- Job market remains robust with no sign of stress.
- Housing market suffers from rising mortgage rates.
- Consumer sentiment declines but expect inflation will not rise further.
The job market continues to be one of the strongest parts of the economy and is showing no signs of new stress.
Meantime, the housing market is suffering the most from the dramatic increase in mortgage rates. Total new home sales are down from a year ago, while mortgage rates rose more than 2.5 percentage points, translating into 30% higher payments before double-digit price increases are factored into the equation.
Consumer sentiment has declined in June, but consumers are not expecting inflation to be as high in five years as the Fed thought they were when they raised rates last week.
Job scene robust: Seasonally adjusted initial jobless claims declined by 2,000 to 229,000 for the week ending June 18. Non-seasonally adjusted claims declined by a similar amount. Both measures continue to be lower than they were in 2019 before the pandemic began.
Continuing claims, which represent people who previously filed and remain on traditional unemployment compensation increased by 5,000 from the week before, bringing the total up to 1.32 million as of the week ending June 11. That level of continuing claims was 448,000 lower than they were prior to the pandemic. Other than the prior week, the last time claims were lower was way back in 1969 when the labor force was half as large.
The broadest measure of continuing claims increased by 14,000 to 1.30 million in the latest data, which lags the traditional number and is not seasonally adjusted. That total measure is down 21,000 over the last 4 weeks and is 806,000 lower than the pre-pandemic level. The jobless claims data continue to show that the labor market remains historically strong.
Housing down: Existing home sales were about as expected in May, as sales declined for the fourth straight month. The market continues to see the impact of a substantial increase in mortgage rates that rivals any other period of change in modern history. The pace of sales in May declined to the slowest pace since June 2020. The existing home sales seasonally adjusted rate (SAAR) declined 3.4% to 5.41 million from 5.60 million in April. At the May rate, existing home sales were down 8.6% from a year ago and down 0.9% compared to May 2019. Inventory increased to 1.16 million units, which was still down 4.1% from a year ago.
The National Association of Realtors reported that the sharp rise in mortgage rates should lead to further sales declines, but homes priced appropriately are selling quickly and supply would need to double to cool price appreciation. Inventory is still moving quickly, as 88% of the homes sold in May were on the market for less than a month, and the typical time on market was 16 days, which was a day less than April and a day less than May last year. The months’ supply of homes for sale increased to 2.6 months from 2.2 months in April, but that level of supply is still closer to the record low of 1.6 months in January than to what is considered normal at above 6 months of supply. The median sales price increased to $407,600, which was up 14.8% from a year ago.
New home sales, which are based on new contracts signed on newly constructed homes recorded a surprising increase in May on top of a positive revision to April. Even with the stronger than expected data, new home sales at an annualized pace of 696,000 were down 5.9% year-to-year. Compared to May 2019, new home sales are still up 12.3%. The new home sales data are based on a survey of builders, and the report is often subject to substantial revisions. The initial increase for May reported was smaller than the survey’s confidence interval.
New home inventory increased 1.6% from April and was up 34.5% from a year ago. With the assumed better pace of sales, new-home supply declined to 7.7 months, which is higher than what is considered normal but less concerning than the nine months initially reported in April.
In May, 27% of the new homes sold were on homes not yet started, while 45% were under construction, and 27% were completed, finished units. The rise in sales of completed, finished units indicates that builders are dealing with cancellations leading to more speculative inventory. With the decline in existing home sales in May, total home sales were down 2.0% for the month and down 8.3% from a year ago.
Consumer sentiment declines: The sentiment index from the University of Michigan declined 14.4% in June as current conditions and expectations both declined. The Michigan reading was down slightly from mid-month and was at the lowest full month reading in the history of the index back to 1978. Buying conditions for vehicles also declined to a new official low.
Consumer expectations for inflation in one year was steady at a median of 5.3%, and their views of inflation over the next five years only increased slightly to a median of 3.1% from 3.0% in May. The preliminary June report from the University of Michigan had that longer term view of inflation at 3.3%. The Fed cited that level last week as a key concern when it decided to increase rates by three quarters of a point instead of half a point.
The Morning Consult index daily index has also declined in June, as it declined 0.6% in the last week and is down 4.9% so far for the month.
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Jonathan Smoke is chief economist at Cox Automotive.