Labor Market Continues Hot Streak as Home Prices Accelerated to Begin 2022

Key Takeaways:

• Nonfarm payroll employment increased by 431,000 in March, while the prior two months were revised upward by 95,000, according to the Bureau of Labor Statistics (BLS). The unemployment rate declined two-tenths to 3.6 percent, only one-tenth above its February 2020 rate, while the labor force participation rate ticked up one-tenth to 62.4 percent, 1 percentage point below the February 2020 level. Leisure and hospitality had another strong month, adding 112,000 jobs, while residential construction, including specialty trade contractors, added 7,600 jobs. Total private average hourly earnings accelerated after a brief slowdown last month, increasing 0.4 percent over the month and 5.6 percent on an annual basis, the fastest rate since the series began in 2007, excluding the compositional shifts caused by the pandemic.
• Gross domestic product (GDP), adjusted for inflation, increased at a 6.9 percent seasonally adjusted annualized rate in Q4 2021, according to the third estimate from the Bureau of Economic Analysis (BEA), a decrease of one-tenth from the second estimate. The change was due primarily to lower consumption, which was partially offset by an upgrade to private investment.
• Personal income, adjusted for inflation, declined 0.1 percent in February, the sixth straight monthly decline, according to the BEA. Excluding transfer payments, real personal income increased 0.1 percent, though real disposable personal income was down 0.2 percent. Real consumption declined 0.4 percent as consumption of durable goods declined 2.5 percent, though this was partially offset by a 0.6 percent increase in services consumption. The saving rate increased two-tenths to 6.3 percent, but it remains around 1 percentage point below pre-COVID levels. The PCE price index increased 0.6 percent over the month and 6.4 percent over the year, the fastest annual rate since 1982. Core PCE prices were up 0.4 percent over the month, a deceleration of one-tenth from January, and up 5.4 percent on an annual basis.
• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined by a modest 17,000 but remained near historical highs at 11.3 million in February, according to the BLS. The quits rate was flat at 3.2 percent, around six-tenths higher than the monthly average in 2019.
• The Conference Board Consumer Confidence Index increased 1.5 points to 107.2 in March after falling a combined 9.5 points the previous two months. Confidence in the present situation jumped 10 points to 153.0, the highest level since July 2021, while consumer expectations for the future continued a three-month slide, falling 4.2 points to 76.6, the lowest level since 2013.
• The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, increased 18.2 percent from a year ago in January, an acceleration of five-tenths from December.

Forecast Impact:

The labor market continued its hot streak last month, largely in line with our expectations. Wage growth in March suggests the February slowdown was more of an anomaly than a trend as businesses continue to compete for workers, feeding into inflationary pressures across sectors. With job openings remaining near historic highs and the quits rate still elevated, current market expectations of a 50-basis point increase to the federal funds rate in both May and June are, in our view, well placed.

Despite real personal income and spending falling slightly in February, we are likely to modestly upgrade our Q1 consumption forecast given an upward revision to January’s figure, a downward revision to Q4 consumption, and modestly stronger Q1 labor gains than forecast. Still, we expect consumption growth to slow considerably this year, though we view the small increase in spending on services, which remains below its pre-COVID trend, as an encouraging sign that consumers are likely to continue their slow pivot away from goods and into services consumption. A return-to-trend for spending on goods would likely ease some inflationary pressures caused by supply chain issues, which are likely to worsen in the near-term as China implements significant COVID lockdowns in major manufacturing hubs and ongoing effects from Russia’s invasion of Ukraine are still to be felt. Still, the PCE price indices were largely in line with our expectations and are unlikely to cause significant changes to our near-term inflation forecast.

In housing, prices unexpectedly accelerated in January as, in our view, buyers rushed to lock in lower rates and as inventories remained historically tight. Despite the reacceleration in house price growth, we continue to predict that it will slow this year, especially as mortgage rates climbed to 4.67 percent, according to this week’s Freddie Mac Primary Mortgage Market Survey, further worsening affordability pressures.

Nathaniel Drake
Economic and Strategic Research Group
April 1, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.