Bad News Is Good News
The employment report for the month of March released March 5, was as ugly as it gets. The consensus among economists was that around 200,000 new non-payroll jobs would be created. The number released was 88,000. Lipstick would not help this report.
Not that much could be more troubling then the report; the numbers released on labor participation were equally unpleasant. Labor participation gages the percentage of potential workers that are actively looking for work. 500,000 people were estimated to have stopped looking for work. This is the largest one-month decline since December of 1979.
This explains why the unemployment rate dropped to 7.6 percent If 500,000 workers had not stopped looking for work, the unemployment rate would have either stayed stagnant at 7.7 percent or even gone higher. It is not unusual in a growing job market to see the unemployment rate tick higher when the job market grows. This is because the available labor market gets larger when unemployed workers get more optimistic and start actively looking for work. This is one of the reasons this job report coupled with the labor participation numbers is troubling. Some economists are pointing to the payroll tax rise, not the sequester, as the catalyst for this job report. As part of the fiscal cliff deal in Congress earlier this year the Social Security payroll tax was allowed to revert back to 6.2 percent from the temporary level of 4.2 percent. This cost the average tax payer around $100 a month is income, which is less money a lot of consumers have to spend in the economy. Effects of the sequestration are about to come on stage. Workers affected by sequestration are typically having their overall hours and pay cut back by five or ten percent. These workers will have less discretionary money to spend which will be a further drag on the economy.
Bad news can be good news for bonds, and ultimately mortgage interest rates. Before the jobs report, some economists and talking heads were debating when the Federal Reserve would take its foot off the accelerator, implying that this would happen sooner then what the was being stated. Well, the “experts” will have to find something to talk about on CNBC or on the internet. This report clearly reaffirms that the stimulus by the Federal Reserve, including keeping rates low is not going away anytime soon. The bond markets reflected this when 10-Year Treasury notes were trading at their lowest point since May of 2012. Mortgage rates are close to historic lows.
The lower rates are hitting at the same time as the spring housing market is starting. This should keep activity active and is good for buyers who need mortgages.
Bill Starrels lives in Georgetown he is a mortgage loan officer. He specializes in purchase and refinance mortgages. Bill can be reached at 703-625-7355, firstname.lastname@example.org