Wednesday, August 3, 2011
The August ISM Service Sector indices weren't nearly as bad as the manufacturing indices. According to the Business Activity Index (top chart), conditions actually improved a bit last month. The employment index dipped, but remains at levels consistent with the sub-par growth we have seen so far in this recovery.
The ADP estimate of July private sector payroll gains fell a bit from last month's level, but as this chart suggests, it points to the likelihood that Friday's reported job gains will be a lot stronger than the previous month's, since the BLS data is probably going to "catch up" to the ADP data. Not surprisingly, according to Bloomberg, the consensus is calling for an increase of 115K private sector jobs, about double June's number. Again, slow growth, but still growth.
The Challenger survey recorded a jump in July announced corporate layoffs, but as the chart shows, such fluctuations are entirely within the range of what one might expect even when the economy is reasonably healthy.
The RadarLogic survey of home prices shows prices (measured on a per square foot basis and using a weighted average of the past three months) have increased over 4% from last February's lows. This is a typical seasonal pattern, however, so I include this chart of the past 5 years to show that the current reading (185.9) is only 5% below the same week's reading in 2009. Prices have fallen only modestly in recent years, despite a significant increase in distressed sales and foreclosures.
The impressive decline in fixed mortgage rates is a story with several themes. Very low mortgage rates suggest that the demand for mortgages is very weak, and indeed, new applications for mortgages are at levels that are significantly lower than what we saw several years ago (see chart below). However, I note that the chart also shows a modest increase new mortgage applications over the past year. Very low mortgage rates also suggest that the supply of mortgage lending funds has generally exceeded the demand for those funds in recent years. In other words, there is no shortage of money; the problem lies more with a shortage of borrowers (lots of people still trying to deleverage, strong demand for rentals, and lots of foreigners buying homes with cash) and stricter lending standards. Looking back at the chart above, I note that the spread between conforming and jumbo loans has shrunk from a high of just over 200 bps in March 2008, to only 40 bps currently. This is a direct reflection of the improved liquidity conditions in the mortgage market and the return of market efficiency. Prior to 2007, the spread averaged just over 20 bps, so conditions have almost returned to "normal."
In short, there has been an awful lot of adjustment going on in recent years, thanks to market pricing (i.e., the price of homes and the price of money) which has enabled this very distressed market to clear without significant disruptions in recent years. Things are getting better on a daily basis, in fact, as excess housing inventories are worked off.
Posted by Scott Grannis at 10:04 AM