MarketTrends 02/07/2025: Seeking Balance

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The information imparted by the Job Openings and Labor Turnover Survey in recent months has also pointed to a moderating labor market. The December version of the data did reveal a solid downshift in the number of open positions, which moved from 8.156 million in November to 7.600 million at the end of 2024. The report also showed that hiring picked up after a couple of softish months, while total separations were largely flat, with a small increase in the "quits" rate and a small reduction in the "layoffs" component. The economy is pretty near full employment at the moment, and businesses and workers remain well attached to one another.

At least as tallied by the outplacement firm of challenger, Gray and Christmas, announced layoffs did pick up a little in January, with 49,785 positions trimmed. That was up from December's 38,792, but not seriously out of line with the trend in place for months, and also about 40% lower than January 2024. Hiring plans by business contacts also slowed, but low levels of layoffs tend to offset the need to hire more folks. Those low levels of layoffs are reflected in the relatively few new claims for unemployment assistance, which continue to run along closer to record lows than not. In the week ending February 1, there were 219,000 new applications for benefits filed, up 11K compared to the week prior, but still within a low, narrow range that has persisted since early December. Continuing claims increased again last week, and remain near a three-year high, reflective of the slower pace of hiring of late.

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Worker productivity has been running quite strong for some time, but this also moderated in the fourth quarter of 2024, landing at a still-solid increase of 1.2% for the period. Gains in productivity means that workers can earn more without undue effects on inflation; the 4.1% increase in wages noted in the employment situation report would likely be too warm for the Fed's comfort if output gains were lower. The smaller increase in output per worker in the fourth quarter did see a commensurate increase in per-unit labor costs, which moved up from just a 0.5% increase in the third quarter to a 3% increase in the fourth. Outside of a larger surge as the pandemic ended, worker productivity gains for all of 2024 were the strongest in 14 years.

While there appears to be better balance in the labor market, it also looks as though there is better balance in the broadest sectors of the economy, too. The Institute for Supply Management's monthly series covering manufacturing and service-business activity in January were both out this week, and for the first time since September of 2022, the manufacturing sector moved to the expanding side of the ledger. The factory-activity barometer rose by 1.7 points to 50.9 for the month, cresting over the breakeven level of 50. New orders moved from a modest level of 52.1 to a moderate 55.1 last month; employment turned positive, too posting a 4.9-point increase to 50.3, this component's best mark since last May. Prices paid also floated higher, although the 54.9 reading for January was reasonably in line with values seen at times over the last six months. By the ISM's measure, manufacturing is now again contributing to overall economic activity.

The service sector is the much larger side of the economy. While the ISM's service-business measure did decelerate in January, easing by 1.2 points to a 52.8 mark, it remains in solid territory at a moderate level. The report noted that new orders settled back a little, with this gauge sliding 3.1 points to a cooler 51.3 for the month, but employment firmed up, with a one-point increase lifting this component to 52.3, best since October. Unlike manufacturing, prices paid backed down a slightly, shedding four points, but a value of 60.4 for this piece is still pretty firm, indicating that more firms than not continue to face price increases.

Probably as businesses looked to attempt to get out in front of tariff increases, the nation's imbalance of trade widened significantly last month, expanding by $19,5 billion to its widest point since March 2022. Our strong dollar and sluggish growth among trading partners likely caused the $7.1 billion decline in exports in December, but there was also a surge in imports, which rose by $12.4 billion to close 2024. With cost increases in the form of tariffs coming into view (if delayed) we'll need to see how these trade-balance figures are impacted, particularly if there are retaliatory levies imposed by trading partners. For now, it would appear that the imbalance of trade still reflects fair economic strength here in the U.S. but less so elsewhere.

Consumer borrowing had a blowout month in December, where $40.8 billion was added to consumer account balances. Revolving credit use -- mostly credit cards and such -- rose by about $22.8 billion, while non-revolving borrowing posted about an $18 billion increase. This was a sharp turnaround in borrowing to close 2024, as overall account balances had actually declined by $5.4 billion in November. The still-solid economy likely prompted some folks to splurge for the holidays, but the surge in buying might also be related to consumers looking to grab big-ticket items before tariff increases can lift final costs. We suspect that was the case in the surge in sales of new vehicles at the end of 2024, but the 16.87 million annual pace for those sales in December lacked follow through. The Bureau of Economic Analysis reported that sales of new cars and light trucks settled back by 7,2% to start 2025, sliding to a 15.6 million annualized pace and returning to the more sluggish pace of last summer.

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The borrowing binge above came despite somewhat tighter credit conditions. The Fed's Senior Loan Officer Opinion Survey noted that "a modest net share of banks reported having tightened standards on credit card loans, while standards were basically unchanged for auto and other consumer loans." Banks reported having tightened most terms on credit cards, with a moderate net share of banks increasing minimum credit score requirements, lowering credit limits and other restrictions. However, most terms for auto and other consumer loans remained basically unchanged. As far as residential mortgage loans go, little was changed, except for subprime and non-QM offerings. GSE- and government-backed loan standards and those for HELOCs were little changed.

Perhaps related to the consumer borrowing binge, wholesaler inventories were depleted a bit in December, as holdings shrank by 0.5% while sales expanded by a full 1% during the month. Holdings of durable goods continue to shrink; the 0.6% decline in inventory levels for items intended to last longer than three years was a fourth consecutive drop. Non-durable goods on hand were also drawn down, but only by 0.2%, partially erasing a build in November. The lift in sales and the depletion of inventories left the inventory-to-sales ratio at just 1.31 months; this is the leanest inventories at wholesalers have been in about two and a half years, and may prompt more orders to manufacturers in early 2025. According to the Census Bureau, factory orders lagged at the end of 2024, posting an overall 0.9% decline in December. Transportation again dragged down the top-line figure, as durable goods orders shrank by 2.2% while non-durables put in an increase of 0.3%, a third consecutive gain. The "core" orders measure (no defense spending, no aircraft) was a solid 0.4%, a second consecutive monthly gain.

Outlays for construction projects rose by 0.5% in December. The gain was virtually all due to a 1.5% increase in spending for residential construction, and home building has been driving the gains here over the last three months. Commercial and industrial spending managed a second-consecutive 0.1% gain and so is also adding a little to the tally. Public-works spending had a pre-election spurt, but November's -0.1% decline was followed by December's 0.5% decline, so government-based construction projects are a drag at the moment.

Inflation concerns appear to be dragging consumer moods down. In the preliminary February survey, the University of Michigan survey of Consumer Sentiment found rather more dour demeanors among those who participated in the twice-monthly poll. The overall measure of Sentiment dropped by another 3.3 points, retreating further after a January decline. Current conditions were assessed to be considerably less favorable and posted a 5.3-point decline to 68.7, a three-month low. Expectations fared little better, with a two-point decline to 67.3 leaving this component at its lowest point since November 2023. Highly visible increases in energy costs and for things like eggs and beef are likely behind the souring in moods, and one-year inflation expectation spiked from 3.3% last month to 4.3% this month, among the largest increase seen in the last 14 years and moving the current level to its highest point in 15 months. The five-year expectation for inflation ticked higher to 3.3%, about a 17-year high. If these expectations for prices don't sound all that "well anchored" to you, you're not alone.

Requests for mortgage credit improved by 2.2% in the week ending January 31, according to the Mortgage Bankers Association. While easing slightly of late, mortgage rates have been fairly stable at elevated levels for some weeks so there's little reason for folks to rush to their nearest mortgage lender. It's also mid-winter, not exactly the best time to be out shopping for houses, so it's not a surprise that requests for funds to purchase them declined by 3.5% last week. That said, it was a mild surprise that applications to refinance existing loans rose by 12.2%, and some folks may be looking to loosen up some pent-up equity regardless of the current interest-rate climate.

The economy, Fed policy, inflation and consumers are all looking to find balance. A balanced economy, where growth is solid but not so strong as to foster new imbalances; monetary policy that allows for both some low-risk return on savings and borrowing costs that are closer to normal levels rather than multi-decade highs. Balance where inflation is routinely back to pre-pandemic days, where there were occasional concerns about deflation but mostly just mild upward pressure on costs overall, and where income gains were sufficient to overcome those increases. Equilibrium where a labor market continues to produce solid increases in hiring, low levels of layoffs and unemployment that approximates full employment. Reaching further, something more closely approximating fiscal balance, where revenue and expenditures are far closer to one another than now, and where financing the difference is not much of a concern.

We don't quite have all these things at the moment, but it may be that some are pretty close. We do need to see more routine progress on inflation to get to where we want to be, but it may be a bit before that happens. As well, fiscal discipline doesn't much seem to be in fashion regardless of who is running the government. Until we see more of these, we won't truly have balance even if other components manage to get themselves on a pretty even keel. We'll also need far greater clarity on the effects on the economy and inflation from of changes to trade and immigration, plus any number of other changes to policies and procedures yet to come. If nothing else, balance is far more predictable than not.

The slew of new data this week gives ways to a much lighter calendar next week, but it will all be about costs. The Consumer and Producer Price Indexes for January are due, as are import and export costs, and we'll see if the consumer borrowing binge helped power retail sales last month, too. What we don't expect to see is much by way of change in mortgage rates; the yields that most influence their movements were down early in the week and firmer in the latter part, leaving us with an expectation for perhaps just a 1 to 3 basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac. Not exactly balance, but stability, perhaps.

With the outlook changing for Fed policy and amid stubborn inflation, what's likely to happen with mortgage rates this winter? Why not check out our latest Two-Month Forecast for mortgage rates to see what we think.

See our new 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.

Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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