KEY MARKET INDICATORS as of Jul 16, 2018
June Jobs Report, Inflation
The U.S. job market had another strong month in June, adding 213,000 jobs. The job market is at full employment, with the overall unemployment rate rising to 4% – as more job seekers joined the labor force. Despite the low unemployment rate, job growth has performed very well in the first half of 2018 – averaging 215,000 jobs a month, outpacing both 2016 and 2017. An important data point for interest rate sensitive sectors such as housing will be wage growth. While faster wage growth is usually a good thing, it is generally a sign of labor market tightening and accelerating inflation at this point in the cycle, and will drive mortgage rates higher. Wage growth and inflation will be two data points that the market and the Fed will focus on in 2018 and beyond. Wages grew by 2.7% in June, suggesting a slow acceleration. In addition, wage growth rates for prior months have been revised lower, suggesting that wage pressure remains moderate.
Job growth in June was broad-based. Healthcare, professional and business services, manufacturing, and tourism reported strong job growth, suggesting that most businesses are doing well. The construction sector, which has benefited from the ongoing housing recovery also continued to report strong job growth. Consumer sectors such as tourism showed that consumers are feeling confident, benefiting from the boost to after-tax income under the new tax law. But the retail sector lost 22,000 jobs in June.
The job market is providing a favorable economic environment for potential first-time homebuyers. Unemployment rates for people in the primary homebuying age (25-34 and 35-44) are now approaching the lowest level since the late-90s and early-2000s. The unemployment rate for the 25-34 year olds remained below 4% in June, and the unemployment rate for the 35-44 year olds came in at 3.1% – both increasing slightly from May.
Despite moderate pressure on wage growth, inflation rate has moved up in 2018. The headline inflation rate increased to 2.9% in June. But to avoid the impact of volatile components in consumer prices such as food and energy, both the market and the Fed pay closer attention to the core inflation rate, which increased slightly to 2.3% in June. Beginning in March, the core inflation rate has stayed above the 2% target set by the Fed. The market will likely follow the inflation data closely over the next few months.
Source: Bureau of Labor Statistics
We have discussed previously that in the aftermath of the Housing Crisis, the mix of new homes has shifted towards more expensive homes. Comparing the median prices of new and existing single-family homes is another way to assess the affordability of new homes. In the first five months of 2018, the median price of new homes has averaged 28% higher than existing homes. This is above the 17% average premium for new homes going back to 1968. To get back to the historical average, the median price of existing homes must continue to outperform the median price of new homes.
Tian Liu, Genworth MI Chief Economist
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