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Employment Gains and Economic Growth
Keep Fed on a Rising-Rate Course

A robust January employment report confirmed the economy’s strength, while triggering a bond sell-off that sent mortgage rates higher in early February.
Mortgage rates, averaging 4.2 percent for conventional 30-year loans in Freddie Mac’s Primary Mortgage Survey, have reached their highest levels in more than four years, as investors are pricing in their expectation that the Federal Reserve will remain on course to boost its target rate multiple times this year.
Confirming the Fed’s increasing confidence in the economy, the Labor Department’s January employment report brought a double-dose of good news: Employers added 200,000 workers to their payrolls, beating analysts’ expectations; and wage gains, elusive throughout the recovery, finally made an appearance. Average hourly earnings increased by nearly 3 percent in January, the largest year-over-year increase since the recession ended in 2009. The national unemployment rate remained unchanged at 4.1 percent, its lowest level in nearly 20 years, with 17 states reporting record lows.

Eye on Inflation
Watching economic trends – and labor market conditions – closely, the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) left its target funds rate unchanged at 1.25 to 1.5 percent in January, while reaffirming its intention to push rates higher this year. The statement issued after the meeting shifted from the concern the committee had been expressing ─ that inflation was lagging the Fed’s 2 percent target ── to concern about heightened inflation risks.
"Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term," the statement said. While “near-term risks to the economic outlook appear roughly balanced, the statement added, the committee is “monitoring inflation developments closely." The December statement, by contrast, said nothing about inflation risks, noting only the Fed’s continuing concern that core inflation indicators continued to decline and were still running below 2 percent.
The employment gains and rising wages that are keeping the Fed on its rate-setting course are also fueling something of a consumer spending spree. Consumer spending increased by nearly 4 percent year over year in the fourth quarter; household debt levels rose to $15.1 trillion in the third quarter from $13.4 trillion in the same quarter of 2011. The savings rate, meanwhile, hit a post- recession low at 2.4 percent in December.
The economy grew at an annual rate of 2.6 percent in the fourth quarter, beating analysts’ expectations, as the recovery continues to reflect the slow pace and resilience that have been its hallmarks during the past nine years.

Housing Stumbles
But the housing market hit another bump at year-end, with declines in both existing and new home sales. Reversing course after three consecutive month-over-month gains, existing homes sales fell by 3.6 percent to a seasonally adjusted annual rate of 5.57 million units in December, eking out a scant 1.1 percent year-over-year gain.
New home sales followed an even steeper downward trajectory in December, falling by 9.3 percent compared with November – the largest month-over-month decline in almost 18 months. But the annualized sales pace – 608,000 units – was more than 14 percent above the year-ago rate.
Pending sales, a measure of future existing home sales – increased for the third consecutive month, but inventory levels continued to trend downward in December, falling by 11.4 percent to reach their lowest level since January 1999, when the National Association of Realtors (NAR) began tracking these statistics. Inventories have now declined year-over-year for 31 consecutive months, making an already tight sellers’ market even tighter, and pushing home prices steadily higher.
The closely watched S&P CoreLogic Case-Shiller index rose 6.2 percent for the 12 months ending in November. Echoing that trend, the median home price, measured by the National Association of Realtors (NAR), posted its 70th consecutive year-over-year increase in December, with a 6.2 percent jump, bringing the median to $246,800.
Prices are now rising at nearly triple the inflation rate, David Blitzer, managing director at S&P Dow Jones Indices, who noted that it is supply, not demand, that is “the primary factor” driving home prices. “Without more supply, home prices may continue to outpace inflation,” he warned.
The housing starts report for December provided no encouragement on that score, as single-family starts declined by nearly 12 percent compared with the November pace. Although starts were still 3.5 percent higher year-over year, the annualized rate of about 800,000 units continues to lag the long-term average of close to 1 million units.
-family building permits increased by 3 percent year-over-year in December, moving in the right direction, but not nearly far enough or fast enough to make a significant dent in the inventory shortage. And that is cause for continuing concern, Lawrence Yun, the NAR’s chief economist, warns.
“Jobs are plentiful, wages are finally climbing, and the prospects of higher mortgage rates are perhaps encouraging more aspiring buyers to begin their search now,” Yun said in a press statement. “[But] sadly, these positive indicators may not lead to a stronger sales pace. Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices ─ especially at the lower end of the market.”
 

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