. Prices for final demand have risen just 2.7 percent for the 12 months ended in March, from 4.6 percent the previous month. It is now approaching the Fed goal of a 2 percent inflation rate for wholesales goods that end up as consumer products.

Is Janet Yellen right, will consumers avoid a crash landing?

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Fed Now Fears a Recession

 Financial FAQs

BEA.gov

It is no longer lost on the Fed Governors that the record speed they have raised short-term interest is causing a possible recession. They have even said so in their just released minutes from the latest FOMC minutes.

Three medium-sized regional banks have already failed and several dozen are on the FDIC watchlist, who have overinvested in uninsured assets that are devaluing fast as interest rates have risen.

And inflation is now plunging, so effective have been rate hikes from essentially zero percent just one year ago to 4.75 percent today.

In fact, the Producer Price Index for final demand that measures wholesale goods and services declined -0.5 percent in March. Prices for final demand goods decreased -1.0 percent, and the index for final demand services moved down -0.3 percent—all plunging the largest monthly amount in three years.

So, alarm bells are sounding for the Fed to move in the opposite direction—to not only pause but reverse course, if they believe what they say—and inflation is no longer a problem.

Prices for final demand have risen just 2.7 percent for the 12 months ended in March, from 4.6 percent the previous month. It is now approaching the Fed goal of a 2 percent inflation rate for wholesales goods that end up as consumer products.

It turns out the Fed Governors have been too good at their job, catching banks and regulators flat-footed from the effects of their rate hikes and a probable cause of a recession sometime later this year.

Why? Because Fed officials are now seeing signs that banks are tightening their credit standards as well, following the Fed’s guidance, which will harm business investments and even homebuyers who will find it more difficult to qualify for a loan or mortgage.

“Financial conditions tightened considerably over the intermeeting period as a whole,” said the minutes. “Market contacts observed that the recent developments in the banking system will likely result in a pullback in bank lending, which would not be reflected in most common financial conditions indexes.”

Given their assessment of the potential economic effects of the recent banking-sector developments, the Fed’s staff now sees “a mild recession starting later this year with a recovery over the subsequent two years.”

The minutes also show that “many” officials said that the likely effects of the banking stress had led them to lower their estimate of the peak rate that would be needed to bring inflation under control, according to the minutes of the March 21-22 meeting.

With such fears it would be far wiser to anticipate other inflation indicators plunging as fast. And once that happens what other dominoes may fall?

But instead, FOMC officials ultimately voted to increase the benchmark borrowing rate by 0.25 percentage point, the ninth increase over the past year. That brought the fed funds rate to a target range of 4.75%-5%, its highest level since late 2007.

Other economic sectors are beginning to plunge as well. Sales at retailers dropped 1 percent in March and declined for the fourth time in the past five months, said the Census Bureau. Watch out below if this reflects consumers beginning to close their wallets.

The problem the Fed Governors haven’t understood in their panicked reaction to the initial inflation surge was that conditions outside of the Fed’s control have caused most of the inflation. A historic pandemic that shut down worldwide economic activity and a European war have been the main cause shrinking world-wide production, while governments pumped in excess liquidity to keep their economies afloat.

There is now the real possibility that the Fed intends to cause a recession, which is the only result that will bring down the inflation rate to 2 percent, which they seem fixated on doing, despite the possibility of more bank failures.

Harlan Green © 2022

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Americans Still Fully Employed

 Popular Economics Weekly

BLS.gov

The Bureau of Labor Statistics graph above shows why the US Federal Reserve keeps raising interest rates. The US unemployment rate dropped from 3.6 to 3.5 percent in March. It was 14.7 percent in April 2020. It was last 3.5 percent in February 2020 at the on set of COVID-19.

The U.S. added a robust 236,000 new jobs in March, defying the Federal Reserve’s hopes for a big slowdown in hiring as the central bank struggles to tame high inflation. We have never before seen such a precipitous drop in unemployment. It took ten years—from 2010 to 2020—to reach 3.5 percent after the Great Recession. It took slightly more than two years to return to 3.5 percent again, in July 2022.

Average hourly wages are rising at 4.2 percent, and the labor participation rate of working-age adults is 80.7 percent, back to pre-pandemic levels. Where are more workers to be found to keep up with employers’ job openings?

The decline in the unemployment rate to 3.5 percent was despite 480,000 entering the labor force. The separate Household survey from which the unemployment rate is derived showed employment increasing 577,000 last month.

While the increase in payrolls was the smallest in more than two years, the number of new jobs created last month was still stronger than is normal for this time of year.

Leisure and hospitality added 72,000 jobs in March, lower than the average monthly gain of 95,000 over the prior 6 months. Most of the job growth occurred in food services and drinking places, where employment rose by 50,000 in March.

Government employment increased by 47,000 in March, the same as the average monthly gain over the prior 6 months. Only two sectors shrank in jobs—retail trade and construction services.

If the Fed continues to raise interest rates, those workers in the lowest paying restaurant and leisure sectors will suffer the most, who spend most of their incomes.

The standard Fed mantra is that higher inflation harms low-paying sector workers the most. Really? The Fed’s current stated goal is to raise the unemployment rate at least 1 percent. That means the loss of 1-2 million jobs.

I believe workers, given the choice, would rather pay slightly more for their goods and services than lose their jobs!

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

More Soft Landing News!

 The Mortgage Corner

The banking failures have begun to raise hopes the Fed will take a pause in its rate hikes. Now more signs of a weakening economy have added to that possibility, a real possibility the Fed will cease and desist with its obsession that inflation is still out of control. If so, a so-called ‘soft landing’—the economy slowing, but not entering a recession—is possible.

Calculated Risk

The latest JOLTS report of fewer job vacancies and a shrinking manufacturing sector are two such signs.

“The number of job openings decreased to 9.9 million on the last business day of February, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations changed little at 6.2 million and 5.8 million, respectively. Within separations, quits (4.0 million) edged up, while layoffs and discharges (1.5 million) decreased.”

The gap has therefore narrowed between the number of jobs available (vacancies) and actual hires. There were as many as 11.8 million job vacancies in early 2022.

Another sign of a slowdown is the faltering manufacturing sector. Per the Institute for Supply Management’s manufacturing survey, it dropped to 46.3 percent from 47.7 percent in the prior month. That’s the lowest level since May 2020, when the pandemic slowed down much of the U.S. economy.

The ISM’s service sector has slowed as well from 55.1 but remained positive at 51.2. It has contracted just once in the past 34 months, this past December.

“There has been a pullback in the rate of growth for the services sector,’ said survey director Anthony Nieves, “attributed mainly to (1) a cooling off in the new orders growth rate, (2) an employment environment that varies by industry and (3) continued improvements in capacity and logistics, a positive impact on supplier performance. The majority of respondents report a positive outlook on business conditions.”

And interest rates are finally beginning to decline after their record rise from essentially zero for short-term rates. Falling mortgage rates in particular are boosting the housing market.

The most popular 30-year conforming fixed rate is now down to 5.625 percent for 1 origination point, and 6.0 percent for 0 points for borrowers with excellent credit. That’s a full percentage point drop from its highs.

I reported in a recent blog that housing prices are finally declining in some regions in concert with lower mortgage rates, which has led to an early buying season.

“I’m quite surprised,” Lawrence Yun, chief economist at the National Association of Realtors said. “The recovery is coming stronger, [but] maybe it will deflate again if the mortgage rates get too high… [and] mortgage rates have a very big influence.”

Signs of lower inflation are now cropping up everywhere, which should help the Fed Governors to decide it is a good time for a time out in raising interest rates further.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

 Financial FAQs

BEA.gov

Why the talk of a recession when predictions are for first quarter GDP growth as high as +3.2 percent?

After fourth quarter 2022 GDP growth came in at 2.6 percent in the government’s final estimate (see graph), economists are now predicting higher 2023 growth, despite talk the Fed may raise their fed funds rate another +0.25 percent.

Why? Firstly, the banking crisis is lowering the odds of any ‘hard’ landing this year caused by the Fed, because pushing interest rates any higher could cause more banks to fail that have loaded up with either Treasury or Mortgage-backed securities that lost value when rates rose.

And real consumer spending surged 1.5 percent in January, which makes up 70 percent of GDP growth (see below graph). Personal income (blue bar) has been exceeding outlays (orange bar) since last November, so personal savings have increased, meaning consumers can continue to spend.

Even if real consumer spending remained soft in March, that would not change its sharp upward trajectory for the first quarter, economists said. JPMorgan raised its first-quarter GDP growth estimate to a 3.25 percent rate from a 2.5 percent pace. Goldman Sachs bumped up its estimate by 0.2 percentage points to 2.4 percent.

There was some good news on inflation as well, as the Fed’s preferred inflation statistic, the Personal Consumption Expenditures Index (PCE), slipped from 5.3 to 5.0 percent in February, its core rate without food and energy prices falling from 4.7 to 4.6 percent.

It isn’t just interest rates that control growth, but consumers’ confidence in their jobs and future prospects. Both the Conference Board and University of Michigan surveys remain slightly positive in their outlook.

“Driven by an uptick in expectations, consumer confidence improved somewhat in March, but remains below the average level seen in 2022 (104.5). The gain reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board.

The University of Michigan’s survey was slightly less sanguine. “Consumer sentiment fell for the first time in four months, dropping about 8% below February but remaining 4% above a year ago,” said survey director Joanne Hsu. “This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank.”

Other inflation indicators are showing similar declines, so there is hope the inflation scare that has affected confidence in our banking system may soon be over. And once again, the necessity of supporting our banking system should help wage earners, since it will trump any desire by the Fed to harm wage earners by pushing interest rates even higher.

Harlan Green © 2023

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen