Why the strong jobs report may hurt home sales
By Joe Higgins, Quest4Quality
After the impact of two successive hurricanes and a significant strike at Boeing in October, job creation soared in November as the economy added 227,000 workers.
Economists had expected hiring to bounce back that month, but the 227,000 new jobs exceeded expectations.
Job creation was partially driven by employees returning to work following the hurricanes and aerospace strike. So, while the month’s final number is not all that impressive technically, it is still a good sign of overall economic growth.
Wage growth was also strong, enough to be inflationary, and could preclude the Fed from cutting rates sooner rather than later as planned. Average hourly wages rose 0.4% in November and were up 4.5% annually since September.
Fed’s Focus
As I read the Labor Department’s November jobs report, I noticed two areas of concern: that the number of unemployed workers and those who left the workforce both increased that month. The Federal Reserve needs to pay attention to this, as holding rates steady could lead to a further slowing of the economy and a hit to the job market. Like falling dominoes, once companies begin layoffs, it’s hard to stop them.
Here’s the problem the Fed must weigh regarding interest rates: It doesn’t want to deal with another round of inflation that could be set off by further rate cuts because the economy is still surprisingly robust. And it doesn’t want to slow down the job market by raising rates and setting off a recession. A big decision, and the latest Consumer Price Index (CPI) could have the answer.
Unemployment is at an historic low but increased to 4.2% in November. Remember that unemployment at or below 4% is rare in America. It has only been this low four times in the past 70 years, so 4.2% is a number we should celebrate. Job creation over October and November averaged just above 100,000 posts.
Wall Street was correct in forecasting an 80% chance of a Fed rate reduction in December. Besides, Fed Chair Jerome Powell is still looking forward to a soft landing, a rare achievement in our country’s economic history, and he will guide the economy to that goal.
The Year Ahead
Now let’s look at 2025. Inflation accelerated in October to 2.6%, the first increase in seven months, and rose from 2.4% in September. I expected inflation to fall closer to the 2% target the Fed has discussed for two years. We are not there as of this writing (mid-December), and now, along with a stable labor market, we have the possibility of some significant policy changes with the new administration in two weeks.
Like Wall Street, I fully anticipated the December rate cut, and also expected fewer decreases this year than the four one-quarter-point cuts announced last September.
The Fed is now close to its so-called “neutral rate,” which is an interest rate we can live with for a while because it’s not too restrictive and, at the same time, doesn’t promote excessive economic growth. It is the “Goldilocks” economy, which is neither too hot nor too cold but just right.
I have been hoping for lower mortgage rates for the past year. The Fed’s actions have hurt housing sales more than anything else in our economy, impacting our home goods dealers. I hate to say this, but looking at 2025, I do not see a time when mortgage rates will drop below 6% unless there is a recession.
The National Association of Home Builders (NAHB) predicts that existing home sales will be up 9% this year and that new home sales will increase by 11%. That will help, but AVB members will not recover the millions of homes that sit unsold and stalled by high mortgage rates.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
