A wave of millennial marriages and parents is its way, according to wedding and birth forecasting firm Demographic Intelligence. WSJ’s Lee Hawkins has the details.
Americans spent more at retailers selling everything from cars to camping gear in July, but they spent less at electronics stores.
How can this be when gadget-head consumers are equipped with everything from Fitbits to Beats by Dre headphones? One answer is that websites and general-merchandise stores are stealing sales from traditional electronics purveyors such as Best Buy and the struggling Radio Shack.
Another reason is that electronics are getting cheaper.
Sales at electronics and appliance stores fell 2.5% from a year earlier in July, according to the Commerce Department’s retail sales report released Thursday.
But adjusting for inflation, that’s not a bad result. The price of products sold at those stores was down 6% in June from a year earlier.
In fact, since the recession ended in mid-2009, the price of electronics is down 33%, by far the largest decrease of any category tracked by the Commerce Department. Overall prices are up almost 10% from six years ago, as measured by the personal-consumption expenditure price index.
The reasons for cheaper electronics are numerous. Technology tends to get cheaper over time, so one-time status symbols such as smartphones and flat-panel TVs are now everyday items. Some would also argue that it’s been a few years since a new must-have item such as the iPad has been rolled out. New innovations tend to be more expensive and prop up overall prices.
The global economy is likely also playing a role. Many electronics are produced overseas. As the dollar has gained strength against global currencies, that’s made foreign-made gadgets cheaper for American consumers.
The rental squeeze is getting worse, according to a new report by Zillow, as people are paying the highest-ever percentage of their income on rent.
Renters can expect to pay 30.2% of their income on rent, according to a Zillow analysis of rental and mortgage affordability in the second quarter released Thursday. That is the highest percentage ever, said Zillow, which has data going back to 1979.
The number is significant in part because it shows rental burdens creeping past 30%, which economists consider an affordable proportion of income for people to pay on rent.
Between 1995 and 2000, renters on average spent just over 24% of their incomes on rents.
“Our research found that unaffordable rents are making it hard for people to save for a down payment and retirement, and that people whose rent is unaffordable are more likely to skip out on their own health care,” said Svenja Gudell, Zillow’s chief economist.
Rental affordability worsened in 28 of the 35 metro areas covered by Zillow. It remained especially poor in the New York area and pricey West Coast cities. Los Angeles renters could expect to pay 49% of their incomes in rent. San Francisco wasn’t far behind, with renters paying 47% of their incomes on rent.
Even in New York and northern New Jersey–long considered a pricey place to rent–affordability has worsened significantly. Renters in the city historically paid about 25% of their incomes on rent and now pay 41%.
In Miami, a city that was long considered affordable but has been dramatically transformed by luxury condos, renters now pay 44.5% of their incomes on rent.
Renters have been becoming increasingly burdened thanks to a combination of rents rising due to increased demand and limited supply and income levels remaining relatively flat. That has put a squeeze even on working, middle-class households.
For some renters there may be a way out: Buy a house. Mortgages remain very affordable. Buyers should expect to pay about 15% of their incomes on housing.
Still, economists say the rising rents are making it even more difficult for renters to make the transition to buying because it is difficult to save for a down payment. Stricter credit standards have also made it more challenging to get a mortgage.
“If you can possibly come up with a down payment, then it’s a good time to buy a home and start putting your money toward a mortgage,” Ms. Gudell said.
Fast-rising home values are raising alarms among some economists that the home-affordability problem is getting out of hand. But there is one happy side effect: The foreclosure crisis is receding into the background.
The Mortgage Bankers Association, which represents mortgage lenders, on Thursday said that the foreclosure starts rate was merely 0.4% in the second quarter, 0.05 percentage point lower than the first quarter and on par with the rate seen during the housing boom.
The delinquency rate–which includes loans that are past due but not in the foreclosure process–fell 0.24 percentage point to 5.3%, after adjusting for seasonality, its lowest point since the second quarter of 2007.
Marina Walsh, MBA’s vice president of industry analysis, attributed the improvement to a strong job market and the broader housing recovery.
Though fewer homeowners are falling behind, there are still an abnormally high number of borrowers stuck in the foreclosure process. In the second quarter, 2.09% of loans were in some stage of the foreclosure process, 0.13 percentage point lower than last quarter and 0.4 point lower than a year ago. That rate is still twice as high as those seen at the peak of the boom.
As has been the case for years, states that use mainly a judicial foreclosure process, which means typical foreclosures must work their way through the court system, had a higher foreclosure inventory rate than nonjudicial states. Judicial states tend to give more protection and time to delinquent borrowers at the expense of a swift process.
New Jersey maintained the highest percent of loans in foreclosure, at 7.31%, followed by New York at 5.31% and Florida at 4.24%. In the meantime, Colorado, North Dakota and Wyoming had foreclosure inventory rates of below 0.7%.
California, another boom-bust state but one with a nonjudicial foreclosure process, had an inventory of 0.91%.
Overall, 3.41% of loans in judicial states are in the foreclosure process, compared with 1.15% of loans in nonjudicial states.
The history of oil tycoons is littered with booms and busts—fortunes that swelled and collapsed with unexpected velocity—subject to the vagaries of oil discoveries and the high-stakes game of world diplomacy and international intrigue. Economic forecasters can’t avoid them, either.
Ever since oil prices collapsed last fall, the best guess of economists has been that oil prices would gradually firm up. The average of predictions in The Wall Street Journal’s survey of economists has shown that forecasters typically expect prices to rise about $5 every six months.
Crude oil prices climbed earlier this year—even briefly surpassing $60 a barrel—only to plunge again over recent weeks as investors contemplated the possibility that there’s simply not enough global demand to support higher prices. As oil prices plunged back below $50 and slid toward $40, it left economists’ forecasts as wrecked as a 1980s oil town in West Texas. At no point in the last 12 months have economists anticipated that oil could drop so low.
The missed forecasts of oil prices matter because of how much oil feeds into inflation. As a crude rule of thumb, energy prices make up about 10% of the consumer-price index, so a major drop in oil can cause inflation to fall through the floor. That’s exactly what’s happened and economists didn’t anticipate it. For the past year, they have forecast that the annual rate of change for the consumer-price index would return to slightly above 2% within about a year.
In recent years, Japan, the U.S. and Europe have been accused of fomenting currency war by employing monetary stimulus that drove down their currencies. These accusations were off base: by boosting domestic spending with easier monetary policy, everyone, including their trading partners, benefited.
But China’s move this week to devalue the yuan is an exception. Because its action was not part of a broader monetary boost, the effect will be to siphon demand from its trading partners while giving nothing in return. It is a zero-sum game and thus the first shot in a currency war.
When the Federal Reserve or the European Central Bank ease monetary policy by cutting interest rates or buying bonds, it prompts investors to move their money elsewhere in search of a better return. This will ordinarily drive down the dollar or the euro. The Fed and ECB, though, have no say in how much it will drop. They only know that the boost to their economies will come through the combined effect of lower interest rates and a lower currency. While the latter may hurt their trading partners, the former will help since stronger domestic demand usually leads to more imports.
By contrast, China has a closed financial system and routinely adjusts interest and exchange rates independently of each other. This week’s devaluation did not come about because of an interest rate cut, but in lieu of one. In seeking to stimulate the economy, the Chinese authorities appear to have taken aim at exports, rather than take the chance that lower rates might elevate asset prices and debt.
The U.S. and the International Monetary Fund have long called on China to let market forces rather than government diktat determine the yuan’s value. This is what China claims to be doing. Market forces had been pressing the yuan to the bottom of its permitted trading band, and henceforth, that trading band itself will adjust in accordance with where market forces are pushing the currency.
But this is far cry from truly making the yuan market-determined. The fact that the People’s Bank of China will maintain any sort of trading band, that the formula behind the band remains a black box, and that trading (at least of the onshore currency) may not occur outside that band, are all at odds with the true market determination.
How, one might ask, is this different from, say, Denmark, which pegs its currency, the krone, to the euro? The reason is that Denmark adjusts its monetary instruments–interest rates and the volume of the volume of krone that it prints–to ensure that the market wants the exchange rate to trade at the peg. If the market is pushing the krone above that level, Denmark has to lower interest rates, print krone and buy euros. Thus, the krone’s peg and its fundamental market value are the same.
For China, the equivalent action would be to allow unlimited purchases and sales of yuan by foreigners and residents, and then use both intervention and interest rates to push the yuan to its desired level. But for all their talk of market reforms, China’s authorities remain deeply attached to having as many macroeconomic levers as possible, and making the exchange rate an appendage of monetary policy, as in most countries, would surrender one of those levers.
While on the surface China has moved in the direction of market determination, it is surely not a coincidence that it came when markets were pushing the yuan in the direction the authorities consider essential for economic stimulus. This has the collateral benefit of leaving the Obama Administration tongue-tied. Since in principle the U.S. only wants the yuan to be market-determined, it can’t really complain if the result is that the yuan goes down instead of up.
But the real test of whether China is truly committed to market determination is when market forces push in the opposite direction to what the authorities prefer. Perhaps China really means it, and will stand aside when that happens. On the other hand, its commitment to market-determined equity prices lasted so long as those prices kept going up, and melted away when prices headed down.
The Obama administration’s move to expand overtime eligibility has the potential to impact millions of workers. And women, who are disproportionately concentrated in low-wage jobs, make up the majority of those who may stand to gain.
A new analysis by the left-leaning Institute for Women’s Policy Research and Moms Rising found that 3.2 million women are newly covered by proposed changes to overtime rules, compared with 2.7 million men. But based on current work habits, men could take a greater share of the additional income, the study found.
The “newly covered” category is based on the proposal’s updated threshold under which most full-time salaried workers would be eligible to earn time-and-a-half pay for working more than 40 hours per week. The threshold would be increased to $970, or $50,440 annually. That level is about the 40thpercentile of weekly earnings for salaried workers. The Labor Department takes comments on proposed changes through early September. The current threshold is $23,660, or $455 a week. The institute’s analysis refers to all eligible workers, including ones who do not currently work overtime.
Currently exempt single mothers and women of color in particular stand to gain, according to the institute’s analysis. It finds 44% of currently exempt single mothers would be covered, compared with 32% of married mothers and 39% of single childless women. The likely newly covered single mothers also start out with the lowest base pay, earning $707 per week compared with married mothers’ $744 and single women’s $719.
Increased pay could help improve outcomes for children living with single mothers, which today is one in four. Since the recession, the share of female-headed households that are low-income has risen to 58 percent in 2012, up from 54 percent in 2007.
Nearly one-half of black and Hispanic workers would be newly covered, compared with about one-third of white women and slightly more than one-fourth of Asian/Pacific Islander women, the institute estimates.
The report found that newly covered men could see a bigger jump in weekly pay than women, since they work, on average, an extra hour of overtime than women, 11.7 hours compared with 10.7. The average newly covered man makes $725 a week, and could earn as much as $252 extra for overtime. The average woman, by contrast, has a base pay of $728 but would earn $227 a week in overtime pay.
A separate analysis by the right-leaning think tank American Action Forum looked at the proportion of newly covered workers who currently do work overtime. Under these conditions, only three million workers would benefit. About two-thirds would be workers in two-earner families. Just under two-thirds would be in households without children. And the majority, about 57%, would be men, according to an earlier analysis by Ben Gitis, director of labor market policy at the American Action Forum.
“Men actually stand to benefit much more than women from the rule,” Mr. Gitis said in an email.
It is possible that employers will avoid paying overtime altogether by limiting hours or hiring new workers to cover additional hours. On the other hand, workers who were previously happy to leave after 40 hours may grab extra hours thanks to the possibility of overtime pay. The final rule—and how employers respond—will shape who truly benefits.
The number of job openings in the U.S. fell slightly in June but remained at a level suggesting strong demand for workers.
Job openings slipped to 5.25 million in June, down from a record 5.36 million in May, according to the Labor Department’s Job Openings and Labor Turnover Survey, known as Jolts.
Hires climbed to the highest level of the year at 5.12 million and the number of Americans voluntarily quitting their jobs climbed to 2.75 million from 2.73 million the prior month. The number of voluntary quits tends to rise when people are confident about job prospects.
Another 1.79 million people were laid off or discharged in June, down from 1.66 million in May.
“In other words, labor demand is still rising very rapidly, and is hugely elevated relative to the unemployment rate,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients.
The main jobs report, out earlier this month, showed the unemployment rate at 5.3% in July and June. Nonfarm payrolls rose a seasonally adjusted 215,000 in July and 231,000 the prior month. The initial employment situation report only shows net job gains or losses, while the Jolts report offers additional details on the total number of hires, openings and separations.
Both reports are closely followed by officials at the Federal Reserve. Chairwoman Janet Yellen has said the rate of voluntary quitting is a key gauge of workers’ confidence in the economy. When the economy is stronger, workers are more likely to quit their jobs because it’s easier to find something elsewhere.
In recent months, the number of quits has held fairly steady and a gap between job openings and hires has opened, a mismatch that suggests employers haven’t been able to find workers with the desired skills at the salary on offer.
“While growth in job openings has cooled off in recent months, the key takeaway should be that the underlying health of the labor market continues to improve,” said Jeremy Schwartz, an associate at Credit Suisse. “The ratio of vacancies to unemployed workers continues to rise and is near precrisis peaks.”
Still, businesses haven’t responded with significantly higher wages. That may be because there’s still a ready pool of workers.
Despite 58 consecutive months of rising payrolls, 8.3 million workers were looking for a job but couldn’t find one in July, while others had given up looking or were stuck in part-time jobs but would have preferred a full-time position.
And the share of Americans participating in the labor force, at 62.6% in July, matched the lowest reading since 1977, a possible sign there’s a mismatch between job openings and job seekers.
In January, President Barack Obama announced a major mortgage-fee cut for some lower-wealth borrowers. The fee cut brought praise from the real-estate industry and affordable housing advocates but ire from conservatives who thought it would result in riskier mortgages and lower revenues for the cash-strapped agency.
More than half a year from the cut, the number and mix of loans being backed by the Federal Housing Administration have changed markedly. Here’s what happened and how the change affected the mortgage market.
What happened in January?
Mr. Obama said the FHA would cut the annual fees it charges most borrowers to 0.85% from 1.35% of a loan. That would save a borrower $1,000 in the first year of a $200,000 mortgage.
That was a big deal for typical first-time home buyers, who often favor the FHA because it allows down payments of as little as 3.5% and credit scores of as low as 580.
At the time, the White House said that the cut would enable 250,000 Americans to buy their first home within the next three years. Some conservatives, on the other hand, worried that the cut would hurt the FHA’s finances without the big gain Mr. Obama promised.
An analysis of the FHA premium cut by Moody’s Analytics’ Mark Zandi performed soon after the announcement estimated the cut would result in 45,000 more home sales in 2015 and 20,000 more single-family home starts. Mr. Zandi also estimated that the FHA’s insurance fund would reach its legally mandated 2% capital ratio by 2018, about a year later than he estimated previously.
What’s happened since then?
According to research by Andy Winkler, director of housing finance policy at the right-leaning American Action Forum, the number of home buyers has increased, but some of the gains are going to more well-heeled buyers that the administration didn’t intend to target.
The fee reduction, for example, made the FHA program more attractive to borrowers with higher credit scores, Mr. Winkler says. The percentage of FHA endorsements where the borrower had a credit score above 680 grew to 45% in the second quarter, up from 41% in the fourth quarter of 2014, he says.
The percentage of FHA loans with high balances has also gone up, and overall, the FHA’s share of the mortgage market rose to 32% in the first quarter.
To be sure, the shift was expected.
When finding a mortgage, buyers or their lenders are often weighing the FHA program against options available from mortgage-finance companies Fannie Mae and Freddie Mac , which back loans with down payments of as little as 3%. By cutting fees, the FHA became the most cost-effective option for more borrowers.
Edward Pinto of the American Enterprise Institute in July criticized the decision to cut fees, saying in part that the premium cut resulted in borrowers buying more expensive homes rather than saving money. Mr. Pinto said that FHA’s increase in loan volume came at the expense of other housing programs.
Did the fee cut hurt taxpayers?
Also perhaps unsurprisingly, the cut in FHA fees reduced the revenues per loan that the agency brings in, Mr. Winkler notes. The FHA estimates that for every $100 the program guarantees, the agency makes $5.35 in profit, down from $9.03 before the cut, Mr. Winkler says.
The reduced revenues for the program were the immediate target of Republican lawmakers and some conservatives after the fee cuts were announced.
The law requires the FHA to maintain a capital buffer of at least 2% of the loans it guarantees, a threshold it hasn’t met since 2009. HUD Secretary Julián Castro has said that the department expected the fee cut to delay reaching the threshold by “a few months.”
HUD and lawmakers won’t get an official update on the financial impact of the fee cut until later in the year, when an independent actuary comes out with its report on the FHA’s finances. The actuary’s outlook is typically heavily influenced by assumptions it makes on the direction of home prices and interest rates, making it difficult to predict the outcome even knowing that fees dropped.
Is the fee cut bringing in more first-time buyers?
All else being equal, cheaper mortgages should make buying a home affordable for more people.
Problem is, all else isn’t equal. This year, home prices have risen sharply, hurting affordability. Some researchers suspect that a small portion of the rise in prices might even be a result of the fee decrease.
On the other hand, mortgage rates dropped early this year, helping to spur a hot start to the spring selling season.
All that’s to say that it’s near-impossible to isolate the fee decrease and calculate what would have happened to first-time home buying but for the cut.
That said, so far this year, FHA originations in the first quarter ran more than 30% higher than they did through the same period a year ago, according to Inside Mortgage Finance.
On a percentage basis, Mr. Winkler says 83% of FHA loans went to first-time home buyers in May, unchanged from a year earlier.
The National Association of Realtors on Tuesday said that home prices in the second quarter rose in 163 out of 176 metro areas, continuing their upward trajectory even as economists warn of looming affordability problems and a limited supply of homes for sale.
The median existing single-family home price rose to $229,400 in the second quarter, up 8.2% from a year earlier. That was a slightly faster rate of increase than the 7.1% price rise seen in the first quarter.
Real-estate agents this year reported a hot spring selling season that bled into the summer with dwindling home supply, the return of bidding wars in some cities and trigger-happy buyers eager to get a home loan before a long-expected rise in mortgage rates.
Still, NAR’s report had signs that some markets aren’t quite as hot as they were at the beginning of the year. In the second quarter, 34 metro areas reported double-digit annual price gains, compared with 51 that reported such gains in the first quarter. Median prices, especially in smaller metro areas, are heavily affected by the mix of homes put up for sale and don’t necessarily reflect actual changes in the health of those markets.
According to NAR, home prices rose the fastest in the stretch of cities extending up the east coast of Florida between Port St. Lucie and Titusville, with the median sales price in those areas rising about 20% from a year earlier. Raleigh and Greensboro, N.C., also saw strong double-digit gains.
On the other hand, Cumberland, Md., the metro including Stamford, Conn., and Kingston, N.Y., were among the few cities showing price declines, NAR said.
Californian cities continued their reign atop the list of most-expensive markets, with San Jose commanding a median sales price of $980,000.
NAR said that the average supply of homes in the second quarter was 5.1 months, down from 5.5 months a year ago.
Keeping supply tight is a high number of owners who still owe more on their homes than they’re worth, along with a pace of home construction that’s still well below the rate in the early 2000s, before the boom. What homes that do get built tend to be at higher price points, exacerbating affordability issues for entry-level buyers.
News Corp, owner of The Wall Street Journal, also owns Move Inc., which operates a website and mobile products for the National Association of Realtors.
China on Tuesday devalued its currency in a way that left it 1.9% weaker versus the U.S. dollar. The move will likely have a ripple effect through financial markets as well as in politics, as China is the world’s largest trader and the yuan is increasingly used overseas. Here are five things you need to know about Beijing’s latest move.
#1: What did China do?
China tightly controls the value of its currency by setting a daily rate for the yuan versus the dollar. In China’s domestic market, traders are allowed to push the yuan 2% stronger or weaker for the day. But the People’s Bank of China often ignores those market signals when it sets the next day’s rate, sometimes setting the yuan stronger versus the dollar when the market is signaling it sees the yuan as weaker. The central bank said it will now take the previous day’s trading into account – and it attributes that move to Tuesday’s sharp drop.
#2: Why did China do it?
In its statement, the PBOC said it wants to bring the yuan more in line with the market. But the move also comes as China’s important export sector has weakened – and overall economic growth looks sluggish. Over the weekend, Chinese customs officials said July exports fell 8.3% compared with a year ago. A weaker currency helps China’s exporters sell their goods abroad.
#3: What does this mean for the rest of the world?
The most immediate effect is that it signals to the world that Beijing thinks the Chinese economy is sputtering. The move suggests China is looking for ways to get it going again. But it also has major implications for the U.S. and other countries that trade with China because it puts their companies at a disadvantage. In the U.S., it will likely reignite criticism that Beijing keeps the currency artificially low to help its own manufacturers – a charge that could get added impetus during the presidential election campaign.
#4: What does this mean for markets?
The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows. The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations.
#5: What’s next?
The move could add to tensions ahead of Chinese President Xi Jinping’s visit to the U.S. and his meetings with President Barack Obama, which is set for late September. It could also complicate China’s efforts to get the yuan added to a basket of currencies tracked by the International Monetary Fund – efforts aimed at giving the yuan greater acceptance abroad. Longer-term, the move raises questions about Beijing’s pledge to liberalize its economy. On one hand, making the yuan more market-driven is a step in that direction. But the move also appears to be designed to help exporters, at a time when China has been looking for other, more dependable sources of growth.
For many luminaries of the financial sector, the place to be when the July payrolls report is released is around a small television set at Leen’s Lodge in Grand Lake Stream, Maine. If you are there on the first Friday of August, you are part of “Camp Kotok.”
David Kotok, the chief executive of Cumberland Advisors, has been coming to Grand Lake Stream, Maine, for 25 years to catch bass, perch and pickerel, but his low-key fishing vacation has morphed into a meeting of minds in economics and finance.
This year’s camp, from Aug. 6 through Aug. 10, was the largest ever with over 60 attendees, but the focus was the same: what’s going on in finance and the economy. Chatter focused on the timing of the Federal Reserve’s first rate increase, China, the outlook for housing and whether measurements of gross domestic product and consumer spending are outmoded in today’s sharing economy.
“There are a lot of smart people here who do smart things,” said first-timer Amy Cutts, chief economist at Equifax . “Even if they don’t work in your field, they are thinking about the same issues you are. And they bring a different perspective or solution to the topic.”
‘The U.S Economy Is in Pretty Good Shape’
This year’s mood was positive about the general state of the economy. “Domestically, the U.S. economy is in pretty good shape,” said Stuart Hoffman, chief economist at PNC Financial Services. A survey of the campers by The Street showed China and other international problem spots remain concerns.
September Rate Rise
On the Fed, the consensus was policy makers would move in September. To wait until yearend would risk raising rates at a time when the financial markets typically have less liquidity.
Some, including former Philadelphia Fed president Charles Plosser, mentioned concern in the Federal Open Market Committee about the consequences of a prolonged period of zero interest rates.
Bullish on Housing—Except
On housing, a presentation by David Berson, chief economist at Nationwide Mutual, and Katie Stockton, chief technical strategist at BTIG, made upbeat cases for the sector. “I’m mildly bullish for home builders to outperform over the near term,” Ms. Stockton said. Mr. Berson said the leading housing indicators for almost all metropolitan areas were very positive.
A big exception, though, were areas where the local economy depends on energy.
What Comes Next in China?
The July collapse in the Chinese stock market along with officials’ attempt to backstop markets caught everyone’s attention. The question on campers’ minds: What comes next? Many argued Beijing’s attempt to support equity prices will do more harm than good and also that the focus on the financial markets will delay needed reforms in the Chinese economy.
There was also some good news on China.
“The real economy is not the stock market,” said Leland Miller, president of China Beige Book International. His company produces the Chinese beige book, which looks at the economy beyond the official government data. Like the Federal Reserve’s U.S. beige book, the CBB uses on-the-ground reporting of Chinese manufacturers, retailers, construction firms and other entities to flesh out what’s really going on in the Chinese economy.
According to Mr. Miller, the Chinese economy, while slowing, is in better shape than it was a few quarters ago. He said sales volume is up, retail sales are doing better and capital spending has stopped falling. The news on the property sector is also better, he said, although residential construction continues to fall.
Still, he recognizes the leadership in Beijing has a problem because the stock market is making Chinese investors worried about their personal finances and the economic outlook. “What you have to worry about is not housing, the shadow banking system or debt,” Mr. Miller said. “The biggest risk is the Chinese leadership losing control of the [economic] narrative.” That could cause unrest—something Beijing wants to avoid.
China’s problems are the world’s problems, especially when it comes to the outlook for pricing power, said Caroline Miller, chief strategist at BCA Research (and no relation to Leland). “China consumes 40% of the base metals traded worldwide,” she said, while fishing. “With growth slowing, spending on metals will also increase at a slower rate.” She expects more defaults among commodity-based firms worldwide.
At the same time, Beijing’s desire to limit debt growth will mean the world’s second-largest economy will import fewer goods even beyond commodities.
“That’s a cold shower for everyone who sells supplies to China,” she said.
Fannie Mae, Freddie Mac, the Federal Housing Finance Agency and the Obama administration over the past year have tried mightily to expand mortgage access for riskier borrowers.
But despite those efforts, there’s little evidence so far of borrowers with weaker credit making a strong return.
On Tuesday and Thursday, Freddie and Fannie released their quarterly earnings reports. Both companies said that the credit scores of loans that they back are actually higher year-to-date than they were last year. Freddie, for example, says that this year through June the weighted average credit score of loans it purchased from lenders was 751–on a scale of 300 to 850–up from 744 in 2014.
To be sure, mortgage rates dropped early this year, causing a boom in refinance activity. Borrowers who are refinancing tend to have higher credit scores and more home equity than people buying homes, which obscures the picture.
The percentage of mortgage borrowers backed by Fannie and Freddie with low credit scores or a low down payment has also risen since mid-2013, even though it has dropped recently with a change in the companies’ business mix.
Still, with such an abundance of anecdotes from lenders who say they’re making it easier to get a mortgage, you would expect there to be a more significant change.
So what’s going on?
Some lenders are still afraid of getting sued or of taking another hit to their reputations.
On Thursday, Fannie Mae CEO Timothy J. Mayopoulos said that Fannie and the FHFA have made great strides toward working with lenders to ease their concerns about being hit with penalties by Fannie years after they’ve made a loan.
Problem is, Fannie isn’t the only entity that lenders have to answer to. In the past few years, lenders have been under scrutiny from the Justice Department, Consumer Financial Protection Bureau and dozens of state attorneys general and lawmakers for alleged mistakes and abuses before, during and after the financial crisis. Some lenders think the scrutiny is overzealous and have pulled back from making certain loans as a result.
“When I meet with lenders, it’s very clear that there’s great concern about the legal and regulatory enforcement from any number of players at the federal and state level. It’s not something that we at Fannie Mae control,” Mr. Mayopoulos said. He said that the actions have had a “substantial effect on the mindsets of lenders, at least as they express it to me.”
Many borrowers with mortgage-eligible but poor credit don’t know they could qualify.
Even though some lenders have said that they’re expanding mortgage access, some borrowers have had it beaten into their heads over the last few years that it’s hard to get a mortgage. Those perceptions are hard to change, even if the reality has.
Many shakier borrowers don’t want a mortgage or can’t afford one for other reasons.
Even though lenders are increasing the availability of loans to borrowers with lower credit scores, many of those borrowers don’t want a mortgage, at least not right now. Some of that might be scars from the housing crisis, but it could also be that sluggish wage growth is tempering confidence.
The U.S. Treasury Department is cautiously preparing for the lifting of economic sanctions on Iran, but is insistent that foreign companies don’t jump the gun.
Treasury, under the nuclear agreement signed with Tehran last month, is preparing to roll back layers of U.S., European Union and United Nations sanctions imposed on Iran over the past decade. But U.S. officials are emphatic that foreign governments and firms not start investing in Iran until it follows through on the commitments it made in Vienna to roll back its nuclear program.
Iran’s commitments include mothballing thousands of centrifuge machines, reducing its stockpile of nuclear fuel and reconfiguring a heavy-water reactor capable of producing weapons-usable plutonium.
“We need to keep everyone onside,” said a senior Treasury official working on Iran. “We want to make sure they’re not tripping over themselves to get in before Iran has actually taken the steps it agreed to under the deal.”
U.S. officials estimate that it will take Iran until around mid-2016 to implement the steps it agreed to as part of the nuclear deal. At that stage, the international sanctions on the country will begin to be rolled back.
Congress also needs to approve the deal, and is scheduled to vote in mid-September.
Treasury officials have said unwinding the sanctions, and explaining the process, will be extremely complicated and require extensive engagement with foreign firms and governments.
Washington and its diplomatic partners—Russia, China, Germany, France and the U.K.—signed an interim nuclear agreement with Iran in late 2013. But many foreign banks refused to conduct financial transactions with Iran—even ones that have been approved by Treasury—because of fears they could be hit with financial penalties in the future.
U.S. officials said they envision that Treasury and State Department officials will need to make extensive trips to Asia, Europe and the Middle East in order to explain what can and can’t be invested in, in the future.
“We’re still in phase one of the process,” said the Treasury official.
Despite the deal, the U.S. is maintaining unilateral sanctions on some Iranian banks, transportation companies and construction firms.
The Obama administration has stressed that it will maintain all of its sanctions on companies controlled by Iran’s elite military unit, the Islamic Revolution Guard Corps. The IRGC is widely seen as the single most dominant entity in the Iranian economy.
Treasury officials have stressed that foreign companies still won’t be able to do business with the IRGC’s holding company, Khatam al-Anbia, which has massive holdings in real estate, construction and telecommunications.
The agreement “has no effect whatsoever on U.S. secondary sanctions related to the IRGC, meaning that foreign banks and companies could be exposed to sanctions,” said the Treasury official in regard to Khatam al-Anbia. “So it’s still a landmine for foreign companies doing business in Iran.”
Americans took on consumer debt at a faster pace in June, suggesting a firming labor market and low gas prices may finally be prying open consumers’ wallets.
Outstanding consumer credit, a reflection of nonmortgage debt, rose $20.74 billion or at a 7.3% annual rate in June, the Federal Reserve said Friday. That’s a slight increase from May, when it increased at an upwardly revised annual rate of 5.9%, but less than April’s 7.6% pace.
Economists surveyed by The Wall Street Journal had expected a $17 billion increase in June.
Revolving credit, mostly credit cards, rose at a 7.4% annual rate, a jump from May when it rose at an annual rate of 2.1%.
Nonrevolving credit, made up largely of auto and student loans, rose at a 7.3% annual rate, a slight acceleration from May’s upwardly revised rate of 7.2% and April’s unrevised 6.2% growth pace.
U.S. employers added 215,000 nonfarm jobs in July, the Labor Department reported on Friday. Gross domestic product, the broadest measure of economic output, grew at a seasonally adjusted annualized rate of 2.3% in the second quarter.
But some economists still question whether Americans will pick up their spending at a time of stagnant wages, despite nearly five straight years of job growth. Consumer spending accounts for more than two-thirds of U.S. economic output, serving as an important driver of economic growth.
Friday’s jobs report revealed that the unrounded overall unemployment rate, at 5.26%, has finally dropped below its prerecession average, a point underscored in a blog post by Jason Furman, chairman of the White House Council of Economic Advisers.
So we’re now fully recovered from the recession, right? The labor market is cranking and the Federal Reserve is sure to pull the trigger on higher rates in September to keep the economy from overheating, right?
Well, not quite. Look below the topline unemployment rate and the picture becomes murkier. Yes, slack in the overall labor market has been absorbed. But as a chart below (created by Mr. Furman’s shop) points out, there is still plenty of labor market slack among certain groups. The share of long-term unemployed workers is still 34% higher than it was before the recession, although it’s come down noticeably.
And the much-scrutinized “U-6” unemployment rate, a broader indicator that includes those stuck in part-time jobs and discouraged workers, is still 14% above where it stood. The unemployment rates for women and Hispanics are also slightly higher than they were before the recession, Mr. Furman notes.
There are two ways to look at this. The optimistic view would note that while some measures of labor market slack remain high, they’re all moving in the right direction. And since the recession was so severe, it’s only normal that some more vulnerable groups in the labor market should take longer to recover. A more pessimistic observer would argue it’s hard to make the case that the labor market is fully healed when it’s still so hard for those who have been unemployed six months or more to get a job.
So where does the Fed fall in all this? It’s hard to say for sure. While economists generally agree that Friday’s report puts the central bank firmly on track to raise rates next month, it’s clear that Fed Chairwoman Janet Yellen remains troubled by stubbornly high levels of slack.
“The lower level of the unemployment rate today probably does not fully capture the extent of slack remaining in the labor market–in other words, how far away we are from a full-employment economy,” she said in a speech last month in Cleveland.
Nothing in today’s data is likely to lead her to change that assessment.
U.S. employers added 215,000 new jobs in July holding the unemployment rate at 5.3%. Employers have now boosted hiring for 58 straight months and the unemployment rate is where the Federal Reserve expects it to be at the end of the year. The past few months have brought a steady rise in employment and a steady decrease in the unemployment rate but other indicators suggest there’s still ground to be made up in the labor market. Labor-force participation is stuck at 62.6% for the second straight month, the lowest level in almost four decades. And there’s no sign of a breakout in wages. Average hourly earnings have risen 2.1% over the year, a modest pace that’s on par with the postrecession norm. The big question now is whether this report is good enough to prompt Fed officials to raise rates in September or whether they will want to wait a little longer. Here’s what economists had to say about the July jobs report.
“Altogether, we view this report as easily clearing the hurdle needed to keep the Fed on track for a September rate hike, and as such, we continue to look for the first hike in September. Of course, there is still one more jobs report before September that, combined with lingering uncertainty about developments in the external environment, could push the Fed to delay the rate hike cycle; but, we view the bar for not moving as much higher now.” –Rob Martin, Barclays
“The report likely won’t change minds on the Fed either way, but it does represent a modest incremental tightening in labor market conditions; the trend in employment continues to rise faster than the underlying rate of growth of the labor force, keeping downward pressure on the unemployment rate. The unchanged July rate doesn’t matter; the trend is still falling and in all likelihood it will dip to 5.2%, the top of the Fed’s Nairu [full employment] range, in August. Remember the Federal Open Markets Committee statement last week said policy makers want to see ‘some further improvement’ in the labor market before they hike; this report qualifies, in our view, with broad-based employment gains. Only mining is shedding jobs, but the rate of decline has slowed sharply and the July dip was only 5,000.” –Ian Shepherdson, Pantheon Macroeconomics
Inside the Numbers: WSJ’s Justin Lahart analyzes the July employment report and explains why the numbers, despite coming in as expected, could give the Fed pause when it considers interest rate increases.
“A largely ‘as expected’ report in terms of payrolls, the unemployment rate, and average hourly earnings, with the workweek ticking up instead of remaining unchanged as most had expected. With the underlying trend of job growth remaining solid, there is nothing in this report to dissuade the FOMC from pulling the trigger on Sept. 16 if that is indeed its preference at the moment.” – Joshua Shapiro, MFR, Inc.
“This report easily meets the definition of ‘some’ further improvement in the labor market and further lowers the bar for the notoriously upward revision prone August payrolls to meet this definition (August payrolls have been upwardly revised by 74,000 on average over the last six years, which means 137,000 on the initial release could be viewed as entirely consistent with the trend in payrolls thus far in 2015 but any revisions would come after the September FOMC meeting). We see a rate hike on Sept. 17 as very likely and think the remaining data releases would have to be quite weak to delay liftoff until December.” –John Ryding and Conrad DeQuadros, RDQ Economics
“While the headline job gain was a bit smaller than expected, this is another solid report that, in our view, meets the criteria for “some further improvement” in labor market conditions and thus will keep the Fed in play in September. The numbers are not strong enough to end the debate, but we remain comfortable with our view that they will take action at that time.” –Michelle Girard, RBS Securities
“The July jobs report came in about as we and the consensus expected. There is nothing in the report that should dissuade the FOMC from their initial rate increase in September. The net 215,000 nonfarm jobs created in July brings the year-to-date job creation total to 1.48 million, and the three-month average monthly gain to 235,000. With only one more employment report before the September FOMC meeting, it would probably take a sharp slowdown in job growth in August, perhaps well below 100,000 jobs or even negative job growth for the FOMC to delay their initial rate hike until December. Thankfully, there is little to suggest that August job growth will suddenly stall.” –Scott Anderson, Bank of the West
“What the July payroll data mean for the FOMC is that efforts to stall [a] first move in September just got that much harder. The economy, through hiring, shows no signs of rapid acceleration, in fact the pace of job growth is slower this year than last. A very high level of job gains are still centered in low-wage industries–health, restaurants and retail. They add to about 45% of the July gains. And we can [add] to this grouping the 14,400 increase in transportation and warehousing–mostly support activities, couriers, messengers, and storage. Perhaps we can call it the Amazon economy. On the other hand, the more important one, we do see in the data improved levels of hiring tied to residential real estate, in construction and finance.” –Steve Blitz, ITG Investment Research
“The 215,000 rise in July payroll jobs, combined with a combined 14,000 upward revisions to job growth in May and June, is another strong labor market report. This will likely give the FOMC the needed ‘confidence’ to begin raising the Fed funds rate by 25 basis points at their Sept. 16-17 meeting, as reflected in our June baseline interest rate forecast. A similar report for August (released on Sept. 4) would likely be enough to ‘seal the deal’ for a mid-September rate hike.” – Gus Faucher, PNC
The U.S. economy added 215,000 jobs in July, continuing a steady expansion. Friday’s report from the Labor Department showed few changes from the prior month on a range of measures, including the unemployment rate, at 5.3%, and the labor-force participation rate.
The economy has added around 2.9 million jobs over the past 12 months. That’s down slightly from earlier this year, when the 12-month paced surpassed three million, but it is still well ahead of the 2.5 million jobs added for the year ended July 2014.
Job growth over the past three months reached its highest level since February, with an average 235,000 jobs added per month.
Meanwhile, the unemployed rate held steady at 5.3%. A broader gauge of underemployment, which includes workers who have part-time positions but say they would like full-time jobs, ticked down to 10.4%.
The economy is very different for college graduates, who face only a 2.6% unemployment rate, compared with 5.5% for those who have no education beyond high school and 8.3% for those who did not complete high school.
The share of Americans in the labor force—that is, those who are working or looking for work, has remained at the lowest level since 1977. The share of Americans with jobs has risen slightly in the past five years, but remains lower than before the recession.
One reason for the decline in labor-force participation has been the aging of the U.S. population and the retirement of baby boomers. When looking only at workers between ages 25 and 54, labor-force participation is at 80.7%. That’s still down from before the recession, as is the share of workers with jobs.
The report provided few signs of accelerating wage inflation. Average weekly earnings rose 2.4% from a year earlier, but that mostly reflected slightly more hours worked in July. Hourly wages were 2.1% higher than a year earlier.
The vast majority of jobs added since the recession officially ended in June 2009 have been full-time positions. More than 8 million more full-time jobs have been added.
Still, more than 8 million full-time jobs were lost during the recession, which began in December 2007. The U.S. has nearly recovered all of those lost full-time jobs.
Half of all unemployed workers have been without work for 11.3 weeks.
The share of the unemployed who have been without work for more than half a year has been gradually decreasing. But even five years since the recession officially ended, today’s share of the long-term jobless is higher than any of the previous three recessions.
The level of workers who are considered long-term unemployed is still higher than it was in December 2007, when the recession ended, but it has been coming down steadily.