THE INGREDIENTS: JOBS & HOUSING
Base of our economy
Leading up to this past quarter we have seen improvements in many facets of the economy. Specifically, we have seen real improvement in the jobs picture, as more Americans are finding employment. We have said numerous times in our commentary that it’s “all about jobs”. Americans gaining employment injects real dollars into the US economy. Wages leads to spending and ultimately higher consumption leads to the potential for the economy to move out of a stagnant stage.
In April, the US economy added 165,000 jobs, in March 138,000; and in February 332,000 jobs were added. In addition, there have been positive revisions in the last several labor reports showing significantly stronger job growth. The strongest areas of job growth in April were from restaurants and bars with 38,000 jobs added; temporary services added 31,000 and retailers added 29,000 jobs.
JOBS REPORT: APRIL 2012 - APRIL 2013
The job growth is encouraging even when government data revealed that Federal, State, and local governments cut 11,000 jobs. By no means is the US Economy out of the woods though. When it comes to American workers, the bigger picture shows nearly 12 million people, or 7.5% of the population, remains unemployed. The unemployment rate does not include people who have not looked for work in the prior four weeks (known as the participation rate). We are not without continued problems in the US Economy as the labor participation rate fell to a 34 year low. The picture is especially troubling for people aged 20-24 looking for work as unemployment is at 13% for these young workers.
Compared to historical levels, the overall unemployment figures are quite high. Prior to the Great Recession, unemployment averaged approximately 4%. Nonetheless, the Federal Reserve sees that there is some degree of growth and stabilization in these figures as the overall unemployment rate is dropping.
The Fed has sent a clear message linking their interest rate outlook (and how they will adjust short term rates) to economic thresholds. Bernanke has said, interest rates will stay low at least as long as unemployment remains above 6.5% and if the Fed projects inflation of no more than 2.5% one or two years in the future. Officials at the Fed don’t see joblessness falling near that goal until 2015.
It is important to understand what Bernanke’s Federal Reserve is trying to do here. The markets, and multiple asset classes at large, have responded to one of the most powerful tools the Fed has as a resource, “FED-SPEAK.” Nothing more than the action of saying “we may look to taper the amount of stimulus we are injecting into the US Economy” has jolted both the bond and stock markets. This comes at a fragile inflection point in the recovery when we are seeing some improvement in data on the US economy. The Fed needs to tread lightly here so they do not choke off the recovery we have made thus far. We believe the Federal Reserve will maintain their commentary and track in letting the markets know they will remain “accommodative” until they consistently see strong US economic growth.
Another important ingredient in measuring the pulse of the US Economy is the housing market. The housing market represents a critical part of a healthy economy. When banks lend, the housing market and US economy is propelled. Jobs are created in businesses such as lumber, concrete, electrical, roofing, steel, bricks, appliances, furniture, and flooring. When housing declined, tens of thousands of jobs were lost and businesses closed that were interconnected to the housing industry. This important additive to the economy is staging a comeback.
In July 2010, sales of single family homes were 276,000 vs. 454,000 today. In the same time period the median sales price of a home was $204,000 vs. $271,000 today. In addition, the economic measurement of looking at housing inventory has come down from 9.1 months to approximately 4 months. New private housing permits to build homes are also up, as shown below:
NEW PRIVATE HOUSING UNITS AUTHORIZED BY BUILDING PERMIT