In a holiday-shortened week, the average 30-year fixed-rate mortgage (FRM) managed a minor fall, easing two basis points (.02%) to close the first week of the month at 6.53%, according to the nation's leading publisher of mortgage rates and terms. Five-one Hybrid ARMs lost eight basis points (.08%) for the week, ending at 6.22%.
With the turn of the calendar comes the start of another football season, where weekly skirmishes are played out from sandlot to stadium. On the economic stage, the chief battle this fall will pit inflation pressures against market expectations. Inflation has built a lot of momentum coming into this season, but so far has met resistance in the form of hopes that slower growth will erode price pressures. At the moment, it's a pretty even match up, but will expectations withstand the constant pounding of higher costs? It's too soon to tell.
The Fed's preferred measure of prices, the 'core' Personal Consumption Expenditures (PCE) index, has been running above what it thought to be the Fed's preferred levels for a while now. For the most part, although those costs are elevated, they haven't been joined by wage pressures, and strong levels of worker productivity have allowed businesses to pay workers more without raising prices.
However, the latest revisions to productivity and wages for the second quarter of 2006 should add a little discomfort in the trenches. Worker productivity (output per hour) was revised upward to 1.6% for the period but was still well below Q1's healthy 4.3% clip. The increase in output, though, was overwhelmed by an upwardly-revised jump in the cost of labor per unit produced, which rose by 4.9% in the quarter. The government's measure of compensation for the first quarter was also revised upward to 9% from an initial 2.5% rise. While the compensation reports are a little troubling, it's hard to know what role bonus, stock options and other one-time increases played in the first quarter's spike. Regardless of the reason, labor costs rose by a stout 5% over the past twelve months. Weak productivity gains with rising costs could add fuel to the inflation fire, bringing the Fed back into play at some point this fall.
At least one Fed Governor noted as much this week. Despite voting for a pause at the last meeting, Janet Yellen, the head of the San Francisco Fed revealed that she still holds a bias toward higher interest rates if inflation proves less transient. In the same vein, Sandra Pianalto of the Cleveland Fed noted that while contained inflation expectations allowed her to vote in favor of a pause in August, "inflation risks are still out there."
Service industries monitored by the Institute for Supply Management said that price pressures remain elevated, too. The index of 'prices paid' in their monthly report for August saw just a little moderation in cost inputs, with the index declining to 72.4 from 74.8 in July. (As a diffusion index, values over 50 indicate rising prices.) Rising too was their overall index of activity, lifting to 57.0 from 54.8 for the month, pointing to a pickup in business during August.
The Fed's own survey of regional economic conditions, called the "beige book" for the color of its cover, told a tale of softer growth in five of its twelve regions, but level growth in the remaining seven through the end of August. Labor shortages and wage pressures were noted in some districts, not on a widespread basis but especially among workers with "specialized skills." In the report, perhaps the softest area of the economy was residential housing markets, described in the summary as having "weakened throughout the nation." Weaker home sales and home building will continue to temper growth, and forecasts for future activity have been ratcheted downward to what will still be pretty solid levels.
On a more recent basis, labor markets remain resilient. Initial Unemployment claims slipped to 310,000 during the week ending September 2. That figure represented the lowest level seen since late July, and coincided nicely with a fair pickup in the weekly ABC News/Washington Post poll of consumer comfort. After plunging by five points last week, the index took back four of those, closing the week ending September 3 at -15.
Way back in July, inventories at wholesale firms climbed by 0.8%, but a still-strong sales pace kept inventories on hand rather lean. Bulging inventories might presage a slowing in imports and manufacturing, but things seem reasonable in those areas at the moment. Also in July, borrowing by consumers rose by $5.5 billion, a greatly reduced level from June's $14.1 billion spending splurge. After two strong months of borrowing on plastic ($13b in May, $13.2b in June) revolving credit rose by a meager $3.4 billion in July.
Although inflation hasn't gone away by any means, we'd be remiss if we didn't mention that there is a little good news about prices. Gasoline prices have begun to slide in recent weeks, and crude oil prices finished the week in the low $66 per barrel range, more than 10% below recent peaks. If we can hold these levels or go lower, economic growth might pick up -- lower gas prices mean more disposable income to spread throughout the economy -- and perhaps some less upward pressure in the price of goods and services in general. Unfortunately, that's probably a bit of wishful thinking right now.
With a quiet, short week behind us, next week's calendar gets a little busier; we'll look at fresh data covering retail sales, import and export prices, industrial output and a few others, notably the Consumer Price Index. At least some of the recent decline in rates has been a bit of a forward bet that inflation will continue to ease, and if the report derails that, rates will likely turn up a little. We think that the general tenor of the week will be uneven, and we'll probably end up about where we started.
Monday, September 11, marks the fifth anniversary of the terrorist attacks on America. Take a minute from your schedule to remember those innocent souls who lost their lives that day, as well as those who still struggle with those memories today.
This posting is courtesy of Bill Young, Metro Capital Mortgage, Boise.
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