September 4, 2009 -- Mortgage rates ended summer on a softer note, drifting back to late-spring
levels. A pause (at least) in stock markets after a strong summer run saw some investors shift cash from equities into
less-risky investments to lock in gains, driving influential Treasury yields lower.
The overall average rate for
30-year fixed-rate mortgages revealed in HSH's Fixed-Rate Mortgage Indicator (FRMI) nudged downward, slipping seven
basis points (.07%) to close the first week of September at 5.56%. The overall average for 5/1 Hybrid ARMs lost five
basis points to landing at 4.87%. Conforming 30-year FRMs finished the period at 5.25%, a level last seen in late May.
The drumbeat of "better" economic news continues to increase in volume. This is especially true in the case of
manufacturing, where at least a year-long inventory reduction spree seems to have run its course. Reflective of that,
the Institute for Supply Management's gauge of the activity levels of its members broke into positive territory for the
first time since January 2008, a culmination of a steady climb which began from December 2008's nadir. The 52.9 reading
bested expectations, and indicates a moderately expanding factory sector.
Two regional reports from purchasing
manager trade groups also found better conditions in New York and Chicago, although the NY regional report was in line
with readings seen over the past four months. The Chicago group, like the national ISM, was probably goosed by the
just-completed CARS program. That rebate program spent about $3 billion taxpayer dollars to produce about 690,000 auto
sales, a fair percentage of which would have occurred anyway. The industry came to near-collapse with annualized sales
figures at or below 10 million, and while moving 690,000 units certainly won't hurt, it represents less than a month of
sales at a 10M level. The industry's woes won't be solved by the program, and now that the program's done, we may see a
worsening falloff in sales as a result.
That short-term boost in sales did push auto sales to a 14.0 million
annualized pace in August, according to AutoData. However, sales would need to run at this accelerated level for an
entire year in order to see that lofty figure realized, and the income and employment fundamentals seem unlikely to
provide that kind of support -- especially with no compelling rebate program. Still, the government-induced drawdown of
inventories does mean that at least some production lines will need to restart, if only to replenish depleted
inventories.
A little further back, July's report covering factory orders of all stripes rose by 1.3%, probably
encouraging the optimism noted in the ISM report above. June's figure was revised upward, too, so there has definitely
been a late second quarter-early third quarter bump, which may carry over into August. Business-related spending remains
uncertain, however, and eased by 0.3% in July after a couple of very strong months.
Construction Spending fell
by 0.2% in July, while outlays for commercial properties declined by 1.7%, and public outlays slipped by 0.7% as state
and local governments struggle with revenue shortfalls. Some stimulus money will probably be making the "roads and
bridges" circuit before long, but true "shovel ready" projects which might use that money have turned out to be few and
far between, aside from repaving and filling potholes. One bright spot in the report was spending on residential
projects, which climbed by 2.3%, the second positive reading this year. With new home sales firming from desperate lows,
at least some new homes must be built to replenish inventory in the most desirable segments of the housing market.
The ISM non-manufacturing index covering service-related business posted a small improvement Thursday, increasing by two
points to 48.4 in August, about as expected. The mix of industries covered includes some which are heavily reliant on
discretionary consumer spending, and in general, service businesses have staged an uneven recovery since coming to a
near-standstill last Autumn. The index has recovered most of the losses it incurred since September 2008's market
meltdowns. A reading of 50 would put it in 'growth' territory, but that's somewhat unlikely without some improvement in
the employment picture.
And the jobless situation -- the key to economic recovery -- is where everyone watches
for signals that the next leg of economic recovery is starting to find traction. New applications for unemployment
benefits have been holding in the mid-to-upper 500,000 range for much of August, and another 570,000 claims were filed
at state windows during the week ending August 29. That number may diminish somewhat in the period ahead, as the latest
report covering "announced layoffs" from the outplacement firm Challenger, Gray and Christmas tallied 76,456 staff
reductions in August, a figure some 14% below a year ago but about the same as the recent low of 74,390 in June. While
improving, the number of announced job cuts in 2009 is only about 200,000 below all of 2008, and there are still some
four months yet to run for this year.
In August, the employment situation worsened as 216,000 more jobs were
shed, along with a combined revised loss of an additional 49,000 from June and July. Together these pushed the
unemployment rate to 9.7%, the highest rate seen since 1983. While the number of jobs lost each month has shrunk since
741,000 were shed in January, the economy continues to lose workers even if at a slower pace. Even though job losses are
moderating, the Obama administration, along with many economists, predicts that the unemployment rate may top 10% before
the recession has fully run its course.
The fewer announced layoffs noted in the Challenger report may simply be
because staffs are already cut to the bone. Fewer workers on the books must produce more in order to meet any increase
in demand, and worker productivity leapt by a revised 6.6% in the second quarter, far outstripping the meager 0.3% rise
in 1Q09. With workers pumping more out, the cost of labor per unit produced is reduced; in the second quarter, labor
costs shrank by 5.9%, and that came on the heels of a 5% decline in the first quarter. This means folks still on the
books can be paid a little bit more without really affecting inflation, which is expected to remain subdued for the
foreseeable future, even when the economy begins to more fully revive.
Even given the jobless picture -- which
was not, after all, unexpected -- the Federal Reserve is starting to sound more cheery. In the minutes of the August
11-12 meeting, the Fed expressed encouragement by recent trends in the economy, with improving financial markets and
increases in production. The Fed's staff "continued to project that real GDP would start to increase in the second half
of 2009 and that output growth would pick up to a pace somewhat above its potential rate in 2010." The economy's
'potential' is thought to be about a 2.5% - 3% annual increase in GDP. However, it's worth noting that the Fed expects
businesses to lead the way, with "a slowing in the pace of inventory liquidation" responsible for the economic gains,
with the consumer not fully engaging until sometime in 2010.
Mortgage rates have slipped back to the levels seen
last spring. If they hold through the next couple of weeks, we should see a seasonal resumption in activity,
particularly for refinances. If the equity rally is substantially over for now, awaiting confirmation that the economy
is ready to power forward, that should be good news for mortgage rates.
While mortgage rates would have to fall
a lot more to revisit the attention-getting levels we saw earlier this year, we are nearing the point at which could we
could see some additional activity. The trend has been mostly flat-to-down in recent weeks, and that should be the case
for next week.
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