HSH Market TrendsUnemployment One-Two PunchApril 3, 2020

After last week’s 3.3 million unemployment claims — a figure some six times larger than the previous one-week record — what can we make of this week’s doubling of that new record to 6.648 million initial claims for benefits in the week of March 28? An unprecedented and astounding 10 million Americans have filed for unemployment benefits in just the last two weeks alone, and there’s little reason to believe that substantially improved numbers will come in the next report.
Where the economy goes from here depends largely on how fast government supports can reach the people, and how fast we can at least start to move from near-shutdowns of virtually all businesses to allow at least some to start to re-open. A couple of more weeks of shutdown may be manageable, but longer than that and we may find that the economy cannot re-ignite with any speed, if at all.
The economic data now becoming available cover March, when both the financial market panic and pandemic were hitting at the same moment. However, the first portion of March was relatively normal, while the second half anything but. As such, the data that is coming out has to be viewed through a darkening lens, because the situation deteriorated so rapidly and continues to do so as we move now into April.
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For example, the national employment for March came out on Friday; forecasts called for perhaps 100,000 job losses, breaking the record expansion of hiring that lasted for 113 months. In fact, the decline in hiring was 701,000 for March, more than seven times the expected total. The figure was bad, but is made worse by the knowledge that the survey reference week used by the Bureau of Labor Statistics only covered the period through about March 15. As might be expected, the vast majority of job losses were in leisure and hospitality (-459K), the sectors where mandatory closures and social distancing requirements hit first, but retail establishments only reported about 49K job losses, and that figure will spike and be joined by others next month. At present, there is little doubt that the next employment report for April will be considerably worse than was this one.
The March report saw the nation’s unemployment rate rise from 3.5% to 4.4%, but that surely understates the size of the actual move for the month. To be counted as unemployed, respondents have to note that they don’t have a job but are looking for one; with commerce shut down in so many areas it’s not possible to look for a job, so the answer would be “no”, and these responses are not included in the unemployment total. Wages did manage a small rise of 11 cents, good enough for those with jobs to see a 3.1% year over year gain in salary. The labor force participation rate dropped by 0.7 percent to 62.7, a level last seen in about September 18, as the size of the labor force contracted by 1.633 million for the month.
Consumers can’t get out to buy cars and trucks — and most states, car dealers aren’t considered to be essential and so have shuttered — so it stands to reason that sales of new vehicles plummeted in March. AutoData reported that just 10.7 million (annualized) new vehicle sales happened last month, a level last seen in the Great Recession about 10 years ago.
The twin reports from the Institute for Supply Management track both manufacturing and non-manufacturing sectors of the economy. From the headline figures of both, you might conclude that the economy in March was soft, but still okay. That wouldn’t be exactly right. The barometer covering manufacturing eased by just a single point, slipping from a barely positive 50.1 in February to a sub-par 49.1 for March. That said, the only reason the top-line figure didn’t decline more was a component that tracks deliveries from suppliers, which slowed markedly for the month. In the ISM series, longer delivery times infer that business is humming and goods are harder to come by; for this month, goods were hard to come by, but not because of strong demand but rather broken supply chains. Otherwise, the report was dour, as the measure covering new orders slumped 7.6 points to 42.2 and that for employment by 2.9 points to 43.8 for the month. Both point to serious contraction for industries that were just starting to get moving after the trade-and-tariff tussles of the last year or so.
The service side of the economy is larger than manufacturing by magnitudes, and also showed a downshift for March, although the indicator still remained in mildly-positive territory. At 52.5, the headline measurement was still 2.5 points above the breakeven level of 50, but was the lowest value since August 2016. As with the manufacturing index, the headline was also propped up by slow supplier deliveries, but again, that was due to disrupted supply lines rather than surging demand. New orders for services dropped 10.2 points to 52.9 for March, and the employment gauge slumped 8.6 points to 47.0, it’s lowest mark in about six years.
With headlines filled with apocalyptic news and becoming more widespread and strident each day, you would expect consumer moods to be souring, and they are. The Conference Board’s measure of Consumer Confidence recorded a 12.6-point decline for March, and the survey only covered though March 19. At least through the, current conditions were still rated pretty favorably, with this submeasure declining by just 1.6 points to 167.7 and continuing a mild downtrend. However, the forward-looking expectations component sees darker times ahead, with a 19.9-point decline here placing the meter at 88.2, a level last approached in October 2016. Moods are likely darkening quickly as conditions change rapidly for many, and we’ll get an early April review for this in the form of Consumer Sentiment next week. Expect moods to be ugly.
The nation’s imbalance of trade narrowed in February, due more to a slowdown in imports as global supply chains (notably China) were impacted by the coronavirus outbreak. The $39.9 billion differential in the values of goods and services coming to and going from these shores was the smallest gap in about 3.5 years. Imports dropped by $6.4 billion; exports eased back by $1.1 billion, but the nation did preserve its net exports of petroleum products for the month. That seems likely to change with the collapse of oil prices last month to perhaps 18-year lows. Russia and Saudi Arabia are feuding, and while prices of oil have surged from about $20 per barrel to $29 over just a few days amid rumors of a deal to support prices by cutting production there is no way to know if this will come to fruition. U.S. based producers need prices to be closer to $50 per barrel to make extracting oil here profitable. Prices haven’t been close to those levels since the end of February.
Excepting non-QM and private jumbo markets, mortgage markets are generally functioning again, and lenders have worked through at least some of the refi-spike backlog of a month ago. As such, mortgage rates have started to ease again, and that has perked up appetite for mortgages by consumers. The Mortgage Bankers Association of America noted a 15.3% increase in applications for loans in the week ending March 27, driven there by a 25.5% bump in refinance applications. Requests for funds to buy homes dried up for the third consecutive week, slipping 10.8% in the latest report, and given challenging conditions in the housing market and consumer pullback it seems reasonable to expect soft homebuying conditions even as we should be hitting the peak of the spring homebuying season. Service providers are scrambling to close loans and purchase deals already in progress, and it’s not clear if potential homebuyers will try to wade into wholly-digital home buying processes, especially given the uncertain income landscape for many. The National Association of Realtors actually reported a 2.4% increase in their Pending Home Sales Index for February, but it remains to be seen how many of those purchase contracts make it to close given significantly changed economic conditions for many people.
As well, it also seems likely that despite what will likely be again record low interest rates at points this spring that job losses will prevent many potential refinances from taking place. Homeowners who lose their jobs will not be able to produce income documentation to meet qualification requirements, even in cases where their actual income may be little changed due to unemployment benefits and other supports. We’ll need to see how that plays out. Anyone up for designing a refinance program for folks on unemployment?
The economic news is bad, and like the curve of the virus spread, is certain to get worse before it gets better. The good news is that financial markets seem to have gotten past the panic, which is an important step; even the truly awful initial unemployment claims and employment report for March failed to cause a significant selloff, although Friday’s markets did fade as the day went on, but like last week, this may be positioning to get out of harm’s way over the weekend.
After trending down a bit, interest rates have been largely flat over the last couple of days, and fairly quiet, given the experiences of the last month or so. Should the relative quiet hold, we could see another decline in mortgage rates in the next week. This week’s dip was about twice what we expected, but we will likely edge closer to “all-time” lows (if perhaps hitting them) in the next week. Without conviction, we’ll call it a 4-6 basis point decline in the conforming 30-year FRM Freddie Mac will report come next Thursday morning.

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