May 1, 2009 -- Signs that the economy may be stumbling back to life are becoming more evident. At some point, perhaps sooner than anticipated, we may actually find ourselves on the cusp of actual recovery. When that eventually happens, concerns about inflation will very quickly find their way back into the economy, and mortgage interest rates will begin to rise. Of course, that presupposes that the Federal Reserve will no longer be the largest component of support for the mortgage market, and that private market interests will be again asserting more influence into the price of credit. That day will come, but not yet.
This week, the overall average for residential fixed-rate mortgages eased by four basis points. HSH's Fixed-Rate Mortgage Indicator -- inclusive of conforming, jumbo and "high-limit" conforming loans -- dipped back to 5.43%. The FRMI's 5/1 Hybrid counterpart also shed four basis points to land at 5.15% for the period. Conforming 30-year FRMs moved down a like amount, again landing at just under 5%, while "true" jumbo mortgages increased by a single basis point.
In addition to massive amounts of new "supply" of government bonds, the slightly improving economic picture is producing a bit of an increase in interest rates. After flirting with a 3% yield on a number of occasions, the yield on the 10-year Treasury blew right on by it this week, running as "high" as 3.16% on Thursday from about 2.95% on Monday. Of course, even with the increase, yields remain extraordinarily low. It wasn't all that long ago that the Fed announced its program to buy Treasuries, causing some speculation that they would drive interest rates even lower (and, in fact, we saw a 50-basis-point decline in the 10-year yield in the space of a couple of hours after the announcement). However, we believed that the Fed would be buying bonds not to lower interest rates, but rather to temper the kinds of increases that a glut of supply would bring. That seems to be the case so far.
Described in some circles as "green shoots," signals of a changing economic pattern from steep to milder decline are starting to show in a variety of places. However, with the Advance reading for Gross Domestic Product falling at a 6.1% pace in the first quarter of 2009, even a figure half that bad is going to look good by comparison but still be a sharp recession. If anything, the advance GDP estimate was just a shade less bad than the 6.34% decline in Q408, but it does seem that the worst of the decline for this quarter took place in January and February, and on balance, the troubles have lessened as we turned from Winter to Spring.
That was also the general consensus revealed at the close of the Federal Reserve meeting this week. Back in March, they thought conditions were difficult enough as to warrant additional "quantitative easing" through new bond purchase plans and an expansion of mortgage-market support. The statement which closed this week's meeting was considerably less pessimistic; they noted approvingly that "the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions" and that "household spending has shown signs of stabilizing." Obviously, there was no change to short-term interest rates but they did indicate that short-term rates would remain "exceptionally low... for an extended period." Of course, anything below the 1% level would easily be considered exceptionally low, and such a statement gives the Fed cover to move rates upward as conditions improve without spooking the market.
The facts are that the general tenor of the data out this week, though improved, was in reality just a better grade of lousy. Much was made of a "surge" in Consumer Confidence; the Conference Board reported a leap from a dreary 26.0 in March to a relatively better 39.2 -- the best reading since December and January, which at the time were generally considered awful numbers. Still, the importance of a change in attitudes cannot be overstated, especially as they seem to be spreading. The improvement in Confidence was joined by a fair increase in Consumer Sentiment, where the final April figure provided by the University of Michigan rose to 65.1, the highest level since September 08. As well, the latest ABC News/Washington Post poll of Consumer Comfort covering the week of April 26 reported a -45 reading, its best showing since early October.
It's a reasonable guess that consumers would be even happier if incomes were rising. However, with labor markets weak, it's hard to ask for a raise even if you have solid employment. Personal Incomes declined by 0.3% in March, fast on the heels of a 0.2% decline in February. With less money coming it, it's not surprising that outgo eased as well, with Personal Expenditures falling by 0.2% for the month. Wages and salaries are actually 1.2% below year-ago levels. Despite this, the nation's rate of savings remained pretty stout at a 4.2% annual rate.
Lower incomes were reflected pretty clearly in the subdued reading for the Employment Cost Index for the first quarter of 2009. The ECI rose by just 0.3%, below expectations. Wages for civilian workers eased to a 2.2% annual increase; they were increasing at a 3.2% clip just nine months ago, so the cooling has been pretty pronounced. Benefit costs have also diminished, although somewhat less. Of course, controlling costs can help a business stay in business and even manage to turn a profit, but workers do tend to get squeezed as a result.
There seems to also be some improvement in the fortunes of manufacturers. At least three regional reports for April found less-dire situations, including improvements noted by a Chicago-area purchasing manager's group and the Federal Reserve banks in Kansas City and Richmond. While none of the readings actually made it into positive territory, they did move closer to breakeven and point to an easing in the rate of decline.
On a broader note, the Institute for Supply Management's national report on manufacturing activity largely mirrored the local reports. The ISM reported a 40.1 number for April, the fourth consecutive increase in movement and the highest number since last September. In the ISM survey, it takes a reading of 50 just to be at a "zero growth" level, and the 40.1 number is consistent with an ongoing sharp decline in health. That said, it is still greatly improved fro the bottom-of-the-abyss 32.9 number seen in December 2008.
Not all areas of the economy are feeling any warmth. Auto sales fell back to a terrible 9.3 million (annualized) level in April, down from a low 9.8m pace in March. GM posted a 200,000 unit increase, but Chrysler shed 300,000 and Ford held steady. Chrysler was forced into the arms of Fiat and the bankruptcy court this week, so we'll have to see what emerges from the other end of that process and what kind of car company remains -- if any.
More data from March continue to trickle out, dark as usual. The overall figure for Factory Orders for March was down by 0.9%, rather lower than was hoped, but business-related spending did sport a 0.4% increase, the second such boost in a row. The members of the ISM and the folks polled by in the Fed districts above must have seen a much better April in order to report the sort of improvement they did. We'll see how that came to be next month.
As we've noted on a number of occasions over the past month, claims for new unemployment benefits have leveled off. The 631,000 new applications for benefits filed during the week ending April 25 represented another slight improvement in that regard. Even with fewer layoffs, though jobs remain hard to come by and continuing claims numbers continue to set new records week after week. If initial claims slow to a greater degree, the increase in that companion series would also finally slow.
The decrease in initial claims this week finished April's reports. Since the average number of claims for the month was 20,000 below March's figure, we think that jobs losses revealed in next week's big Employment Situation report for April should be lower than March's 661,000. We should probably be closer to 635,000 or thereabouts... but the unemployment rate, 8.5% last month, will probably cruise closer to 9%. As hiring won't occur until the economy does get over any breakeven point, it's going to be a while until that unemployment rate levels off, let alone falls -- probably not until late this year or early next year if things go well.
Mortgage rates are poised to move nowhere fast, either up or down. The impending bank "stress tests" may or may not move the market to any great degree as they are revealed, starting next week, but it's unclear what will be revealed and to whom. Even if some bad news is revealed, is there anyone at this stage of the game who could claim to be surprised by it, even if tens of billions of dollars of deficiencies were unearthed? We're hundreds of billions into losses already, and that just to a single company (AIG). We'll bet on little change to rates, no matter what or how much hits the news.
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