Attention this week was squarely focused on Fed Chair Powell's speech Friday morning in Wyoming at the Jackson Hole Economic Symposium. As we discuss in Interest Rate Watch, Chair Powell confirmed that the "time has come" for a monetary policy pivot now that inflation is subsiding and the labor market is displaying signs of faltering. Not surprising, these topics were discussed at length at the most recent FOMC meeting in July, according to the meeting minutes released this week. The key takeaway from the FOMC minutes was that several members expressed a willingness to ease policy back in July, and the vast majority of the Committee voiced support for a rate cut at the next meeting in September. Overall, July's FOMC meeting minutes add credence to our view that September will mark the start of the monetary easing cycle.
One unique challenge the FOMC may run into as it commences with rate cuts is the housing market, where a structural imbalance between strong underlying demand and scarce supply threatens to clog a critical channel through which monetary policy typically works. Amid a growing consensus that a number of rate cuts are on the 2024 calendar, mortgage rates have declined from about 7.2% in May to about 6.5% currently. The drop has yet to lead to a discernable pickup in mortgage demand. The MBA's mortgage application for purchase index fell during July, posted a mild gain in the first two weeks of August and then fell sharply during the week ended Aug. 16.
Home sales also have been slow to respond. Existing home sales inched up during July alongside a modest dip in mortgage rates. That said, the 3.95 million unit pace of resales during the month is still remarkably sluggish and on par with the tepid pace experienced in the aftermath of the Great Recession. The significant contraction in resales since the Fed started tightening policy is partially the result of higher mortgages, and lower financing costs will very likely improve adverse affordability conditions around the margins. A wholesale upgrade seems unlikely, however. Home prices have risen sharply over the past four years and, in July, rose even further with the existing median single-family home price up 4.2% on a year-to-year basis. Looking ahead, homes are likely to stay out of range for many buyers as supply and demand remain misaligned and existing home prices continue climb, a problem we explored in a housing report published this week.
Meanwhile, the new home market continues to outperform. New home sales jumped 10.6% to a 739K-unit pace in July, helping offset a sharp decline over the previous two months. Home builders have dodged the full effects of restrictive monetary policy by providing mortgage-rate buydowns and other pricing incentives for buyers. As a result, new home sales have held up comparatively well this cycle. The stronger pace of sales during July brought down the supply of available new homes slightly, with months supply falling to 7.5 months. Although improved, new home supply is still elevated, most notably in the major homebuilding markets of the South and West regions. Consequently, builders now appear to be scaling back production for the time being. All told, lower rates should eventually provide a boost to the residential sector, but the positive impulse could take longer to be felt on account of poor affordability conditions and elevated supply of new construction.
Another obstacle the Fed may need to navigate is a foggier gauge on the labor market. This week, the BLS released payroll employment revisions which reduced the level of employment by 818K over the 12 months ended March 2024. As is the case with most economic data, revisions are a necessary fact of life since most data are estimated with the help of surveys for the sake of timeliness and then updated as more concrete information arrives. The relatively large but not unprecedented downward revision likely reflects the many challenges of collecting data in the modern era, including lower survey response rates and increased noise surrounding estimates of the number of businesses opening and closing. For more on the annual benchmark revision, please see Topic of the Week.
All told, the downward revisions to payrolls provide additional evidence that strains are emerging in the labor market. Initial jobless claims ticked up to 232K during the week ended Aug. 17 from 228K the week prior. Zooming out, the level of initial claims is still relatively low and not consistent with the high readings typically observed during recessions. That said, the trend in claims has drifted higher over the summer, all while other economic indicators continue to flash red. The Leading Economic Index (LEI) again declined in July. Not only has the LEI gone 29 consecutive months without a gain, but the index now sits beneath the low reached in April 2020. A deep contraction in the LEI has served as a reliable predictor of recessions in previous cycles. Clearly, a downturn has yet to emerge despite the long downdraft, but it's still a reminder that the risk of a recession remains unusually elevated. It also suggests that noisier data and structural imbalances, such as in the housing market, are new quirks that the Federal Reserve may need to work around as it seeks to ease monetary policy.
This Week's State Of The Economy - What Is Ahead? - 24 September 2021
Wells Fargo Economics & Financial Report / Oct 10, 2021
While fears of an Evergrande default in China were rattling financial markets, for those of us in Southeast Texas who have survived the typically very hot months of July, August and September, this week brought the very welcome first early fall-like
This Week's State Of The Economy - What Is Ahead? - 03 May 2024
Wells Fargo Economics & Financial Report / May 10, 2024
The Federal Reserve can afford patience thanks to a resilient labor market. During April, total nonfarm payrolls rose by 175,000 net jobs, continuing a string of solid monthly payroll additions.
This Week's State Of The Economy - What Is Ahead? - 14 October 2020
Wells Fargo Economics & Financial Report / Oct 14, 2020
The global mobility playing field is equalizing. Major European countries such as Germany and France have seen a slowdown in recent weeks, leaving them right in line with the United States relative to the January baseline.
This Week's State Of The Economy - What Is Ahead? - 03 November 2023
Wells Fargo Economics & Financial Report / Nov 08, 2023
Although payroll growth is easing, the labor market remains relatively tight. The unemployment rate inched up to 3.9% in October, slightly higher than the cycle low of 3.4% first hit in January 2023, but still low compared to historical averages.
This Week's State Of The Economy - What Is Ahead? - 23 September 2020
Wells Fargo Economics & Financial Report / Sep 22, 2020
European activity is surging. Germany and Italy are leading the way, but France is close behind despite an ongoing rise in cases. The Google data are a bit outdated, but are hard to reconcile with today’s weak Eurozone services PMI figures.
This Week's State Of The Economy - What Is Ahead? - 21 August 2020
Wells Fargo Economics & Financial Report / Aug 18, 2020
Despite indications of lost momentum elsewhere, residential construction activity is picking up steam.
This Week's State Of The Economy - What Is Ahead? - 28 February 2020
Wells Fargo Economics & Financial Report / Feb 29, 2020
The COVID-19 coronavirus hammered financial markets this week and rapidly raised the perceived likelihood and magnitude of additional Fed accommodation.
This Week's State Of The Economy - What Is Ahead? - 18 December 2020
Wells Fargo Economics & Financial Report / Dec 21, 2020
This week marked the first U.S. COVID vaccinations and the imminent rollout of a second vaccine.
This Week's State Of The Economy - What Is Ahead? - 03 June 2022
Wells Fargo Economics & Financial Report / Jun 08, 2022
While talk of recession has kicked up in recent weeks, the majority of economic data remain consistent with modest growth.
This Week's State Of The Economy - What Is Ahead? - 16 February 2024
Wells Fargo Economics & Financial Report / Feb 20, 2024
The out-of-consensus start to the year for economic data continued with a slip in retail sales and industrial production followed by a startling 14.8% drop in housing starts during January.
