Jobs Report Undercuts Recession Talk – Market Update

Last updated for legal disclaimers. Originally written in August 2022.

Inflation continues to run hot and the most recent gross domestic product (GDP) release has observers wondering whether we’re in a recession. At the same time, just-released employment numbers don’t support that assertion. Let’s get into the nitty-gritty.

Headline News

As always, this portion of the report is backed by the analysis of our friends at Econoday.¹

Consumer Price Index (CPI)

Inflation in the month of June was up 1.3% overall, with a 9.1% uptick compared to last year. This is going in the wrong direction. It’s the highest level since November 1981. When food and energy were taken out, prices were up 5.9% annually with a 0.7% monthly increase.

There may be relief coming because energy prices were up 7.5% in June with an 11.2% increase in gas prices, but this is trending down recently. Prices are 41.6% for the year. Meanwhile, food prices were up 1% and have gone up 10.4% this year, which is the fastest pace since February 1981.

Shelter costs were up 0.6% while used cars and trucks were up 1.6% and the cost of medical care rose 0.4%. The cost of lodging away from home was down as well as the cost of airfare.

Producer Price Index (PPI)

Prices for producers were up 1.1% and have risen 11.3% overall. When food and energy were taken out, prices were up 0.4% and have gone up 8.2% since last June. Finally, when retail and wholesale sales were removed, inflation was up 0.3% and 6.4% over the last 12 months.

Breaking this down further, there was a 2.4% increase in the cost of goods in June and a 10% upward swing in energy costs. Food prices came in up 0.1% while trade services in the retail and wholesale sector were up 0.8% pricewise.

Retail Sales

Retail sales rebounded in June, up 1% overall, a number that was matched when taking out vehicles. When further removing gas, sales were up 0.7%. Gas sales were up 3.6% in June on higher prices. Sales in core categories were up 0.8% overall.

Interestingly for observers of inflation, sales of building materials were down 0.9%, but this was attributed to a drop in prices rather than lower volume of sales. Sales of furniture and home furnishings were up 1.4%. Electronics and appliance sales rose 0.4%. Sales in a catchall category that includes sporting goods, hobby, instrument and book stores were up 0.8%. Meanwhile, sales at restaurants rose 1%.

There was a 2.2% uptick in e-commerce sales and miscellaneous stores saw sales rise 1.4%.

Industrial Production

Industrial production in June was down 0.2% including a 0.5% decline in manufacturing output. Capacity utilization in factories was down slightly, falling 0.3% to 80%. However, this was after being revised up in May.

The production of both durable and nondurable goods was down, falling 0.3% and 0.8%, respectively. Motor vehicles and their parts had a 1.5% downtick in durable goods. In nondurable, everything fell except apparel and leather.

There was a 1.4% downturn in utility production. On the electric side, this was down 2%. However, natural gas production was up 2.2%. That’s an interesting number to keep an eye on because lots of liquefied natural gas is being sent over to Europe right now with Russia cutting much of its energy supply to the continent.

Mining production is up 1.7%, as oil and gas well production has risen 4.3%. With gas prices going up as much as they have, there’s been a return to a “drill baby, drill” attitude. It’s something to watch.

Housing Market Index

In one for the recession signs column, homebuilders in July had sentiment drop 12 points in the quickest month-to-month decline the National Association of Homebuilders said it had ever seen.

Single-family sales were down 12 points at 64. This is the lowest it’s been since the height of the pandemic. Meanwhile, expectations for future sales were down 11 points at 50. And the reason for this pessimism? Traffic of people walking through homes was down a further 11 points at 37. Sales aren’t going to be as high if fewer people are touring homes.

New Residential Construction

Housing completions were down 4.6% at 1.365 million in May. Still, this was 4.6% higher than a year ago. Single-family completions were down 4.1% at 1.039 million, while completions in buildings with 5 or more units came in at 366,000.

Housing starts were down 2%, falling to 1.559 million, 6.3% lower than this time a year ago. On the single-family side, starts were down 8.1% at 1.068 million, while there were 568,000 multifamily starts.

Building permits were down 0.6% at 1.685 million, still up 1.4% compared to a year ago. Single-family permits were down 8% at 967,000. Meanwhile, multifamily authorizations came in at 666,000. We’re going to defy superstition and print it in the name of accuracy.

Existing Home Sales

Sales of existing homes were down 5.4% to a seasonally adjusted annual rate of 5.12 million. They’ve fallen 14.2% compared to the same time a year ago. Higher rates certainly had an effect in June.

At the same time, the average purchase of an existing home was up 1.9% at $416,000, which represented a 13.4% increase over last year. It is noted that the pace of appreciation is slowing a bit. Meanwhile, the market continues to be incredibly active, with sellers having their home on the market just an average of 14 days.

Supply continues to be tight. If every home on the market was sold with no new inventory coming online, they would be sold out in 3 months. At the same time, this is actually an improvement over June when supply was 2.6 months.

Case-Shiller Home Price Index

This 20-city index is a rolling 3-month average of home prices in the cities surveyed. Prices were up 1.3% on a seasonally adjusted basis and 1.5% overall in May. On an unadjusted basis, prices have gone up 20.5% since last May. If there’s any relief for home buyers, it’s in the fact that prices are going up more slowly.

FHFA House Price Index

Unlike the Case-Shiller index, this one looks only at conventional loans and it’s not an average. Prices were up 1.4% on homes with loans backed by Fannie Mae and Freddie Mac in May. For the year, prices are up 18.3%. Directionally, the two indexes have been in lockstep with a slower pace of appreciation.

New Home Sales

New home sales were down 8.1% in June to come in at a seasonally adjusted annual rate of 590,000. This is down 17.4% compared to last year. Higher mortgage rates are having an effect.

It hasn’t happened yet when it comes to existing homes, but the median price of a new home was down 9.5% at $402,200 in June. You read that right, at the median, an existing home in the U.S. was more expensive than a new one. We were living in interesting times in June.

There are 9.3 months’ worth of homes available. That’s a high number, but because of the difference in expense (real or perceived), people often pursue existing homes first.

Consumer Confidence

Consumer confidence came in down 3.1 points at 95.7. This included an across-the-board drop in consumer buying plans over the next 6 months. Additionally, fewer people see their incomes increasing and more expect declines. Meanwhile, those who see the stock market falling outnumber others, representing 45.9% of those surveyed.

Additionally, more people think jobs are harder to get and fewer people think business conditions are good. It’s worth noting that this isn’t necessarily borne out in actual employment numbers. More on those in a minute.

Durable Goods Orders

New orders of durable goods were up 1.9% in June. When transportation was taken out, the increase was 0.3% and there was a 0.5% rise in core capital goods orders.

Transportation orders in particular were up 5.1% as there was an 80.8% uptick in defense aircraft. There was also a 5.9% increase in orders for computers and related items.

Pending Home Sales Index

The number of existing homes under contract for sale was down in each of the four major regions. Pending home sales fell 8.6% nationwide to an index level of 91.

GDP

Most of the time, only total nerds pay attention to economic releases, but this one caught mainstream attention. For the second consecutive quarter, initial estimates showed that GDP fell, down 0.9%. One of the traditional bellwethers of a recession is back-to-back quarters showing a shrinking economy.

There are plenty of caveats to this. For starters, consumer spending was up 1% in this reading. And we’ll get to it, but employment is strong. (I know I’m a tease.) Services spending was up 4.1%. Spending on goods was down 2.6%, but still, a net positive.

What really pulled things down was a 13.5% downturn in gross investment as well as declining inventories. Retailers overbought goods at the height of the pandemic and people are now spending more on experiences than goods.

Personal Income And Outlays

Personal incomes were up 0.6% last month with consumer spending up 1.1%. What’s especially interesting is that this is the preferred inflation metric for the Federal Reserve when they set policy. On that front, prices were up 1% in June and 6.8% overall. In core categories, the rise was 0.6% in June and 4.8% over the last 12 months.

Durable and nondurable goods spending was up 1.5% and 1.7%, respectively. Meanwhile, services spending increased 0.8%. Wages and salaries increased 0.5% to go along with a small increase in unemployment insurance benefits of 0.5%.

ISM Manufacturing Index

On one hand, manufacturing is growing, but it’s doing so at the lowest rate in 2 years, coming in at 52.8 in July. Any number above 50 does indicate growth. Prices were down a bit and one sign that inflation may be forcing everyone to take stock of what they really want to buy.

The new order component was in contraction at 48. Inventories also remain low at 39.5. The employment index was also showing shrinkage, although not as fast at 49.9. The areas still showing growth are backlogs and supplier deliveries.

Employment Situation

If you’re going to question the idea that we might be entering a recession, this piece of data is a big feather in your cap. There were 528,000 jobs added to nonfarm payrolls in July. The unemployment rate fell 0.1% to 3.5%.

In terms of the government vs. private payroll breakdown, 471,000 jobs came courtesy of private sector employers. Average hourly earnings were up 0.5%, and they’ve risen 5.2% on the year. The average workweek was 6 minutes longer at 34 hours, 36 minutes.

Taking a look at individual industries, there were 30,000 jobs added in manufacturing. Meanwhile, 96,000 jobs were added in leisure and hospitality to go along with a matching increase in health care assistance employment.

There were also 32,000 jobs added in construction and 89,000 jobs tacked onto professional and business service payrolls. If there was one downside, the labor force participation rate did go down 0.1% at 62.1%.

Mortgage Rates

If you’ve been following mortgage rates lately, you might find that you’re suffering from a bit of whiplash with all the ups and downs. However, it’s incredibly important to lock your rate right now if you see one you like.

For prospective home buyers, our friends at Rocket Mortgage^® offer RateShield^®, which allows clients to lock the rate for up to 90 days. In addition, if rates drop over the time frame, you can move down to the lower rate once.²

For those looking to refinance, but considering all of their options to access their equity, there is also a new Home Equity Loan option.³ Between the Home Equity Loan and your primary mortgage, you can access up to 90% of your equity at rates far lower than credit cards or personal loans.

According to Freddie Mac, the average rate on a 30-year fixed last week was down 31 basis points to 4.99% with 0.8 points paid in fees. This is up from 2.77% last year at this time.

Looking at shorter terms, the average rate on a 15-year fixed with 0.6 points paid was down 32 basis points at 4.26%. This is up from 2.1% last year.

Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage was down 4 basis points to 4.25% with 0.3 points paid. This is up from 2.4% a year ago.

We get that mortgage rates and economic data aren’t going to keep everyone awake in the dog days of August. If you want to take a refreshing dip, but you don’t have an inground pool, here’s how much it would cost to install one ahead of next summer.

¹ Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2022 Econoday, Inc. All rights reserved.

² RateShield Approval is a Verified Approval with an interest rate lock for up to 90 days. If rates increase, your rate will stay the same for 90 days. If rates decrease, you will be able to lower your rate one time within 90 days. Please contact your Home Loan Expert for additional information. This offer is only valid on 30-year FHA, VA and conventional purchase loan products. RateShield Approval not eligible for clients with a signed purchase agreement, on Charles Schwab loans, or new construction loans. Additional conditions and exclusions may apply.

³ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.