Housing affordability and mortgage payments as a percentage of income
refinitive
The market’s reaction and direction has always been based on employment numbers. On the face of it, the +315,000 from the BLS payroll survey looked “solid” and shares were up more than 1% early Friday. However, as further analysis was conducted, the markets ended the day significantly in negative territory. Apparently, the details under the headline were anything but “solid.”
Here are some of those details:
- The totals for the previous two months have been reduced by -107,000.
- BLS “adds” a number to the “small business” salary survey each month because the survey only covers large companies. In August, this automatic “add” was about 90,000. So they really didn’t count +315,000, it was more like +225,000. In Wednesday’s ADP survey, the reported number for small businesses was -47,000. (ADP uses its payroll business for such data.) ADP has been reporting negative small business results for several months. Using ADP’s small business census, the BLS number would fall further to around +175,000; So the +315K number is misleading.
- The household survey, the sister telephone survey of households, was +442,000. This was the first truly positive result after three months of flat or negative data. Again, it looks strong on the surface, but it was all part-time jobs. In the BLS surveys, part-time and full-time positions are treated equally, i.e. counted as a “job”. full-time employment fell by a fairly large -242K. The increase in part-time jobs was +684k, not a very good economic signal. The way things are counted could be very misleading. Losing a full-time job and taking on two part-time jobs to make ends meet (probably resulting in less total income) still counts as a +1 in the job count. There was a significant amount of that in this report as the number of multi-job holders increased by +114,000.
- Part-time employment “due to economic reasons” (no full-time available or the company has reduced its hours) rose +225k in August after rising +303k in July.
- The workweek contracted -0.3%, never a good sign. It has been flat or down for five of the past six months. Such a contraction corresponds to -150,000 jobs.
- On a positive note, the labor force participation rate (LFPR) rose +0.3 points to 62.4% from 62.1% in July, hitting the highest level since March 2020 and a sign that either pandemic fears are finally ending to subside or inflation requires employment for some couch potatoes. The LFPR for women aged 25-34 (usually new mothers) increased by +0.6 points to 78.6%, the highest value ever recorded. Perhaps the tight labor market is finally easing – good news, especially for the service industries.
- The unemployment rates (both U3 and U6) are based on the household survey. While employment there increased, the re-entry of applicants into the labor market increased both U3 (from 3.5% to 3.7%) and U6 (from 6.7% to 7.0%).
- At 0.3%, wages rose more slowly than in the recent past. As a result of the aforementioned fall in the working week (-0.3%), average weekly earnings stagnated.
After the markets digested all of this, the downward trend in share prices that we have been witnessing since mid-August continued, with the major indices all trading in the range of -1% on the day, -3% to -5% on the week and – 7.0% to -8.5% since this renewed downtrend started in earnest in mid-August (see table).
stock prices
Universal Values Advisor
inflation
Inflation is the big topic in today’s business press. In past blogs we have indicated that June (+9.1% Y/Y) would be the peak of the Y/Y inflation numbers. The July rate was 8.5% Y/Y, but what you (other than us) didn’t see is that the M/M rate for July was negative at -0.19%. As a thought experiment, the table below shows 1) what the Y/Y rate (what the Fed is fixated on) would be if the M/M rate were flat (ie a 0% change) the following year, and 2) how what the Y/Y rate would look like with an M/M change of -0.1%.
Y/Y CPI change 0.0% and -0.1% M/M
Universal Values Advisor
The table shows that with an M/M inflation rate of 0%, Y/Y inflation will not reach the Fed’s target of 2% until April 2023. 0.1% as base case. The chart shows that the backward looking Y/Y CPI hits the Fed’s 2% target next March and that we do indeed have deflation in June. Here is the basis of our thinking:
- The supply chain has relaxed. The chart below is a compilation of supplier delivery delay indices from the regional Federal Reserve Banks in New York, Richmond, KC, Philly, and Dallas, and the Texas Manufacturing Survey. Note that ‘bottlenecks’ are back to pre-Covid levels.
Supply Shortage Index
Haver Analytics, Rosenberg Research
- The Baltic Dry Index is an index of the cost of transporting bulk materials such as iron ore. Note it has fallen to June 2020 levels in the heart of the Covid lockdowns. That says something about supply chains.
Baltic Dryness Index
Baltic Stock Exchange
- The next chart is an index of the prices paid by companies and its high correlation to the CPI. If the correlation holds, the CPI should soon plummet.
ISM index of paid manufacturing prices and CPI inflation
refinitive
Ironically, the NY Fed’s research team recently issued a paper that concluded: “Barring new energy or other shocks, it is… possible that the sustained easing of supply constraints will result in a significant fall in inflation in the near term.” .” Research staff at the St. Louis Fed published a paper with similar conclusions. We wonder why the Federal Open Market Committee (FOMC), the Fed’s rate-setting committee, doesn’t listen to its own staff! In any case, the FOMC, at least according to its public statements, does not see such a weakening of price pressures. In fact, one would infer from their public dialogue that they intend to raise rates quickly and keep them high at least until 2023.
Housing
We’ve written extensively about what looks like a major economic problem for the economy – housing. It makes an important contribution to GDP. Besides the house price problems, the main culprit is the rapid rise in interest rates. Housing is now the cheapest it has been in over 40 years (see graph at top of this blog). Because of interest rates, the affordability factor has priced out many potential buyers. Mortgage purchase applications continue to fall on a w/w basis. Prices are market based and are only at the beginning of a correction process that could correct between 10% and 20% depending on interest rates (ie the Fed), the latter if the Fed continues to hike rates. We note that Canadian home prices, which have had a similar price hike to the US, have already started their correction and are down -5% Y/Y so far.
The Federal Agency for Housing Financing (FHFA) has a home price index. In June (latest data) it rose significantly more slowly than in the previous months at +0.1%. The median price in the index fell -0.4%. According to other data, July and August were probably negative for both statistics. Note that the Case-Shiller 20 City Composite chart shows a decline in Y/Y prices in both May and June (latest data).
S&P Case-Shiller House Price Index
Haver Analytics, Rosenberg Research
Final Thoughts
The next “big” report for the Fed will be the CPI, which is scheduled for September 13, just before the September 20-21 Fed meeting. We don’t think this will have a big impact on the Fed’s rate hike decision as even a -0.1% or -0.2% M/M CPI report is unlikely to move the Y/Y number (it will still be above 7% Y/Y). ). That’s the number the Fed is fixated on.
The supposedly strong payroll survey headline will continue to convince the Fed that the economy is not in real danger and that if a recession does occur, it will be mild. As implied in this blog, the Payroll Survey headline likely sends a false all-clear. The chart presented earlier shows that even if M/M inflation disappears completely, the backward looking Y/Y numbers will not reach the Fed’s 2% target until next spring. Because monetary policy acts with a significant lag, if the Fed waits until then before restoring policy to at least “neutral,” the economy will face a deep and likely prolonged recession, eventually ending up in a deflationary environment.
(Joshua Barone contributed to this blog)
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