Macro Insights Weekly: How long before US labour and housing markets crack?
- Latest jobs data underscore the Fed’s quandary
- Vacancy rates are falling, but unemployment and wages are still indicating a robust labour market
- Housing is bound to soften against sharply rising mortgage rates
- But home price and rents are yet to reach a level that would make the Fed comfortable
- Softer housing and jobs data are coming, but Fed would need a lot of that before relenting
Commentary: US labour and housing markets
US headline inflation has eased from a peak of 9% in June to 8.2% in August and is likely to fall to or below 8% in September. Similarly, core PCE inflation peaked in June. And yet, markets have not been able to take solace, with the Federal Reserve continuing with its policy tightening path. The reason behind this has been made clear by Fed officials through the course of this year—unless the labour and housing markets soften, underlying inflation pressures would likely remain uncomfortably high. Hence, while inflation numbers are important to track, at this juncture, those two markets are key to gauging the final phase of this monetary tightening cycle.
Friday’s jobs data release underscores the Fed’s quandary. Job growth slowed, but was still robust, with employers adding 263,000 jobs in September, pushing down the unemployment rate to 3.5%, a half-century low. There are plenty of anecdotes of companies freezing hiring in light of softening demand, but so far that has not yet translated into an economy-wide deterioration in employment conditions.
In addition to hiring, the number of vacancies is a critical indicator of labour market strength. In that area, the developments are indicative of some weakening, with job openings in August posting their largest decline since the early months of the Covid-19 pandemic. Wage growth is running at about 5%, which, like jobs growth, is on the softer side, but well above the Fed’s comfort zone, which is formed around its 2% inflation target.
What about housing? US mortgage rates have risen sharply this year; the average interest rate for a 30-year fixed-rate mortgage has risen to about 6.7%, compared to about 3% in January. Home prices, which were up nearly 20%yoy earlier this year, have begun to soften, although they are still up by double digits. Home inventories shrunk sharply during the Covid years, but now transactions are easing, and the number of houses on the market is rising. This should pave the way for weaker rents at some point, but unfortunately for the markets, not in the very near term.
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