Although the actual end to summer is still weeks away, the turn of the calendar to September signals the end of long, lazy days. Along with the economy, mortgage rates spent most of the summer on a softening trend, and the final week of August was no exception. According to the nation's widest survey of retail mortgage rates, the average 30-year fixed rate mortgage (FRM) eased back by a single basis point, closing the week at an average 6.55% -- about a half-percentage point better than the peaks of early July. Five-one Hybrid ARMs edged downward, too, ending the week at 6.29%.
The downshift in economic growth since early 2006 has allowed the Federal Reserve to stop lifting interest rates for at least one meeting, and while there's little to suggest that an increase will come at the next meeting, the nation's central bankers are feeling a bit nervous. The minutes from the August FOMC meeting, at which the decision to pause was made, revealed not only some dissent (one voting member preferring another quarter-point increase in rates) but a general sense that the "risks to upside inflation were significant." Recent revisions to previous inflation estimates found that the Fed's preferred measure of core inflation has run above 2% for over two years now. This is thought to be above their level of comfort for price increases.
In the latest revisions to growth, the preliminary reading for the Gross Domestic Product for the second quarter of 2006 was moved upward to 2.9% for the period (up from 2.5% in the 'advance' measure). This puts us somewhat closer to the economy's "potential" or ability to grow without producing inflationary pressure. In the report, Personal Consumption Expenditure (PCE) measurement revealed that 'core' inflation run at a 2.8% clip in the second quarter, and higher when food and energy costs are factored in. We expect that it will take several months of slower than 'potential' growth to pull in the reins on inflation, and while we seem to be headed that way, we're certainly not there yet.
As growth has eased since the first quarter, hiring patterns have become more subdued, too. In the employment report for August, the Commerce Department noted 128,000 new hires, about as expected and continuing a pattern of mild increases begun in April. Average hourly earnings, the key "wage component" of the report rose just 0.1%, matching the smallest rise of 2006, diminishing worries that spiraling wages would foster a more permanent bout of inflation, which might require more Fed intervention. We have been under the impression that more sizable increases throughout this year were most likely worker requests to offset sizable increases in energy costs. Now that oil and gasoline prices have stabilized, perhaps wage increases will level off as well. In a separate report, the nation's official unemployment rate ticked back down one notch to 4.7%.
Near-full employment is good, but soft increases in hiring and still-high (if not increasing) prices don't exactly inspire confidence, especially when you factor in the troubles around the world, the widely-publicized one-year anniversary of government failure after Katrina and the approach of the fifth for the September 11 terrorist attacks on America. All measures of consumer attitudes have turned down in recent weeks. The ABC News/Washington Post poll of Consumer Comfort went decidedly south during the week ending August 27, slumping five points to -19; from the Conference Board, the report covering Consumer Confidence declined from 107.0 in July to 99.6 for August; and the final monthly look at Consumer Sentiment from the University of Michigan moved down to 82.0 for August after posting a meager 84.7 in July. Certainly, it's possible that some easing of happiness has come from softening real estate markets, leaving homeowners feeling somewhat less wealthy.
Incomes are rising, however. Personal Incomes rose by 0.5% in July, fresh on the heels of a 0.6% lift in June, but our spendthrift ways ate up all of that and more, as spending rose by 0.8% for the month. The nation's savings rate sported another negative reading: -0.9% for July, but revisions to that measurement made the picture over the past few years somewhat less bleak.
Of course, spending by consumers powers the economy forward. During July, Factory Orders eased less than expected, sliding by 0.6% where a full one-point decline was forecast. Like other series covering orders for goods, this one runs hot and cold. For example, July's decline came after a 1.5% lift in June. Regardless, three measurements of manufacturing activity pointed to solid if unspectacular growth. Regional reports from the New York and Kansas City Federal Reserve banks saw faster expansion in August, and a Chicago-area survey of Purchasing Managers noted just a minor easing in strength from July to August. Their index edged down to 57.1 from 57.9 during the month, with 50 being a break-even point (and readings toward 60 denoting pretty fair strength). On the broadest basis was the national look from the Institute for Supply Management, whose index of factory health held just about steady in August at 54.5, just a whisker below the 54.7 seen in July. The percentage of firms reporting higher input costs remained elevated but trailed back a little.
With the weakening real estate market becoming a central feature in the economic slowdown, and high levels of unsold inventory still weighing on the market, it's unsurprising that Construction Spending would slump. During July, spending for new projects fell by 1.2%, with residential spending falling by a full 2%, the fourth consecutive negative reading for homebuilding. According to the most recent reports, inventory levels are still rising, so it may be a while before building projects add much to economic growth.
While hiring has been tepid, at least layoffs have been pretty level. For the week ending August 26, some 316,000 new applications for unemployment benefits were filed, about the same number as the last few weeks. As well, a long-standing measure of help-wanted advertising gave a darker picture of potential job openings over the last two months, so it appears that low levels of hiring will probably persist as we wend our way deeper into this economic expansion.
The collective sigh of relief seen in the market a few weeks ago when the Fed decided to pause is continuing, and probably will for a little while yet. Despite the wide slate of news above, bond markets barely budged as it appears that everything is proceeding as expected, at least for the moment. Inflation seems to be leveling, growth has settled at moderate levels and with a little luck going forward, we could be setting the stage for a very solid period just ahead. That's a bit off into the future. Next week is a holiday-shortened one as we celebrate the American Worker. How fitting that perhaps the biggest report due next week is the one covering worker productivity?
With the "big sigh" over and the reinforcing data for such a relaxed stance in place, there isn't much more room for mortgage rates to fall, sans a downturn in growth. For next week, anyway, rates might wobble by a basis point or two, but not enough to get excited about. Any patterns likely to emerge are at least a couple weeks away, if history is any guide.
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