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? - 08 October 2021
Wells Fargo Economics & Financial Report / Oct 15, 2021
September\'s disappointing employment report clearly takes center stage over this week\'s other economic reports. Nonfarm employment rose by just 194,000 jobs, as employers continue to have trouble finding the workers they need.
Where Will That $2 Trillion Come From Anyway?
Wells Fargo Economics & Financial Report / Apr 01, 2020
Net Treasury issuance is set to surge in the coming weeks and months. At present, we look for the federal budget deficit to be $2.4 trillion in FY 2020 and $1.7 trillion in FY 2021.
This Week's State Of The Economy - What Is Ahead? - 23 October 2020
Wells Fargo Economics & Financial Report / Oct 24, 2020
A recent strong report from the National Association of Homebuilders set the tone for another round of strong housing data. The NAHB index rose two points to a record high 85.
This Week's State Of The Economy - What Is Ahead? - 02 June 2023
Wells Fargo Economics & Financial Report / Jun 06, 2023
This week, Congress and the president prevented what would have been the first default in U.S. history by agreeing to suspend the debt ceiling through the end of 2024.
This Week's State Of The Economy - What Is Ahead? - 11 March 2022
Wells Fargo Economics & Financial Report / Mar 16, 2022
Russia\'s invasion of Ukraine continues to consume nearly all media attention and has created a level of volatility that is not yet reflected in the data released this week.
This Week's State Of The Economy - What Is Ahead? - 17 May 2024
Wells Fargo Economics & Financial Report / May 23, 2024
The Producer Price Index (PPI) was a bit firm in April, rising 0.5% amid higher services prices, though it did come with slight downward revisions to prior month\'s data.
This Week's State Of The Economy - What Is Ahead? - 31 January 2020
Wells Fargo Economics & Financial Report / Feb 01, 2020
Mexico’s economy has slowed notably over the last year, with the economy contracting again in Q4, indicating a full-year contraction for 2019.
This Week's State Of The Economy - What Is Ahead? - 13 October 2023
Wells Fargo Economics & Financial Report / Oct 13, 2023
The Consumer Price Index (CPI) rose 0.4% in September, a monthly change that was a bit softer than the 0.6% increase registered in August. The core CPI rose 0.3% during the month, a pace unchanged from the month prior.
This Week's State Of The Economy - What Is Ahead? - 06 March 2020
Wells Fargo Economics & Financial Report / Mar 07, 2020
An inter-meeting rate cut by the FOMC did little to stem financial market volatility, as the number of confirmed COVID-19 cases continued to climb.
This Week's State Of The Economy - What Is Ahead? - 20 December 2019
Wells Fargo Economics & Financial Report / Dec 21, 2019
President Trump became the third president in U.S. history to be impeached by the House, but removal by the Senate is highly unlikely. The House also passed the USMCA, which should be signed into law in early 2020.
