The US Labor Department said the US economy added 110,000 new jobs in September, higher than the 100,000 figure predicted by economists. Also, rather than shedding 4,000 jobs in August as initially estimated, 89,000 new jobs were actually created. The government also revised upwards non-farm payroll figures for July, saying 93,000 jobs were created as opposed to the 68,000 first estimated. However, the overall unemployment rate rose to 4.7% from 4.6%, the highest for a year. If the August initial estimate had been confirmed it would have suggested a sharp slowdown in the economy since the economy has not shed jobs on a monthly basis for four years.
Ironically, the rise in August’s jobs figure was largely due to the previous underestimation of government hiring, particularly of new teachers, of which one might have thought the government would have a clear idea. And the September rise was driven by the services sector, while there was a net loss in jobs in construction and manufacturing industries. Jobs data is a key indicator of the health of the US economy, which has to create about 100,000 jobs a month to replace those lost through retirement and natural attrition. The data coming out does not appear strong and seems to have been prone to large adjustments since the July implosion of the sub-prime market.
To underline the point, at right is an employment chart shared by John Mauldin, Van Hoisington and Lacy Hunt at the end of October.
A useful summary of data points from John Mauldin illustrates that the US housing market is still receding. This matches the IFC chart showing that sub-prime mortgage problems are not expected to peak till the beginning of the year. (That chart is in the July Review here.)
First the inventory of existing homes rose yet again to 4,581,000, which is an increase of more than 1,000,000 since March alone. It is more than double the supply since the beginning of 2005. In January there was a 6.6 months supply of homes for sale. Now it is 10 months. Over 500,000 homes are in the process of foreclosure and will soon come onto the market. I think that means in the near future we will see a 12 month supply of existing homes for sale.
Remember, that is an average. In some markets, that means there may be a two year supply and a three month supply in areas of higher demand. It is going to become a buyer’s market in the middle of next year as sellers
Want to buy a condo? Existing condos for sale have risen by 35% since January to 661,000. That is almost 12 months of supply, and there are a lot of new condos coming onto the market as there are a lot of construction projects that are just now nearing completion.
New home sales in August saw the largest decline in three decades, down 8.3%. Mean new home prices are down 11% in the last five months. The inventory of new homes for sale is up to 8.2 months and rising.
Greg also spotted something which I suspected and hinted about in previous letters. The number of homes above $750,000 which are selling is down by over 35% from last year. Sales of home from $500,000 to $749,000 is down by 25%. Jumbo mortgages are just hard to find at rates that make sense. I think it is likely that Congress will allow Fannie and Freddie to take larger loans onto their books. I would not be shocked to see the number at $600,000, at least temporarily. Right now they are limited to taking $417,000 loans. With a 20% down payment that means about $525,000 for the sales price of the home.
These anecdotal data points illustrate that the adjustment in US housing has not yet completed and we can expect more downward pressure on consumption and by extension the economy in general.
Although Commerce Department data for August showed a rise in August and a moderation of core inflation, this data should be considered warily as they may be a result of unusual incentives. Consumer confidence and housing are still down.
Consumer spending rose 0.6% in August, the largest increase since April and more than expected. The rise was underpinned by strong sales of durable goods, automobiles and weather-related services. However, analysts have noted that retailers offered discounts and other incentives to move product, especially 2007 cars.
The core personal consumption expenditure deflator, posted its smallest year-over-year gain since February 2004. The core deflator index, which excludes food and energy prices, rose 1.8% on an annual basis, continuing a downward trend since February. This adds to the confidence the US Fed might have in reducing interest rates again. However, we still believe this would be dangerous as it contributes to moral hazard (attested to by the spike in stock markets since the rates were dropped on 18 September) and would reduce their ability to reduce rates in future, when it may be more needed.
Separately, construction spending increased 0.2% in August after a 0.5% decline the month before, though many had expected another drop. Nonresidential construction offset a decline in home building.
This data continues to give mixed signals, contributing to uncertainty which make business planning difficult. It is pragmatic to focus on core business in this difficult environment and be prepared for a downturn – it is easier to rise with the tide, than stay afloat while everything else is sinking.
Retail sales and industrial output both slowed in the US in August.
Shop sales grew 0.3% in August, below market expectations of a 0.5% rise and below July’s 0.5% increase, but excluding car sales, which are at their strongest in two years, retail spending actually declined 0.4% in August.
Industrial output rose 0.2%, the slowest pace in the past three months; output at U.S. factories fell 0.3% last month, the first decline in manufacturing after five straight increases.
Last month the economy also shed 4,000 jobs. The August figure from the Department of Labor came as a surprise, because economists had anticipated data showing an increase of 110,000 jobs. The last time the US economy shed jobs was four years ago in August 2003 when the total number employed fell by 42,000. The Department of Labor also cut its estimates for the number of new employees hired in June and July by a total of 81,000.
Meanwhile, figures from the University of Michigan showed that consumer confidence remains close to a yearly low.
A piece of more positive economic news: the US balance of payments deficit, which has been a factor in the weakness of the dollar, narrowed to $190.8 billion in the second quarter from $197.1 billion in the previous three months. However, this may be partly a consequence of a slowing economy and more expensive imports. The financial system is working.
We expect data to continue to be modest, but this is appropriate and will equalise the imbalances in the US economy, allowing a natural adjustment there and globally. Importantly, these changes must be underpinned by a changing culture, one which saves more and spends on infrastructure, health and education as much as convenience consumption.
This extract from John Mauldin’s Thought’s From The Frontline suggests that the downturn in US housing could be bad for inflation:
Indeed, there may be some concerns that the CPI (Consumer Price Index) number could come under pressure from the housing component. Given that home prices are falling, that may be considered odd by many. But CPI does not measure home prices. It measures something called owner’s equivalent rent. And even as house prices rose by 93% in real terms (per Bob Shiller) in the last decade run-up, rent in real terms did not go up all that much, so the cost of a new home was not reflected in the CPI.
Now, we may have the opposite problem. As more and more people cannot get a mortgage coupled with a very precipitous rise in foreclosures, we are seeing more people who need to rent. Rental property availability in many markets is quite tight, which means that rent prices are increasing. If you go to the Bureau of Labor Statistics and look at the housing rent data, it is not too hard to think that the housing component of CPI could easily rise by more than 4% in the fourth quarter given the current trend.
Since the housing component is about 30% of the total CPI, a 4% inflation in housing could be significant. And oil is over $80 and rising. The dollar is falling, meaning that import prices are going to rise. And should we mention that food costs a lot more than this time last year?