In a normal world, positive economic news can usually be counted on to be accompanied by firming interest rates. After all, if the prospects for growth are rising, so too are the chances that taking on financial risks could produce higher rewards, and money tends to follow its best opportunity. In such cases, investors often allocate more money toward equities and away from safe (but low yielding) bonds, a shift which tends to see bond yields rise. As well, in more typical times, rising growth would be associated with a potential future increase in inflation, and to hedge against that, investors begin to require higher yields in order to keep “real” rates of return on target.However, these are anything but normal times. The economy is climbing out of a record-size hole at an uncertain pace, and one perhaps with somewhat less vigor than recent and most current economic data may reveal. Even as we celebrate signs of improvement, we can’t help but view the data with a skeptical eye, as improvements from the re-opening of a pandemic-shuttered economy just don’t feel all that durable. Of course, we’ll only come to know this in time.The two broad facets of the economy were moving forward at a fair pace in July, according to the latest reports from the Institute for Supply Management. The barometer covering manufacturing edged higher by 1.6 points to 54.2 for the month, the highest values seen here since March 2019, with the upward move over the last two months helping to fill in some of the March-May hole. Subdued as they had been, measures of new orders pushed higher, rising to pretty robust territory at 61.5, but an expression of wariness about the strength of these gains could be seen in the employment measure, which, while improved, remains at a level where more manufacturers are shedding jobs than adding, which has been the case since last July (intensified by the pandemic, of course)
The larger and more important services side of the economy sported a similar outcome for July. The ISM non-manufacturing gauge has completed a “V”-shaped rebound, and is back to about where it was in February. At 58.1, this indicator gained just a point for the month, but that was sufficient to be the best reading since February 2019. New orders rose to a very robust 67.7, but employment faded, declining by a point to 42.1, a value more consistent with recession than expansion.The ISM series are useful indicators but like all series have limitations. The indicator uses a par value of 50, with figures above signifying increase in a given component or sum, and those below signifying contraction. Importantly, they only reference such change when weighed against responses from a month ago, and even though things improved this month relative to last it doesn’t necessarily mean that the broader trend is fully reflected. That items such as orders have improved relative to last month is helpful to know, but it doesn’t reveal whether the number of value of orders are actually higher than, say, where they were at the start of the year. Still, improvement is improvement, and we are glad to see it happening.One demonstration of the improved-over-last-month-but-still-not-great can be seen in the monthly report covering sales of new vehicles. According to AutoData, the annualized rate of sales of new cars and trucks sold in July rose by 2.3 million from June to July, climbing to 15.0 million units. Now, that 18.1% month to month rise in sales is appreciable, but even so, any car dealer will likely tell you that things are better but not good, given that the rate of sales as recently as February was 18 million units, annualized, and relative to last July, sales were off more than 11 percent. Still, it’s better than the 9 million of a few months ago, and the trend is heading in the right direction.
!Also heading in the right direction was the nation’s trade imbalance. An uneven recovery across the globe means such improvements in the difference in value between imports and exports will likely be erratic at best. In June, that gap narrowed by $4.1 billion, landing at $50.7 billion for the month, and the first decline since the impact of the pandemic started to become clear. Although still $40+ billion below pre-pandemic levels, exports managed to grow by $13.6 billion for the month, so at least some of our trading partner’s economies picked up, while out appetite for imported goods increase by $9.4 billion, a figure also about $40 billion or so below where we were before the global outbreak. A whole lot more trading needs to happen to get us back to where we were before, and it will be a while before we get there. We have watched the weekly initial claims for unemployment assistance begin to pick up again in recent weeks, a sign that the recovery in labor market may have been faltering. In the latest week, initial claims suddenly dropped by 249,000 to 1.186 million, easily the best of the post-shutdown period. After weeks of both barely declining and actually increasing, the question is “What changed in the week of August 1 to cause such an improvement?” and “Is it a coincidence that the additional $600 weekly benefit provided by the federal government expired on July 31?” For some portion of folks that have recently been laid off, does this change make it more beneficial to go look for another paying job at full scale since state-only benefits only provide a partial recovery of income? It’s hard to say, but the number of claims for those extra funds also fell by an eerily similar amount – 253,000 for the same week. If these above-and-beyond benefits are renewed, it will be interesting to see if initial weekly unemployment claims might rise again following any reinstatement.
Other labor market metrics were generally improved, if less so than in other recent months. The payroll processor ADP’s monthly look at private payrolls was expected to show as many as 1.5 million new hires for July, but that turned out to be a wildly optimistic guess by the markets as just 167,000 new jobs were added. Conversely, the outplacement firm of Challenger, Gray and Christmas tallied announced workforce reductions of 262,649 for July. Between the two was a net loss of employment, although how much is unclear, since not all announced job cuts take place here in the U.S. and not all happen immediately, so the difference is probably a wash overall. The employment situation for July did improve a bit, though, according to the Bureau of Labor Statistics. In July, 1.763 million new hires took place, a figure a little higher than was expected, if only about one-third of the job resumptions that happened in June. Still, the improvement in hiring was enough to bring the official unemployment rate down to 10.2%, so there has been a 4.5 percentage point improvement since the April peak. The labor force contracted a bit in July, declining by 62,000 folks, leaving the labor force participation rate at a still-subdued 61.4%, so there are plenty of able bodies should work become available. In March and April, a cumulative 22.13 million people lost their jobs. In May, June and July, some 8.829 million have gained them back (or found new ones). Although this amount of job creation in such a short while is remarkable, it bears remembering that only about 40% of the jobs lost have been recovered so far, and recovering that other 60% will be a lot harder and take a lot longer than this first chunk. Even if jobs continued to be created at a million per month, a full labor market recovery is more than a year off, and any gains are of course offset by any losses over that time. To continue to make progress, monthly job increases need to start outpacing the kinds of job losses that are keeping initial claims above the million mark each week. Challenges lie ahead.
For the first time since February, consumer use of credit rose. June’s $8.9 billion increase in debt was a meager one, with new balances on installment-type loans (autos, education loans) increasing by $11.3 billion dollars. That said, consumers must still be flush with disposable cash for smaller-ticket items, as balances on revolving accounts (mostly credit cards) contracted another $2.3 billion for the month, the sixth time in the last eight months that outstanding balances have been trimmed. Stimulus checks and other income supports are helping to power personal consumption, as are savings from no commuting costs and other fortunate COVID-related happenstances over the last few months, so paying cash rather than putting it on plastic is an option for many. Mortgage rates moved to new record lows again this week, but low and even falling rates don’t seem to be attracting as much attention as you would think they would. In the week ending July 31, applications for mortgage credit declined by 5.1%, noted the Mortgage Bankers Association. Requests for funds to buy homes slipped by 1.8% , a third decline in the last four week, while those for refinancing existing mortgages dropped by 6.8% after a 0.4% fall the week prior. It’s peak vacation season, and odds favor that apps will pick up again, but it’s also likely that the spring-pushed-to-summer homebuying season may be starting to show signs of normal seasonal waning. Of course, tight inventories of homes to buy and somewhat stiffer mortgage underwriting conditions are probably playing a role in that as well.
Mortgage credit is a little tighter at the moment than it was, according to the Federal Reserve survey of Senior Loan Officers and lending practices. Although banks are not the dominant players in the mortgage market at the moment, their stances on lending are likely reflective of the industry as a whole, if to varying degrees. Majorities of the 70 banks the Fed includes in its quarterly poll reported “somewhat” or “considerably” tighter underwriting conditions across all classes of mortgage; for example, 45.3% of banks reported unchanged conditions for lending GSE-eligible mortgages, but 54.7% reported increasing things like downpayment requirements or required credit scores and the like. The greatest amount of tightening could be seen in jumbo mortgage classes, where QM-eligble jumbos saw 58.9% of banks increasing requirements, and non-QM jumbos posted a whopping 70.2% of respondents making it more difficult to get one of these loans. Risks of making, servicing and investing in mortgages remains elevated. This remains the case even as loans in forbearance have been gently declining for a while, and many loans are now passing (or past) the four-month window in which servicers are required to make payments on GSE-backed loans to investors before the loan is taken over by Fannie or Freddie. Yesterday’s risks may be diminishing, but with a troubled economy all around and an uncertain level of future fiscal support coming, more difficulty in the mortgage space seems likely as we move forward in time. So the economy is improving, a good thing, but remains far from healthy, and the road ahead is likely to be bumpy. The recovery remains uneven, if moving in the right direction in the aggregate, but the speed and amount of recovery vary greatly from region to region, state to state and household to household. Until we start to contain the virus more effectively, and certainly until a vaccine becomes available, it will likely be this way. The big blast of improvement is behind us now, and with new COVID-related headwinds in place and more likely to come when “indoors” becomes a thing in the coming months, it’s hard to gin up much enthusiasm for what’s to come. After weeks where underlying interest rates should have caused mortgage rates to fall, they finally succumbed to that pressure this week and fell meaningfully. It may be this way — a plateau for a bit before a drop to the next level — and at the moment, it looks like next week will be a pretty flat spot, probably one of a few before the next leg down. We think there will be a couple of basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday.