Eye on the Economy: Glimmers of Hope on the Employment Front
As is often the case in the early stages of a recovery, the economic data give mixed signals. The latest example is the employment data for January. Nonfarm payroll employment fell 20,000 in January at a seasonally adjusted annual rate. However, at the same time, the unemployment rate, which peaked at 10.2% in October and plateaued at 10.0% in November and December 2009, fell 0.3% to 9.7% in January.
The two reports are derived from different sources, the payroll employment report from a survey of primarily large businesses on how many workers they employed. The results are extrapolated to total employment for the nation.
The unemployment rate comes from a smaller survey of households. The payroll survey measures the number of jobs, while the household survey measures the number of people employed and unemployed, including self-employed. Thus, the household survey does a better job than the payroll survey of picking up changes in small businesses and among the self-employed.
During long periods of expansion or recession, the payroll survey is generally considered a better indicator of general employment conditions than the household survey because its results tend to be less volatile.
However, at turning points, when the economy moves from contraction to expansion (or vice versa), the household survey is generally considered more accurate because the payroll employment survey does not do as good a job of capturing employment changes among small businesses and the self-employed.
That is what might now be occurring. While the payroll employment survey showed a loss of 20,000 jobs, the household survey reported 541,000 more people employed in January than in December. The increase in employment was greater than the rise in the labor force (+111,000), resulting in the lower unemployment rate.
The two reports do paint a somewhat positive employment picture. At worst, the loss of 20,000 jobs in January reported by the payroll employment survey represents an improvement because it was the smallest job loss since January 200 (10,000), which followed four months of job gains. It was considerably less than the monthly job losses of 200,000 to more than 700,000 that had prevailed for a year and a half, or even the average loss of 103,000 jobs per month in the fourth quarter of 2009.
Further, temporary service jobs have now increased for four months in a row. Companies often hire temporary workers early in a recovery when they are unsure whether increased demand will justify hiring a permanent employee. As demand continues to increase, many of these temporary jobs turn into full-time, permanent jobs. At best, the household survey may indicate that the labor market is finally turning positive.
It will take several more months of data to know the true employment picture. However, if the labor market is indeed improving, that is one of the key supports that residential construction needs in order for its recovery to continue. As people feel more confident about their employment situation (for those who already have jobs) and the unemployed get jobs, demand for housing will increase.
Despite this relatively good news for national employment, the same cannot be said for construction workers. Residential construction jobs fell 15,100 in January. This reversed six consecutive months of declining job losses. In November and December 2009, losses were down to 2,800 and 2,400, respectively.
Meanwhile, the unemployment rate in construction — both residential and commercial construction — rose to an all time high of 24.7% (not seasonally adjusted) in January from 22.7% in December 2009. Clearly, construction employment, both residential and commercial, continues to struggle.
And Glimmers of Hope Among Home Builders
The NAHB/Wells Fargo Housing Market Index (HMI), after falling in December to 16 and in January to 15, rebounded in February to its October and November level of 17. Hardly a stellar number (anything above 50 indicates more positive responses than negative and anything below 50 the reverse), the uptick in the index still signals some improvement in the outlook among builders.
Two of the three underlying indexes — current sales activity and expected sales activity — improved, while the traffic component remained level. The variation in improved sub-index values could suggest that there are more actual buyers to be found in the traffic that is occurring.
The improved outlook among builders appears to be based on the home buyer tax credit (available to first-time home buyers and repeat home buyers, see www.FederalHousingTaxCredit.com for details), continuing low mortgage rates and an improving economy.
But Housing Still Struggles
There are clearly signs that the national economy is improving. These range from the strong fourth quarter real gross domestic product (GDP) number (up 5.7% at a seasonally adjusted annual rate) to improved retail sales (up 0.5% in January over December, up 3.2% from January 2009 to January 2010) to the slowly declining unemployment rate.
It is not entirely clear whether this is translating into improved consumer confidence. The Reuters/University of Michigan Surveys of Consumers’ preliminary index of sentiment for February was 73.7, down from 74.4 in late January; however, it was up from 56.3 a year ago. At the same time, the percent of households who believe now is a good time to purchase a home rose from 72% in January to 76% in February. That February reading is the highest since October of last year.
Overall, the housing market has improved, although residential construction remains at a very low level of activity. Single-family housing starts in the fourth quarter averaged 480,000 per month at a seasonally adjusted annual rate.
Though down from 498,000 in the second quarter — which, no doubt, was positively affected by the first-time home buyers tax credit — it still was a significant improvement over the first half’s 392,000 starts per month. The improvement continued with January’s single-family housing starts of 484,000 (at a seasonally adjusted annual rate).
Single-family building permits tell a similarly positive story. Although January permits were only marginally higher than December permits (507,000 versus 505,000), we now have two months of permits in excess of 500,000.
The last time that single-family building permits were above 500,000 was in September 2008. Higher building permits are likely due to home builders preparing for greater sales driven by the current home buyer tax credits.
Meanwhile, multifamily starts, which are at a very low level, rose to 107,000 — the first time they have been above the 100,000 mark since August 2009. This market has struggled in the face of difficulty in obtaining financing for new projects and competition from the single-family housing market and foreclosed properties. However, there has been gradual improvement since October’s historical low of 53,000 starts, a suggestion that the worst may be over.
The home buyer tax credits will stimulate additional home buying in the early spring as buyers anticipate their expiration at the end of April (for a signed contract) and move forward plans to buy later in 2010. Advancing demand to qualify for the credit will mean a leveling of production and sales in mid-summer, but the expectation is that job and economic recovery will become the engine of continued growth after the home buyer tax credits expire.
Nonetheless, impediments to improvement for the housing market remain. The job market, though improving, remains weak, potential home buyers still need very good credit scores to obtain a reasonable mortgage and FHA announced further impediments that will prevent some marginal borrowers from purchasing a home.
Builders are now seeing increases in the prices of some of their key materials that go into residential construction. These range from high energy prices — higher prices for diesel and gasoline — to higher copper prices to higher lumber prices.
According to Random Lengths, lumber prices have jumped $65 per thousand board feet since the end of December and are about 50% higher than the same time a year ago. Higher lumber prices are being driven by a number of factors.
Low and generally falling lumber prices over the past three years have led to numerous sawmill plant closings and reductions in lumbering operations. Mill operators are reluctant to re-start operations even in the face of higher prices for fear that those prices are transitory.
Bad weather has exacerbated the problem by hindering lumbering operations, driving up the price of logs. Demand for logs from paper and pulp mills has driven log prices even higher, putting additional upward pressure on them.
Meanwhile, builders continue to face difficulty in obtaining acquisition, development and construction (AD&C) loans. For most builders, not only has it become increasingly difficult to obtain AD&C loans, but in many cases there have been significant adverse changes to existing loans.
In the fourth quarter 2009 NAHB survey of builders on AD&C lending conditions, two-thirds of the respondents indicated that the availability of credit for land acquisition was worse than in the third quarter. Almost as large a percentage (62%) indicated that borrowing for land development was more difficult and 58% responded that borrowing for single-family construction was harder.
Inaccurate appraisals are also hindering a faster recovery for housing. In an NAHB survey of builders in November 2009, nearly two-thirds of the respondents (64%) said that they had an appraisal that was below the agreed-upon contract sales price for a house and one-third of the respondents indicated they had lost a sale because of a low appraisal.
Foreclosures are yet another drag on numerous housing markets. Many of the foreclosures and past-due mortgages are concentrated in the formerly hot markets — parts of California, Las Vegas, Phoenix and southern Florida — and economically distressed markets, primarily in the Great Lakes region of the upper Midwest.
However, only 12 states accounted for a little over 70% of all foreclosures started in the third quarter of 2009. At the opposite end of the spectrum, 25 states account for less than 10% of foreclosures.
Although foreclosures are adding to excess inventory in all states, the severe problems are concentrated and will continue to be concentrated.
Foreclosures are no longer being driven by fallout from the poor lending practices and exotic mortgages. Now it is the effects of job losses and the commensurate loss of income that are driving new foreclosures.
Even with an improving economy and the home buyer tax credit, foreclosures are likely to continue to rise over the next few months, especially in the areas already experiencing the highest foreclosure rates and continued high unemployment.
NAHB Chief Economist David Crowe analyzes the economy from the point of view of the housing market every other week in the free e-newsletter, “Eye on the Economy.” The preceding is a reissue of his Feb. 19 edition. To subscribe to “Eye on the Economy,” click here.
Web Site One-Stop Shop for Tax Credit Info
Builders and other industry professionals can help spur home sales by referring prospective home buyers to www.federalhousingtaxcredit.com. The NAHB Web site provides detailed information on both the extended $8,000 first-time home buyer tax credit and the new $6,500 repeat buyer tax credit signed into law by President Obama.
Consumers can use the Web site to find information on both tax credits — including frequently asked questions and links to social media sites that provide updated information as it becomes available. It also includes a number of home-buying resources for consumers.
Industry professionals are encouraged to highlight the tax credit Web site when marketing to their potential home buyer market.