Hot Housing, Hot Inflation, Cool Jobs

Last week's calendar was jam-packed with important news on employment, housing, and inflation. Plus, the final or third look at second quarter GDP came in at -31.4%, which was basically unchanged from the second look of -31.7% and still extremely weak. On a positive note, a big rebound is expected in the third quarter.

September Job Gains Less Than Expected

The Bureau of Labor Statistics (BLS) reported that there were 661,000 jobs added in September, which was much less than expectations. However, revisions to the data for July and August showed that there were 145,000 more jobs created in those months than previously reported. Putting things in perspective, we are still 11 million jobs short of where we were before the pandemic.

Looking deeper into the numbers, there are two reports within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it's based predominately on modeling.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, meaning it may be more reflective of actual job numbers, and the Household Survey showed that there were 275,000 job gains in September (as compared to the 661,000 job gains in the Business Survey).

The Unemployment Rate decreased from 8.4% to 7.9%, which was much stronger than expectations of 8.2%. Unfortunately, however, the decrease was for the wrong reasons. While there were 275,000 job gains, the labor force decreased by nearly 700,000 people. The combination of job gains and people leaving the labor force pulled the unemployment rate lower.

It's also important to note that there has been a misclassification error where people were classified as absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. Without this error, the unemployment rate would have been 0.4% higher or 8.3%.

Looking deeper into the numbers, Government jobs fell by 216,000, but that was mostly due to the temporary 2020 Census workers. The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, decreased from 14.2% to 12.8%.

Average hourly earnings increased 4.7% year over year, which was unchanged. Average weekly earnings, which we focus on more, rose by 5.6%, up from 5.3%.

Private Payrolls Rise More Than Expected

The ADP Employment Report, which measures private sector payrolls, showed that there was a gain of 749,000 jobs in September, which was better than the 650,000 expected. Additionally, August’s report was revised higher by 53,000 jobs to 481,000.

Per ADP, the economy lost 19.7 million private-sector jobs in March and April and has only recovered 9.3 million of those since. This better than expected report is a step in the right direction, though there is still a way to go.

Jobless Claims Remain Staggeringly High

Another 837,000 people filed for unemployment benefits for the first time during the week ending September 26. California (+226K), New York (+66K) and Georgia (+43K) reported the largest gains. And 11.8 million people are continuing to receive benefits after their initial claim is filed.

In addition to the number of people receiving regular unemployment benefits, there are an additional 11.8 million people receiving Pandemic Unemployment Assistance (PUA). PUA benefits are for people who would not typically be approved for unemployment, like gig workers and contractors. People can also apply for PUA benefits when their regular unemployment benefits expire.

All in all, the total number of individuals receiving some kind of unemployment benefit is 26.5 million, which worsened by 500,000 from the previous week. The lack of people working will continue to pressure supply chains and with the economy starting to get busier, this will only add to the possibility of inflation.

Pending Home Sales and Home Prices Rise

Pending Home Sales, which measure signed contracts on existing homes, were up 8.8% in August after a 15.9% gain in July. The index is now at an all-time high, and all in the face of record low inventory levels! Sales are also up 24.2% when compared to August of last year, which is a big improvement from the 15.5% annual gain in the previous report.

Meanwhile, home prices continue to appreciate. The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that there was a 4.8% annual gain in July nationwide, which was 0.5% higher than the gain we saw in June.

The 20-city Index showed that home price gains rose from 3.5% to 3.9% compared to July of last year, with almost all of the cities showing strong gains. Phoenix (+9.2%), Seattle (+7%) and Charlotte (+6%) reported the highest annual gains.

Case-Shiller said that they expect this year-over-year appreciation figure to jump again in August. Think of it this way. Purchasing a $300,000 home that gains 5% in appreciation would be a benefit of $15,000 in just one year of appreciation alone. What's more, the equity gain with amortization would be even greater.

Inflation Heating Up

The Fed’s favored measure, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.3% in August. On a year-over-year basis, inflation increased from 1.1% to 1.4%.

Core PCE, which strips out volatile food and energy prices and is the Fed's real focus, increased 0.3% in August and rose from 1.4% to 1.6% annually. This is a big move both on a monthly and annual basis.

Why is this significant? Inflation reduces the value of a Bond's fixed coupon over time and home loan rates are tied to Mortgage Bonds. So, if Mortgage Bonds worsen or move lower as they often do when inflation heats up, home loan rates can move higher. The bottom line is that if inflation begins to persistently move higher, it will start to pressure longer-term Bonds like Mortgage Bonds, which could push home loan rates a bit higher.