MarketTrends 12/06/2024: Expecting Data Independence, Perhaps

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With the turn of the month come broad evaluations of what's happening in the economy, but to start December, we also got an update from the Fed itself. The latest "Beige Book" (an anecdotal review of activity in each of the Fed's 12 districts) collected responses from contacts in the weeks leading up to November 22. The summary noted that "Economic activity rose slightly in most Districts," that "employment levels were flat or up only slightly," while "Prices rose only at a modest pace." Some of the additional color provided pointed to increasing price sensitivity among consumers and businesses, that "Job growth and wage growth for entry-level positions and skilled trades were rising robustly," and that respondents believed that potential tariffs posed a "significant upside risk to inflation."

As all of the roughly six-week period the Beige Book covers took place during the fourth quarter, it's useful to reference it against the running rate of growth as produced from the Federal Reserve Bank of Atlanta's GDPNow model. Through December 5 -- a couple of weeks in the future compared to the Beige Book period -- annualized growth for the fourth quarter so far is reckoned to be running at a 3.3% clip. This figure up a bit from the third quarter, perhaps a bit more so than the "rose slightly" of the Beige Book. Regardless, neither points to much by way of weakness.

According to the Institute for Supply Management, November saw some improvement in the fortunes of manufacturers. Their barometer of factory activity posted a 1.9 point increase, rising to 48.4 for the month. While still below the breakeven level of 50 used in this series, the figure was the highest since May, and suggests that manufacturing is only a mild drag on economic growth at the moment. Components of the report were also favorable; new orders rose to an above-par 50.4 last month, the strongest since March, while labor conditions moved up 3.7 points from a soggy 44.4 to a improved 48.1 for the month. "Prices paid", an inflation tracking measure, eased from 54.8 to just 50.3, settling again after an October bump.

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The much larger service side of the economy also fared well in November, if somewhat less so than in October. The ISM's service-business gauge slid by 3.9 points in November, easing from a moderate-to-strong overall pace in October to one closer to a modest-to-moderate level for November, finishing at a value of 52.1 for the month. The report's measure of new orders eased by 3.5 points to 53.7, still solid enough, while employment slipped 1.5 points to 51.5 for November. Prices paid here remained stable and on the firm side, with a 0.1-point lift leaving this piece at a reading of 58.2 for the month. Prices paid readings in the last three months somewhat higher than those in the previous three.

When the Fed began cutting rates it was likely doing so in response to labor conditions that appeared to be deteriorating, with job growth slowing and unemployment rising. Overall, those conditions have improved since late September, although strikes and storms distorted the picture for a time.

The latest Job Openings and Labor Turnover Survey (JOLTS) covers October. For that month, there was an increase in the number of available positions, which rose by 372,000 to 7.744 million. The modest increase should help allay concerns that the job market was cooling too quickly. That said, the report also noted that hiring settled back from September's 5.583 million pace to 5.313 million, although hurricanes Helene and Milton likely damped this figure. While there were slightly more overall separations on October, this was due to more folks voluntarily leaving positions rather than being asked to go; layoffs actually retreated during the month. Voluntary quits by workers are considered to be a sign of confidence about the prospects of landing another job, possibly one at a higher wage level.

The employment situation for November was expected to show a rebound from October's strike-and-storm distortion, and it did. The Bureau of Labor Statistics reported that an above-forecast 227,000 new hires took place last month, and there were upward revisions to both October (+24K) and September's (+32K) running tallies. Smoothing out the distortions in hiring in October, the three-month pace of 173,000 jobs created on average is more on par with the solid conditions of the spring than the softer ones of the summer. Wage growth for the month was 0.4%, leaving the annual rate at 4%, still perhaps a touch too warm to be consistent with falling inflation. As well, the unemployment rate ticked back up by a tenth of a percentage point to 4.2%, with the labor force contracting for a second month and the participation rate returning to 62.5%, a level last seen in May. It's not clear if there are still effects on those figures from hurricanes in October.

Layoff announcements as tracked by the outplacement firm of Challenger, Gray and Christmas were little changed in November, totaling 57,727 positions affected by headcount reductions, a 3.8% increase from October. Layoff announcements are 26.8% above the same month last year, and have been somewhat higher in 2024 than in 2023, but also continue to be concentrated in just a few industries, including tech and automotive. While folks that are losing positions may be having a more difficult time finding new ones, they are finding new ones, which is why the unemployment rate remains quite low. Also remaining low is the number of folks filing for unemployment assistance for the first time; in the week ending November 30, just 224,000 new applications for benefits were filed. While this is up a bit from recent weeks, it is still very low, and the ever-shifting Thanksgiving holiday may be distorting seasonal adjustments to the data. Continuing claims, a reflection of folks taking longer to get new digs actually moved a little lower last week, slipping by 25,000 and retreating from a three-year high.

Presaging the ISM manufacturing improvement, overall orders to factories rose by 0.2%, a positive mirror image of the -0.2% decline in September. Orders for nondurable goods showed a similar reflection, with a 0.1% increase reversing a 0.1% decline a month prior, while orders for durable goods managed a clean 0.3% increase for the month, breaking a two-month string of declines. That said, the core factory orders measure (no defense spending, no aircraft) was down by 0.2% for October, its first negative reading since July. This report was positive overall, but the breadth of orders wasn't all that solid. With the incoming administration promising sizable tariffs, it's possible that we'll see a burst of orders for November to try to get imported goods here before prices kick higher.

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The nation's imbalance of trade narrowed in October, shrinking by $10 billion for the month. A strong dollar makes U.S. goods and services more expensive to our trading partners and likely helped cause imports to decrease by $4.3 billion. Conversely, that same lever lowers the costs of imported goods, likely contributing to the $14.2 billion in the value of imports for the month. Slowing trade flows might also be reflecting some economic softness abroad, or perhaps even uncertainty as to how the U.S. elections might impact future trade opportunities. Whatever the reason, trade flows have returned to levels last seen in May, give or take a little.

Possibly reflecting concerns about forthcoming tariff increases, sales of new vehicles powered higher in November, rising to a 16.5 million annualized rate, and October sales were revised a bit higher, too. The November pace was 1.6% above October's revised levels and up 6.7% compared to last November, so the gains are solid enough. If the increase in sales of cars and trucks is a preemptive strike by consumers, we might also see a bit of follow through for December. If nothing else, the bump in sales suggests that the auto industry is probably close to if not fully healed from the multi-year pandemic distortion, and also shows that consumers still have space to spend.

Consumers also seem to still have some capacity to borrow, too. Overall consumer debt balances rose by $19.2 billion in October, according to the Federal Reserve. Revolving accounts (mostly credit cards) saw a blowout increase of $15.7 billion for the month; installment-type borrowing growth was considerably more muted, although the $3.5 billion gain was more than double a very soft September increase. It may be that somewhat lower interest rates on credit accounts helped boost borrowing, as the Fed began its new policy cycle with a noisy half-point cut in late September.

Outlays for construction projects also moved higher in October, rising by 0.4%. A 1.5% surge in spending on residential construction projects -- the strongest since April -- was the source of the strength, as other major segments were a drag. Non-residential construction spending declined by 0.3% in October after a flat September, and public-works projects sported a 0.5% shrinkage for the month after a sizable pre-election splurge in September. Homebuilders have become increasingly optimistic about the prospects for sales in the coming year and seem to be ramping up projects in advance of expected demand.

Increasingly optimistic, too are consumers. The preliminary Consumer Sentiment report from the University of Michigan rose 2.2 points to 74.0 so far in December, which will be a fifth monthly gain should it hold. All of the improvement in demeanor came from an improvement in the assessment of current conditions; this component rose by 13.8 points to 77.7 the month so far, the highest it has been since April. However, all this near-term enthusiasm was tempered by a darkening in the expectations portion, as a 5.3-point decline there to 71.6 put this component at its lowest mark in five months. Inflation concerns probably infused this portion, as the one-year forecast for price increases moved up 0.3% to 2.9%, back to where it was in July. Longer term, the five-year expectation for inflation eased 0.1% to 3.1%, stepping back from a recent one-year high.

Mortgage rates have not been all that favorable in recent weeks, but at least some mortgage shoppers don't seem to mind. The Mortgage Bankers Association reported a 2.8% increase in the number of requests for mortgage financing in the week ending November 29. The top-line figure was lifted by a 5.6% gain in applications for purchase-money mortgages, which isn't all that surprising as folks look to take advantage of seasonally-lower home prices; for purchase mortgages, it was a fourth consecutive weekly increase in requests. What is less surprising is that applications for loans to refinance existing mortgages decreased, posting a 0.6% decline for the week. Refi applications have managed just one gain in the last eight weeks, and that will likely be the story until mortgage rates move measurably lower.

Okay, so that's the update of the latest data, at least the bulk of it. Given Mr. Powell's recent comments and the overall tenor of the data -- and coupled with available information on inflation -- it's hard to see why futures market speculators would have moved from about a 66% chance of a quarter-point cut by the Fed to more than 85% as we write this. There's little evidence that the economy is faltering or that inflation is fading routinely toward target, and labor market conditions aren't reflecting a deteriorating climate.

We're of the mind that the decision to make a change to policy may be a closer call than markets believe. Of course, as this won't be reflected in the meeting-closing statement, we'll not know this until the minutes of the meeting are released early in 2025. The minutes of the November meeting saw at least some folks leaning toward a pause, noting "some participants noted that the Committee could pause its easing of the policy rate and hold it at a restrictive level if inflation remained elevated."

Given the backdrop above and the Fed's belief that growth has improved and inflation firmed up, the decision may very well come down to the fresh inflation data coming out next week, when we'll see November updates to the Consumer Price Index, the Producer Price Index and what's happening with import and export prices.

There's still a week and a half before the Fed next meets. As far as next week goes for mortgage rates, the picture seems a little mixed to us at the moment, but the yields which most influence retail mortgage rates were slightly lower as this week came to a close, so we'll go with that near-term trend. While we hedged on the side of caution last week due to the Thanksgiving holiday, the downdraft for yields this week suggests we'll see perhaps a 4-6 basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac next Thursday.

There's a lot going on as 2024 starts to wind to a close, including elections and consequential Fed decisions. What will happen to mortgage rates between now and mid-December? See what we think in our latest Two-Month Forecast for mortgage rates.

To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more. We recently did a mid-year review to see how well market conditions met our expectations. Have a look and see how things are turning out.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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