KEY DATA: Sales: down 8.1%; Jobless Claims: 284,000 (down 19,000)
IN A NUTSHELL: “The labor market may be getting better but wage gains are not and until that happens, families will not be buying new homes at any great pace.”
WHAT IT MEANS: When it comes to economic numbers, today’s data were the best of times and the worst of times. First the good news. Jobless claims dropped to their lowest level in over eight years. And when you adjust for the size of the labor force, you have to go back to 1999. Clearly, the labor market is tightening, but we have to be a little cautious about the July claims numbers. The vehicle makers don’t close plants in the same pattern that they used to when July was standard changeover to new model time. Thus, the seasonal adjustments may be a little out of whack and it wouldn’t be surprising if the number gaps upward next week. It will still be low, but not as eye-catching as today’s number.
While the job market may be getting better, the housing market is not, at least when it comes to new home sales. Builders saw demand plummet in June and the decline was across the entire nation. The largest fall off was in the East, where sales plummeted 20% while the West saw demand decline by just under 2%. The supply of homes for sale is continuing to rise and that growing inventory could lead to improving sales as buyers have more options to choose from.
MARKETS AND FED POLICY IMPLICATIONS: While the declining housing sales are troubling, they really didn’t make a lot of sense. It is hard to believe that builder confidence is jumping, as we saw with the jump in the Home Builders’ index, while sales are falling. So I am a little suspect about these data. Meanwhile, the jobs numbers are just getting better and better and for me it is all about the labor market. Not to sound too much like the broken record that I am, the missing link in this recovery continues to be solidly growing worker income. We saw this week that in June, earnings were flat again and adjusting for inflation, they declined. It is hard to make a commitment to buy a house when you don’t have increasing funds. But that is likely to change. The low levels of claims points to another solid jobs report and we could see the unemployment rate decline to 6% or even lower when the July data are released next Friday. Now there are many who simply do not believe that worker compensation will accelerate any time soon. But unless the law of supply and demand has been repealed for the labor market, the tightening of conditions will force firms to start bidding for workers. There may be resistance to doing that and the appearance of wage pressures may take longer to show up as a result, but it is coming and probably sooner than most think. When household incomes start rising, they will be better able to qualify for mortgages while the resulting increase in confidence will likely also encourage more home purchases. The Fed will likely wait to until wages are actually rising before any decision to increase rates is made. The old saying that “if you wait to see the whites of inflation’s eyes before tightening you have waited too long” seems to have been discarded by the Yellen Fed. As for investors and business owners, they dismiss the warning signs about growing wage pressures at their own peril.