Mortgage Rates Pretty Stable. Economy, Not so Much

March 9, 2009 – 1:09 pm

By Richard Russell

March 9, 2009 — We will get longer days starting on Sunday, but the days feel quite long enough already, what with the difficult economic environment. Perhaps a sun still shining for the evening commute will lend some cheer, as may, the warmer days, which will follow. At a time when things are pretty difficult, it’s at least something to look forward to. Eventually, the economy will show real signs of recovery, bringing with it any number of new challenges, not to mention a return to whatever may pass for ‘normal’ government involvement into financial markets. At present, that is well into the future, and we still have many troubles to overcome before we get there. Before that, though, we need to arrive at a point where things have stopped getting worse. Looked at in this way, it’s possible that we saw some signs of stabilization this week, but there’s no way to know how firm that ground is just yet.

As has been the case of late, mortgage rates failed to move very much, even as equity markets slumped and long-term Treasuries bounced around a bit. The overall average for 30-year fixed-rate mortgage money — Fixed-Rate Mortgage Indicator — declined by two basis points to land at 5.80%. The FRMI’s 5/1 Hybrid ARM counterpart shed three basis points to close the survey week at 5.48%, while conforming 30-year FRMs increased by a single basis point.

Certain of the economic data were as flat as the rates. Take the Institute for Supply Management manufacturing indicator, which came in at 35.8 for February, a still-awful number. It showed just a whisper of improvement over January’s 35.6 reading, but was certainly stable, if at terrible levels. That was also the case with the ISM’s non-manufacturing gauge, which eased just a little from January’s level, slipping to a 41.6 mark, a decline of 1.3 points for the month.

January’s report covering Personal Incomes reported an actual, if convoluted increase. All of the 0.4% increase — the first since September 2008 — was due to spikes in government outlays, end-of-year bonuses, and other less regular events. Still, rising incomes (at least for some) should help support the economy to a degree. Personal Consumption outlays increased by 0.6% for the month, the first positive number since last July, but even with outgo outstripping income, the nation’s rate of saving increased to a fat 5% during the month. Also lending some economic support was the small but notable surge in consumer borrowing during January. The $1.8 billion increase in loan balances may have been slight, but it was the first such increase since September 2008 and was pretty equally split between credit cards and installment debt. Not a huge surge by any means, but at least a little sign of stability.

Factory Orders did not show much sign of stabilizing during January, but they did manage to decline less than expected, for what that is worth. The 1.9% decline for the month was the best showing since last July, and represented the smallest negative number of the bunch since then, so it could be characterized as somewhat better news. What can we say about the level of auto sales? The 9.1 million (annualized) rate of sale for February is still on a downward trend, even if the decline in terms of percentage has slowed somewhat. The auto industry continues to take it on the chin, and continues to pester Congress for more taxpayer support. General Motors this week indicated it could be open to considering bankruptcy to help re-cast its obligations, and that possibility is growing. Hyundai was the only manufacturer who reported increased sales, largely due to a "buy back" program if the car’s purchaser should lose their job. Perhaps that is a concept one of the "weak three" might consider employing in order to goose sales.

Construction spending wallowed by 3.3% during January. Declining spending on residential projects (-2.9%) was joined by commercial construction (-4.3%) and pressed further downward by a falloff in public works projects (-2.3%). Cash-strapped states have no funds to promote any sort of spending except for basics like schools, but the stimulus plan should pump some money back out via transportation projects and the like before too long. Announced layoffs abated somewhat in February, according to the outplacement firm of Challenger, Gray and Christmas. The 186,350 workers who will be losing their jobs was rather fewer than the 241,749 in January, and still remains at a very elevated level, if improved somewhat. The labor market is a "lagging indicator," with job losses occurring in the months after a market or markets experience slowness. Very few firms could easily practice "preventive layoffs," and are also loath to shed experienced employees when a slowdown first happens, hoping for a short recession. When that is no longer the case, firings begin. In this way, the acceleration of layoffs which began last summer as economic skies darkened was then intensified in September when Fannie, Freddie and Lehman Bros all floundered, and exploded after October/November’s credit market shutdown. The cumulative effects of those events are only now being reflected fully and may yet have some time to run.

Weekly jobless claims rang in at 639,000 during the week ending February 28, in line with the numbers seen over the past five weeks. Continuing claims remain over five million, a strong indicator that new jobs are hard to come by for those who have lost them. Of course, that is not news to the 8.1% of American workers who are unemployed, the highest such figure in over 25 years; those unlucky souls were joined by a new group numbering some 651,000 during February. The huge job losses over the past few months — well over 2 million since November — are alarming. However, that they have been about the same level in each of the past three months — and that November’s events are falling further behind — could revive some hope that this could be the bottom for labor markets, or at least provide some reason to expect that they won’t continue to worsen from these levels. However, there’s no indicator we can point to which suggests any improvement so far. Layoffs and reductions in hours worked haven’t been enough to offset the sharp decline in demand. As a result, worker productivity has plummeted, falling by a revised -0.4% during the 4th quarter of 2008. With slumping orders, there’s apparently just little for workers on the books to do, which also drives up the labor-per-unit produced cost, now up by 5.7% for the quarter. In a different economic climate, such numbers would sound inflation alarms, but in the present situation, it suggests that, absent any pickup in demand, more layoffs are on the way.

Consumer comfort levels as measured by the ABC News/Washington Post poll were about flat. The -49 noted for the week ending March was just a tick lower than the week prior, and no trend of rising optimism seems to be coming soon. That lack of enthusiasm is well grounded: The Fed’s own survey of regional economic conditions noted that "contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010." Overall, the document was rather bleak.

We keep looking for signs of any bottoming, let alone improvement, in the economic picture. As far as housing goes, we’d probably be happier if the weekly onslaught of new programs, offers, and market manipulations would simply stop, to give the industry some time to develop a better picture of where we are and where we need to go. However, there’s more change afoot, with new tweaking to the all-but-dead Hope for Homeowners program likely to come before long, and a ‘cram down’ bill hot on its heels. A breather would be useful to see whether the extant programs — enacted in such haste — have the desired (or any!) effects on the health of the mortgage and housing markets. After all, we’re paying for them. Hard to think that there’s any reason for mortgage rates to break strongly in one direction or another next week, so we’ll look for little change to rates again. However, what might happen over the next couple of months?