Jobs Report Reveals Improvement

This morning’s jobs report from the Bureau of Labor Statistics (BLS) showed ongoing recovery in the labor market, though what it all means is up for analysis.  

Doug Duncan, Chief Economist at Fannie Mae was one of a few experts who summarized and interpreted the report. 

“Non-farm payrolls increased by 1.4 million in August, a deceleration from last month’s pace. A large fraction of this month’s jobs (238,000) came from hiring for the 2020 decennial census; we expect these temporary jobs to be lost over the next few months. The bulk of private-sector hiring came from service industries, with robust jobs gains in retail trade (249,000), professional and business services (197,000), and leisure and hospitality sectors (174,000). While payroll employment growth has averaged 2.7 million per month since April’s trough, total non-farm employment is still nearly 8% below February’s peak, reflecting the dramatic and sudden depth of this recession,” he said. 

“Meanwhile, the household survey painted a much rosier picture of the labor market,” Duncan said.  

Unemployment fell by 1.8 percentage points to 8.4%, doubling the decline from last month.  

According to this survey, there were close to 3.8 million additional employed persons in August, and the labor force participation rate rose 0.3 percentage point.  

“On the face of it, household survey results appear much more optimistic than payroll survey results; however, the household survey tends to be more volatile, given its significantly smaller sample size.” 

Also, the number of people working part-time but who would prefer full-time continued to decline, falling 871,000 in August. The U-6, a broader measure of labor utilization that includes this group, fell by 2.3 percentage points to 14.2%. Average hourly earnings grew at a 4.7% year-over-year pace in August, unchanged from last month.  

Finally, residential construction employment (including specialty trade contractors) grew by 27,700 this month, a slower pace than in last month’s report, but a welcome gain for a sector dealing with supply constraints. In summary, while there is some divergence between the two surveys, both are clearly heading in the right direction regarding the continuing labor market recovery.” 

Economist Odeta Kushi from First American added that,“the only major sector to display immunity to the coronavirus is the housing market, which has experienced a strong V-shaped recovery. This is largely due to the fact this has been a services-driven recession, disproportionally hurting younger, lower wage renters that are less likely to be homeowners or home buyers.” 

Earlier this summer, Bankrate posed the question, “Will improved jobs reports derail the low mortgage rate bandwagon?” To answer that, the Bankrate professionals said, one should pay attention to the 10-year Treasury yield, which can be pushed higher amid strong jobs reports.  

“The 10-year Treasury is a key benchmark for 30-year mortgage rates. The two generally move in the same direction — if the 10-year Treasury rate moves up, so does the 30-year mortgage rate,” Bankrate reported in July. “But despite the recent increase, mortgage rates may remain fairly steady through 2020.”  

To the 10-year Treasury rate, banks add a “spread.” It helps to cover operating costs and allows lenders to make a profit so they can continue to operate and fund loans. 

“The spread is often 1.8 basis points, according to experts. Lately, however, the spread has been abnormally high — as high as 2.72 points. One of the potential reasons it’s stayed elevated is because lenders are currently saturated with loans, and they don’t want a lot of new ones to come in. It could also be due to the increased risk lenders take on with high or rising unemployment. Keeping the spread high is one way to guard against that risk,” Bankrate said. 

“Due to the high spread, even if the 10-year Treasury rate does move up, mortgage rates might only move up a little or could remain at the same levels,” they reported.