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Investments

Fed may hedge its taper bet

Housing, employment aren't nearly so solid as claimed

December 19, 2013

The Fed bet big on job creation, a robust housing market and continued economic growth when it announced the “Tepid Taper” on Wednesday.

And as welcome as any movement to towards curbing ad infinitum quantitative easing is, there is some legitimate concern that they’ll have to hedge that bet in 2014 because there’s a lot of evidence that there’s still rough times ahead and that we’re not so much seeing “recovery” as we are seeing “wreck hovering.”

Put simply – economic conditions are not much better off now than we were in January 2013.

A day after outgoing Federal Reserve Chair Ben Bernake said the bank will be scaling back from $85 billion a month in bond and treasurys purchases to $75 billion comes news that supports a little pessimism and which runs counter to Bernake’s painted portrait.

Thursday started with the report that sales of existing homes dropped to the slowest in almost a year, according to the National Association of Realtors. The sales pace in November was down 1.2% from the year-earlier period – the first annual drop in more than two years – and down 4.3% from October.

Lawrence Yun, NAR chief economist, said the market is being squeezed and that there “is a clear loss of momentum.”

"Home sales are hurt by higher mortgage interest rates, constrained inventory and continuing tight credit," he said.

It was good news that housing starts soared in November, rising 22.7% from October’s revised estimate, but building permits – a forward looking indicator for the construction industry – saw a 3.1% drop from October, meaning starts will likely see a decline in the first months of 2014.

Perhaps more concerning was a nugget buried in the weekly jobless claims report from the U.S. Department of Labor.

Back in October, the level of new claims fell below 300,000, a psychological threshold if not a solid metric. But for the week ending Dec. 14, the advance figure for seasonally adjusted initial claims was 379,000, an increase of 10,000 from the previous week's figure of 369,000 and back to where it was in April 2013.

More concerning was the four-week rolling average, which was 343,500, an increase of 13,250 from the previous week’s revised average of 330,250.

Week-to-week totals don’t mean that much but the four-week rolling average is a decent measure that tracks with economic performance, and the four-week rolling average rarely jump by a full 13,000 claims in one week, especially when there hasn’t been any major economic meteor strike.

Furthermore, the more detailed (some say more accurate) measure of real unemployment, the U6 unemployment rate that includes part time workers looking for full-time work and those who dropped out of the labor force but would like to work – remains stubbornly high at 13.2% as of November.

Coupled with the ongoing – and apparently worsening – challenges being thrown at employers by the Affordable Care Act rollout where employers are looking at putting hiring plans on hold or even cutting workers…well, it’s going to be hard to find a silver lining spin in job growth forecasts. 

The slight uptick in average fixed mortgage rates today is one of the few metrics today that doesn’t cast a heavy shadow over Bernake’s sunny outlook yesterday. The 30-year fixed-rate mortgage rates rose to 4.47% from 4.42%. The 30-year fixed averaged 3.37% a year ago.

But even in housing there is cause for concern.

"While most housing markets still remain affordable, rising mortgage rates and rising house prices over the past six months are making it more challenging for the typical family to purchase a home without stretching beyond their means, especially in the Northeast and along the Pacific Coast,” says Frank Nothaft, Freddie Mac vice president and chief economist. “Like most, we expect mortgage rates to rise over the coming year, so it's critical we start to see more job gains and income growth in the coming year."

Just prior to Wednesday’s announcement of the tepid tapering, Sterne Agee chief economist, Lindsey Piegza told HousingWire that she doubted the Fed would taper at all, given the overall weakness of the economy.

While she was wrong on the tapering, she was right about how fragile things are right now.

Yes, she said, with unemployment hitting 7% there are good signs, but there is ongoing “weakness in other variables that also measure the health of the labor market -- average hourly earnings, the participation rate, the workweek -- all of which have shown minimal improvement," Piegza said.

And employment isn’t gaining that much, in context, she said.

“Headline growth has been uneven with two back-to-back monthly gains of +200,000 resulting in a six-month average of just +180,000, the very same pace we were at in January,” Piegza said. “In other words, despite 11 months passed and discernible weakness along the way, we are no better off in terms of labor market strength than we were at the start of the year.”

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