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Economic & Housing Weekly Note

Steady Employment Gains Continue as Manufacturing, Services Indices Rise

August 6, 2021

Key Takeaways:

  • Nonfarm payroll employment increased 943,000 in July, the largest gain since August 2020, according to the Bureau of Labor Statistics. Additionally, the May and June employment reports were revised upward 31,000 and 88,000 to 614,000 and 938,000, respectively. The unemployment rate fell 0.5 percentage points to 5.4 percent and the labor force participation rate increased by one-tenth to 61.7 percent. Employment in leisure and hospitality rose by 380,000, though employment in this industry is still 1.7 million lower than in February 2020. Local government education employment followed strong gains in June with an increase of 221,000, though this number is likely distorted by atypical seasonal buildup and layoff patterns caused by the pandemic.
  • Light vehicle sales dropped 4.5 percent in July to a seasonally adjusted annualized rate (SAAR) of 14.7 million units, the lowest level in a year and the third straight monthly decline, according to Autodata.
  • The ISM Manufacturing Index ticked down 1.1 points to 59.5 in July. The production index fell 2.4 points to 58.4, the lowest level since June 2020, while the new orders index declined 1.1 points to 64.9. The employment index rebounded 3.0 points to 52.9, ending a three-month string of declines. Customer inventories reached a record low, falling 5.8 points to 25.0. The prices index dropped 6.4 points to 85.7, though remains elevated. The ISM Service Index rose 4.0 points to 64.1 in July, a record high since the survey began in 1997. The business activity index jumped 6.6 points to 67, while the employment index increased 4.5 points to 53.8 after falling below 50 in June. The prices index rose 2.8 points to 82.3, the highest level since 2005. The supplier deliveries index continued to climb, rising 3.5 points to 72.0, the highest level since April 2020. Any reading above 50 indicates expansion.
  • Private residential construction spending rose 1.1 percent in June, according to the Census Bureau, the fourth straight monthly increase. New single-family construction jumped 1.8 percent over the month, a whopping 51.4 percent above the levels seen a year ago, the fastest annual pace of growth on record.
  • The Federal Reserve Board Senior Loan Officer Opinion Survey in the three months ending in July showed the largest percentage of loan officers loosening lending standards for residential mortgages since 1993, though the loosening was driven mostly by jumbo loans. GSE-eligible lending standards were flat and standards for subprime mortgages tightened. Demand for residential mortgages continued a nine quarter streak of increases, led by jumbo and GSE-eligible loans. Demand for subprime mortgages continued to decline for the fourth straight quarter.
  • Factory orders increased 1.5 percent in June, reaching the highest seasonally adjusted level since July 2014, according to the Census Bureau. May’s number was also revised higher by 0.6 points to 2.3 percent growth. Excluding transportation, factory orders were up 1.4 percent, while core capital goods orders increased 0.7 percent. Nondurable goods orders rose 2.1 percent and factory shipments grew 1.6 percent to the highest level since October 2018. Inventories increased another one percent, the 11th straight monthly increase.
  • The real U.S. trade deficit widened by $3.6 billion to $105.2 billion in June, nearly matching the record deficit set in March, according to the Census Bureau. Imports edged up 1 percent, while exports fell 0.7 percent.
Forecast Impact:

The strong overall July employment report continued to show robust gains in leisure and hospitality, suggesting that the pace of economic recovery will remain robust and that labor supply shortages may be easing. However, there are still about 6.0 million fewer payroll employees than there were in February 2020 and the labor force participation rate remains about 1.6 percentage points below pre-pandemic levels. Average hourly earnings continued to increase this month, which we believe will help support consumer spending as enhanced unemployment benefits expire, though it also introduces the risk of a potential wage-price spiral. This report is largely in line with our expectations of stronger job growth in the second half of 2021 compared to the first, though inflationary pressures and the impact of the spread of the Delta variant could slow both hiring and economic growth, particularly in the leisure and hospitality industry if the increase in case counts begins to weigh on consumer activity.

The decline in light vehicle sales continues to be more a reflection of the severe supply shortages faced by the industry, as opposed to a signal of weakening consumer spending. This theme is consistent with other indicators, as both the ISM services and manufacturing indices increased but continue to face elevated prices and supply constraints, highlighted by the elevated supplier deliveries indices. Further, imports rose, indicating strong consumer demand in June. Though we expect the trade deficit to decline gradually through the end of the year and into 2022 as consumer demand shifts away from goods and back into services, the current elevated levels will likely weigh on current quarter GDP growth. This shift back into services also is also expected to help business inventories rebuild to a more “normal” level. However, the Delta variant poses significant downside risk to this expectation, in part due to risk of supply chain disruptions being exacerbated via stricter lockdowns implemented abroad.

In housing, spending on private residential construction continued to increase. While construction activity has been hampered by supply disruptions and labor market tightness, we continue to expect some acceleration in residential construction activity moving forward as homebuilders work through order backlogs.

Nathaniel Drake and Ryan Gavin
Economic and Strategic Research Group
August 6, 2021

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.