Economic & Housing Weekly Note

Job Growth Hits the Ground Running to Start Off 2020

February 7, 2020

Key Takeaways:
 

  • Labor market conditions remained solid as payrolls increased by 225,000 in January and average hourly earnings increased 3.1 percent from a year ago, while benchmark revisions boosted earnings growth in prior months. The prime-age (25- to 54-years old) labor force participation rate continued to increase, rising to the highest level since September 2008, and a Q4 rebound in productivity supported our view that the decline reported in Q3 was an aberration.
  • The ISM Manufacturing Index jumped 3.1 points to 50.9 in January, the first month of expansion since July and the largest increase in more than six years.
  • Private residential construction spending rose 1.4 percent in December and new housing construction spending rose 1.9 percent to the highest level since October 2018, driven entirely by an increase in single-family construction spending, which rose for the sixth consecutive month.
  • The Federal Reserve's Senior Loan Officer Opinion Survey showed that banks left credit standards unchanged for all residential mortgages in the three months ending in January. Banks continued to report strong demand for residential mortgages, particularly GSE-eligible residential mortgages, though demand for HELOCs was weaker.
Forecast Impact

This morning’s jobs report, which came in stronger than consensus estimates, supports our view that the economy remains resilient and that 2020 will be a good year for housing. The data on average hourly earnings show that wage growth remains strong and should continue to support consumer spending. We believe the report should help give the Federal Reserve confidence to remain “on hold” regarding changes in the federal funds rate target. The expansion of manufacturing activity in January suggests that the manufacturing slowdown has bottomed out, a boon for business investment. The continued strength in demand for residential mortgages, as shown in the Senior Loan Officer Opinion Survey, supports our expectations for a moderate increase in home sales in the coming months, especially as more new construction comes online.

Benchmark Revisions Boost Recent Annual Earnings Growth

 

Productivity Rebounds In the Fourth Quarter


Details on Key Takeaways and Other Releases

  • Nonfarm payroll employment increased 225,000 in January, according to the Bureau of Labor Statistics, and the three-month moving average also rose to 211,000. The average workweek was unchanged at 34.3 hours for the third month in a row, while average hourly earnings increased 0.2 percent over the month (and 3.1 percent from a year ago) and previously reported data were revised significantly upward. The unemployment rate ticked up one-tenth to 3.6 percent as the labor force participation rate for workers 16 years and older rose two-tenths to 63.4 percent. The prime-age (25- to 54-years old) labor force participation rate continued to increase, rising to 83.1 percent, the highest level since September 2008. Manufacturing employment fell by 12,000, while residential construction employment (which includes specialty contractors) added 20,200 jobs, the largest monthly gain in a year.
  • Nonfarm business productivity grew 1.4 percent annualized in Q4 2019, according to preliminary estimates by the Bureau of Labor Statistics, leaving the average gain for 2019 at 1.7 percent, the strongest since 2010. Real output increased 2.5 percent annualized, while total hours rose 1.1 percent annualized and unit labor costs rose 1.4 percent annualized. On a year-over-year basis, productivity increased by 1.8 percent, tying the fastest annual growth since Q1 2015.
  • The ISM Manufacturing Index rose 3.1 points to 50.9 in January, the largest monthly increase in over six years and the first month of expansion since July (any reading above 50 indicates expansion). The index was boosted by increases in new orders, employment, and production, as well as an increase in new export orders and imports.
  • Private residential construction spending rose 1.4 percent in December, according to the Census Bureau. New housing construction spending rose 1.9 percent to the highest level since October 2018. This increase was driven entirely by an increase in single-family construction spending, which rose for the sixth consecutive month to the highest level since August 2018, while multifamily spending declined for the fifth month in a row. On a year-ago basis, new housing construction spending rose 2.9 percent, the first year-over-year increase since November 2018, with single-family spending rising 5.2 percent and multifamily spending falling 7.1 percent.
  • The Federal Reserve Board Senior Loan Officer Opinion Survey in the three months ending in January showed that banks reported no change in lending standards for all residential mortgages. Banks continued to report strong demand for residential mortgages, particularly GSE-eligible residential mortgages other than Home Equity Lines of Credit (HELOCs). Banks also reported tightening lending standards for commercial real estate loans in the construction and land development categories, as well as a decrease in demand for construction and land development loans.

Ricky Goyette
Economic and Strategic Research Group
February 7, 2020

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