Solid MBA Applications Report
MBA applications report from the week of September 6th showed the composite index had weekly growth of 2% after it fell 3.1%. This was a great report. But one has to wonder how the housing market will deal with higher rates. I don’t expect treasury yields to increase significantly. But there could be a modest increase in mortgage rates over the next couple months if treasury yields have bottomed. The housing market might be fine either way because affordability improved and the inventory glut was taken care of.
Ultimately, the delta of the moves it what matters. Housing market wouldn’t be fine if the 30 year average fixed rate increased back to almost 5% where it was late last year. Currently, rates are at 3.49%. Lowest average ever was 3.31% in November 2012. Good news is rates have fallen enough to drive demand. It just takes time to see it in the numbers.
If rates rise back to where they were last fall, Seattle won’t be the only city with a decline housing prices. Purchase index’s growth rate improved 4% weekly on top of 4% growth. That led to a fantastic 9% yearly growth rate. Yearly growth has sharply rebounded from where it was 2 weeks ago as growth was only 2% in late August. Refinance index increased 5% on top of a 7% decline.
As you can see from the chart below, the refinance index isn’t close to where it was from 2012-2013 despite rates being low. There aren’t that many mortgages where it makes sense to refinance. Refinancing will decline if rates pop a bit. Obviously, I’m much more focused on how the small rise in rates impacts purchases.
JOLTS Pay Attention To What Matters
Anyone focused on the weakness in job openings in the July JOLTS report is completely missing the point of the report. Openings don’t matter if they don’t lead to hiring. If you can believe it, from the start of the survey in December 2000 until 2014, there were more hires than openings.
As you can see in the chart below, that changed in the past few years making openings less relevant. Therefore, look at hirings instead.
Specifically, June openings were revised from 7.348 million to 7.248 million. July’s reading fell from there was it was 7.217 million. They are down 3% from last year which is the 4th worst growth rate of this cycle. They are down from the peak of 7.626 million in November 2018. This caused many economists and investors to discuss how bad this reading was, making it seem like a bad report. That’s a mistake.
Hiring improved fantastically to its second best reading ever. That’s what matters. It went from 5.716 million to 5.953 million. The record high is 5.991 million in April. Yearly growth went from -2% to 2.1%. There have been a few negative yearly readings, so June’s growth rate isn’t an issue. It would be an issue if yearly growth was consistently negative.
Let's briefly review a few notable changes to hiring. Construction hiring fell from 413,000 to 380,000. Manufacturing hiring increased from 336,000 to 345,000. Manufacturing job creation was weak in July and August according to the monthly BLS report. Despite the improvement in hiring, it’s consistent with the BLS report as yearly growth fell from -9% to -12%. This is much worse than the last slowdown, but not as bad as the trough in the first slowdown of this expansion.
The biggest sequential hiring improvements were in professional and businesses services and healthcare and social assistance. Professional and business services hiring improved from 1.112 million to 1.211 million. Healthcare and social assistance hiring improved from 583,000 to 637,000. In healthcare and education, there was strong payrolls growth in the ADP report. The reverse was true in the BLS reading. Let’s see if it’s revised higher next month.
Another positive from this JOLTS report is that the quits rate improved from 2.3% to 2.4%. That’s a new cycle high and just below the record high of 2.5% in January 2001. Private sector quits rate improved from 2.5% to 2.6% which is 0.2% below the record high. This means that workers see enough opportunity elsewhere that they are willing to quit their current job. It’s great news. Accommodation and food services had the highest quits rate of 5% and government had the lowest rate at 0.8%.
Coming Decline In Non-Manufacturing PMI?
A main takeaway from the ISM reports was the bifurcation between services and manufacturing. Services implied 2.7% GDP growth and manufacturing implied 1.8% GDP growth. You can see the big difference in the PMIs in the chart on the bottom right. It’s generally not a good thing for manufacturing to be much weaker than services. However, there have been some false red flags.
Specifically, the average 6 month change in the services PMI is -2.13 after the manufacturing PMI falls 6 points or more below services (it’s now 7.3 points below services). Average in all periods is only -5 basis points which means this is highly significant. In the 7 situations this has occurred since 1998, the service sector PMI only rose once.
To be clear, if the service sector PMI falls 2.13 points, that doesn’t mean a recession is coming. It really wouldn’t be a surprise drop because the economy is in a slowdown. The question is if manufacturing is telling us something or if this is just noise. If there is a trade deal, the manufacturing PMI will improve. On the other hand, the Markit services PMI is already weak, so maybe the ISM PMI is simply too optimistic.
Conclusion
Both the MBA and JOLTS reports were strong. However, the big difference between the services and manufacturing PMIs is disconcerting. There may not be a recession, but there will be a slowdown indicated in the NMI if the average is met. That actually shouldn’t be a surprise because very few economists are projecting the 2.7% GDP growth the NMI sees. The average estimate on Wall Street for Q3 GDP growth is 2%. The range of expectations is from 1.7% to 2.7%.
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