The Jobs Report was released today and on the surface it was a bit of a letdown. With only 148,000 new jobs created last month, the news momentarily squashed the felt euphoria from the flurry of cheerful data released so far this week. I’m here to tell you that the celebration can continue and here’s why: The average rate at which jobs have been created in the U.S. is 210,000 per month, and there have been over two million new jobs created every year for the last seven years! There are about 124 million people working full time in the U.S., and our population is growing at a rate of only 0.7% per year, so the 1.6% rate of new employment opportunities outpaces population growth by 2X. And that means that employers have to pay more to attract the help, which is one reason that wages increased by 2.5% last year alone. So if you are willing and able to work, that’s good news.
All that comes at a cost, however, and that will be higher interest rates in the future. With the Fed raising three times in 2017 and committing to three more in 2018, those in the know are forecasting the 30 year rates to end the year about 1/2% higher than present levels, which are still pretty attractive.
It’s been seven years since policymakers started using the term “transitory” to describe the period of low interest rates that we are still experiencing. Rates have been held low in part because inflation remains near zero. This morning, Personal Consumption Expenditures dropped again to a 1.3% increase. That means that we are only spending 1.3% more for our personal effects this year than last year. While personally I think it’s great that my paycheck doesn’t feel quite as tightly stretched to cover costs of living, others feel that we need to be seeing a 2-3% annual increase in the price of goods and services to maintain a healthy economy. Those expositions are coming from the very body that regulates interest rates, but perhaps that argument is fundamentally flawed, given the advances made in the sectors that make all that stuff.
Attempting to figure out the future of our evolving world economy, there is a hypothesis which argues that technology has driven down, and will continue to drive down the cost of goods and services. The price increases that we have experienced in the past are irrelevant moving forward because the way we make and consume things has changed. It has been estimated that 38% of American Jobs are at high risk of being replaced by robots (or other artificial intelligence) over the next 15 years. Robots currently account for about 10% of all tasks performed in the manufacturing sector. That number is anticipated to rise to 25% in the next eight years alone. Increased automation of course has its advantages, one of them being a productivity gain of 32% in the last 14 years. That expansion of output has brought more goods and services to the market, which means more supply, which drives down prices. And while I love getting good quality stuff at a great price, I also recognize that without a job, I can’t buy anything.
There are seven million people in this country who are officially “unemployed”. The Unemployment Rate ratcheted up a tenth to 4.4% this morning, even though the BLS Jobs Report shows that there were 43,000 more jobs created than had been expected. That seems erroneous at first glance until you see that 361,000 people entered the workforce but only 245,000 jobs were created.
Now look at the same report which shows that 69% of men and 57% of women who are eligible to be employed are actually in the workforce. That’s an average Labor Participation Rate of 62.8%, which is well under what the headline 95.6% “Employment” rate might make you believe. The difference between the Unemployment Rate and the Labor Force Participation Rate is complicated, but boils down to whether that person really wants to be working or not.
Those of us who are working average $26.25 per hour and put in 34.5 hours per week. That keeps wage-based inflation steady at a 2.5% year-over-year growth rate.
After starting to slide upward for no apparent reason over the last ten days, hopefully interest rates will settle back down now that the confusing but uneventful Jobs Report is behind us.
Mortgage pricing slipped under the 100 day moving average yesterday. The last time that happened was October 5, and rates moved up about 1/4% over the next six weeks. Pricing has declined again this morning. Although we look at the technical picture only in the absence of “real” news (as opposed to “fake news”), movements like today have a marked impact on direction of interest rates. Evidence of economic growth (or at least the hope for growth) will be required to see interest rates move meaningfully higher from here. Such proof typically comes slowly over time. Here is today’s data:
The Producer Price Index rose 0.5% last month, to a year-over-year increase of 2.5%. Increased manufacturer’s costs do not always lead to increased consumer costs, but we’ll get that number tomorrow. Also, Initial Jobless Claims were reported at 236,000; a slight drop from last week’s 238,000. The employment picture keeps getting better.
The 39 page Jobs Report released today by the Bureau of Labor showed many, many boring graphs and charts. It also showed that the Unemployment Rate dropped to 4.4%, which is the lowest finding in a decade. Ironically, the Labor Force Participation Rate is also at a 10 year low 62.9%, meaning that even though folks aren’t claiming to be “unemployed”, fewer Americans are working now than at any time since 2007. Less demand for jobs means that employers need to pay more to keep their talent, consequently, wages rose 2.5% from this time last year to a cushy $26.19 per hour. Some talking calculators say that an economy in recovery should be experiencing a 3-4% annual wage growth. Where some surmise that economic growth trails wage increases by several years, we might conclude that we are still a ways away from any real threat of widespread inflation.
A little bit of Cinco de Mayo trivia: Foreign-born workers account for 17% of the total workforce in the United States, and 50% of those in this demographic came into this world in Mexico. If you think that 7.5% is a big population, consider that the state of California by itself accounts of almost 13% of the total population of the United States. Just a bit of trivial information, that’s all.
Yesterday the Fed left interest rates in place. Ironically, this puts upward pressure on mortgage bonds. The 10 Year has risen to 2.36% this morning, the highest in a month. The Fed commented that although GDP for the first quarter was only 0.7%, they have reason to believe that the second quarter will produce a 4.3% expansion rate. That would net the growth for the year above the 2.0% target rate, and poise the economy for the two further rate hikes promised.
Tomorrow is the Jobs Report. Like the expectation on GDP, last month’s measly 98,000 is anticipated to flourish to 180,000 new jobs created this month. The Unemployment Rate is also expected to drop to 4.6%. See you tomorrow!
The appetite for mortgages, as evidenced by the pricing on Wall Street, is at a three year low this morning. Mortgages are sought after by investors as a safe place to put money when the economic future is uncertain. When more traders, including the federal government, throw excessive amounts of money at the mortgage market, the price goes up and the rate of return goes down. Now that it appears that our economy has turned the corner (after like eight years), boring ol’ mortgages are getting the back seat to the high-flying thrill of the high-flying stock market.
The Jobs Report this morning is yet another evidence that the great recession–and super low interest rates–are no longer the talk of the town. The Unemployment Rate dropped to 4.7%, the Labor Participation Rate rose to 63%, Average Hourly Earnings rose 2.8%, and 227,000 new jobs were created. Should optimism continue across other sectors, I see mortgage rates breaking through the three-year high and hustling up another 1/2%. The excitement of a great running machine doesn’t come cheap, and neither does a vibrant economy.
It is both intriguing and discouraging how quickly our little brains forget the things that we learn and we regress to become entrenched again in our personal agendas. After last week’s congressional testimony by Janet Yellen, the perceived likelihood of rapid rate hikes these next few meetings was a virtual certainty. Throw a three-day President’s Day weekend at those trading money for a living however and that confidence wanes significantly. Today’s Fed Fund futures polls are predicting only a 17.7% probability for a March 15 rate hike, a 44.1% chance of a hike on May 3, and a 69.9% expectation for a 0.25% advance on June 14. It’s like the classic kids’ party game where the target is right in front of you, but after putting on a blindfold, you lose all sense of reality.
The fundamentals only confirm that the economy is ripe for higher interest rates. The National Association of Realtors said that existing home inventory has declined by 22% in the last six months. Lower supply=higher prices. Housing isn’t the only winner here, the S&P has gained 13.3% in the last three months. Higher prices, higher wages, and higher employment rates=inflation. And inflation=higher interest rates. Even the donkey can see that.
After rising for almost nine straight weeks, mortgage rates (on average) decline this week to 4.09%. Hoping that this trend continues; cross your fingers for luck.
Yesterday, the released Fed minutes showed that the FOMC is concerned with the next administration’s fiscal policy. The promise of higher growth by Trump, et al.’s future administration may lead the Fed to continue to tighten monetary policy. However, with the rotation of Fed Open Market Committee Members becoming fully fledged, voting members being more dovish that hawkish, they might be more reluctant to do so. Remember that they committed to three rate hikes in the year 2017 at their last meeting. So maybe their fingers are crossed for luck and maybe they are crossed because they don’t intent to keep their three-hike promise. The market is pricing in only two interest rates hikes this year. Time will tell what lies in store.
The close of business today marks the end of the first quarter of 2016. The stock market indices that were down as much as 10% a few months ago are now back in the black by about 1%. It’s quarters like this when investors look to the comfort of history, which shows that over the last 100 years, stocks have produces an annualized 10.3% return on investment.
Chicago Fed President Charles Evans will be speaking later this morning, just a day ahead of the monthly Jobs Report. Mr. Evans has supported Fed Chair Janet Yellen’s accommodative position, saying that the current low level of inflation makes raising interest rates a challenge. Even if the Bureau of Labor Statistics surprises us with a number way north of the 200K expected newly created jobs tomorrow, I think that 30 year rates in the 3’s are here (dare I say it) through the election.