Labor Market Still Strong As Federal Reserve Continues Inflation Fight – Market Update

The Federal Reserve continues to focus on bringing inflation down to its 2% target on an annual basis. At the same time, even as it continued to raise the target for the federal funds rate, the job market remains in good shape.

Headline News

The information in this article has been supplemented by an analysis from our friends at Econoday.¹ Let’s get to it!

International Trade

The overall U.S. trade deficit increased by $4.1 billion in October to $78.2 billion. There was a $2.2 billion increase in imports while exports were down $1.9 billion.

Looking at the gap more closely, $49 billion out of it is the consumer goods deficit. Americans import a lot more of the things we buy than we make. There was also a $2.2 billion drop in pharmaceutical exports. Meanwhile, there was a $1.4 billion downturn in exports of natural gas and a $1.1 billion rise in imports of industrial supplies.

Where the U.S. excels is in its surplus in the services sector. This was up $2 billion as exports of services were up $1.8 billion with travel leading the charge. Meanwhile, there was a $200 million decrease in imports of services. The total services surplus is $21.4 billion.

Producer Price Index (PPI)

On the producer side, prices were up 0.3%. They’ve risen 7.4% since last November. Removing food and energy, these were up 0.4% in November and 6.2% on the year. When further removing wholesale and retail sales, prices were up 0.3% and 4.9% on the production side.

Service prices were up 0.4%, although they’ve only risen 5.9% on the year, which is down from 6.5% in November and the lowest annual increase since June 2021. On the goods side, prices were up 0.1% and have increased 9.7% on the year, down from 10.5% in October.

Consumer Price Index (CPI)

At the consumer level, prices were only up 0.1% in November, below expectations for a 0.3% increase. Prices have gone up 7.1% since the same time a year ago. When food and energy were removed, prices were up 0.2% for the month and 6% on the year.

Food prices were up 0.5% and have gone up 10.6% since last year. Meanwhile, energy prices were down 1.6%. While they are up 13.1% since November of last year, that’s down from 17.6% year-over-year appreciation in October and the lowest pace of increase since February 2021.

Shelter prices were up 0.6% and 7.1% since last year. Also up were prices for communication, recreation, auto insurance, education and apparel. On the other side of the ledger, prices decreased for used cars and trucks, medical care and airfare. 

Retail Sales

Retail sales were down 0.6% for the month of November. When vehicles were taken out, the drop was 0.2%, and the same number persisted when gas was removed. Looking at individual categories, auto sales were down 2.3%. Meanwhile, sales at gas stations were down 0.1%.

Sales at building material stores were down 2.5%, while furniture sales saw a similar 2.6% decline. Department stores sales fell 2.9%. Sporting goods stores saw sales fall 0.6%. Finally, sales for e-commerce and catalog retailers were down 0.9%.

Some categories did see sales rise, with food and beverage stores up 0.8% and restaurants rising 0.9%. 

Housing Market Index

The housing market Index for December fell a couple of points to 31. Builders feel pretty cautious right now.

Present sales were down 3 points at 36 in December, which is the lowest the number has been since July 2012, excluding the beginning of the pandemic. At the same time, sales over the next 6 months were up 4 points at 35. There might be some expectation here that business will pick up if rates stabilize. Meanwhile, the index of traffic going through homes stayed at 20. That’s not very high, but mortgage rates are leveling off.

New Residential Construction

Housing completions have the most immediate impact on inventory within the market, so let’s start there. This was up 10.8% in November at a seasonally adjusted annual rate of 1.49 million, 6% higher than the same time a year ago. On the single-family side, finished units were up 9.5% to 1.047 million. There were 430,000 multifamily units completed in buildings with 5 units or more.

Housing starts were down 0.5% at 1.427 million on a seasonally adjusted basis. Meanwhile, single-family starts fell 4.1% to 828,000 to go along with 584,000 multifamily starts in November.

Finally, permits are the furthest out from becoming reality, but they do signify a directional thought from builders on the market. They were down 11.2% overall at a seasonally adjusted rate of 1.342 million in December. Single-family starts fell 7.1% at 781,000. 

Consumer Confidence

Consumer confidence in December was up 6.9 points to 108.3 and was revised up 1.2 points in November. The present conditions index was up 8.9 points at 147.2 while expectations for the next 6 months were up 5.7 points at 82.4.

People tend to see jobs as being more plentiful and current business conditions are thought of as being better. Looking to the future, people have lower inflation expectations, as low as they’ve been since September 2021. Meanwhile, business conditions and the employment outlook also improved, but people weren’t as optimistic about income.

In terms of life decisions, more people plan to take vacations, but there’s some reticence to spend on major appliances and homes at this point with interest rates still fairly high.

Existing Home Sales

Sales of existing homes fell 7.7% in November to 4.09 million. They’ve fallen 35.4% on the year. Higher mortgage rates are certainly having an effect. Rates have begun to stabilize and come down a bit recently, but not when this data was collected.

Supply in the market was 3.3 months at the current pace of sales in November. In some good news, prices were down 2.1% on the month at $370,700. This is not just 3.5% from a year ago. The crazy housing market of last year has definitely cooled.

Breaking this down a bit further, single-family sales were down 7.6% to 3.65 million units, falling 35.2% for the year. Meanwhile, multifamily sales dipped 8.3% to 440,000 units in November, down 37.1% from last year. 

Gross Domestic Product (GDP)

Overall GDP was up 3.2% in the final analysis for the third quarter, up from 2.9% in the prior estimate. A big part of this was a 0.6% uptick in the rate of consumer spending to 2.3 %. Both numbers beat all estimates.

Personal consumption expenditures alone added 1.54% to GDP, led by a 3.7% increase in spending on services. This helped make up for the fact that spending on goods was down 0.4% including a 0.8% decrease in spending on durable goods and 0.1% drop for nondurables.

Nonresidential fixed investment was up 6.2% compared to 5.1% in the last estimate. However private domestic investment was down 9.6% and residential investment fell 27.1%. Higher mortgage rates were a big contributor to the latter. Finally, exports were up 14.6% as imports dropped 7.3%. 

Durable Goods Orders

Durable goods orders were down 2.1% in November. The good news is if you exclude transportation, orders were up 0.2%. This number was matched in terms of core capital goods orders.

There was a 6.3% downturn in terms of transportation orders. When defense orders were excluded, overall new orders were down 2.6%. 

Personal Income And Outlays

Personal incomes were up 0.4%, while expenditures were up 0.1%. This matched overall inflation increases which were up 0.1% for the month and have risen 5.5% overall on the year. Meanwhile, prices in core categories were up 0.2% and 4.7% annually. It’s worth noting that this is the Fed’s preferred inflation metric. When officials say they want a 2% target, the core annual number is the one that they are looking at.

Wages and salaries were up 0.5%. Meanwhile, Social Security payments were down 0.3% and unemployment benefits were up 9%. Layoffs hit the tech sector in November. There was a 0.7% increase in spending on services while spending on durable goods fell 2.3% and nondurable spending was down 0.2%.

New Home Sales

New home sales were up 5.8% in November to a seasonally adjusted annual rate of 640,000, which is still down 15.3% from last year, but a positive note. Sales were up 27.6% in the West to go along with a 21.3% gain in the Midwest. In the South and Northeast, sales were down 2.1% and 8.5%, respectively.

Supply of new homes on the market was down to 8.6 months at the current pace of sales in November. Meanwhile, the median price of a new home was down 2.8% at $471,200, still up 9.5% from last year. There’s a bit of a dearth of low-price new construction in the last few years. 

Case-Shiller Home Price Index

Both this and the Federal Housing Finance Agency (FHFA) data we’ll discuss next are lagging by a couple of months. Additionally, this one is a 3-month rolling average of transactions. So while home prices may have been falling in many markets for a while, we’re just starting to see it in this data.

Across the 20-city index, prices were down 0.5% on a seasonally adjusted basis and have fallen 0.8% overall. They still remain up 8.6% for the year.

FHFA House Price Index

This works a little bit differently than the Case-Shiller index. It only looks at home purchases backed by conventional loans and it’s not a 3-month average. In this one, prices were flat in October while they’ve gone up 9.8% this year.

Pending Home Sales Index

Pending home sales were down 4% at 73.9. This is the 6^th consecutive month of declines. Because this is a leading indicator, it’s not a good sign for the December release on existing home sales.

ISM Manufacturing Index

This index for the manufacturing sector was down 0.6 points at 48.4. This means the sector is slowing at a slightly faster pace in December. Only two of 13 manufacturing sectors surveyed showed growth.

Among key metrics, new orders slowed a little faster, coming in at 45.2. As a reminder, 50 is breakeven. Meanwhile, average lead time and capital expenditures remain elevated. Prices were down a bit at 39.4. One piece of good news was that production increased, up 3 points at 51.5.

Employment Situation

The economy added 223,000 jobs in December while the unemployment rate fell 0.2% to 3.5%. One good sign here is that the labor force participation rate increased 0.1% to 62.3%. Average hourly earnings were up 0.3% and have risen 4.6% on the year. That’s down from 5.1% previously and may be a sign that inflation pressures are easing.

The length of the average workweek was 34 hours, 18 minutes in December. There were 228,000 jobs added to private payrolls, with 8,000 added specifically in manufacturing. There were also 28,000 jobs added in construction. Other areas seeing a large increase in employment included 78,000 in education and health services and 67,000 jobs in leisure and hospitality.

Mortgage Rates

Mortgage rates picked up slightly last week. However, overall, they have begun to moderate a little bit. They’re no longer in an unending upward climb. While the Federal Reserve continues to raise the target for the federal funds rate, the increase was lower this time around. If you’re thinking about buying a home or doing a refinance, you can lock your rate to protect against future increases.

According to Freddie Mac, the average rate on a 30-year fixed is 6.48%, up 6 basis points on the week and having risen from 3.22% last year.

Looking at shorter terms, rates are averaging 5.73% on a 15-year fixed, up 5 basis points for the week. Rates are up from 2.43% last year.

If this has you bored out of your mind, let’s try something different. Here’s what you need to know to live in a yurt. Have a great month!

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