MarketTrends 03/07/2025: Instability Effects

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To be fair, the underlying economic metrics are still likely pretty good, with the GDPNow figure heavily impacted in recent weeks by things like a surge of imports relative to exports (negative for GDP), sharp monthly declines in things such as sales of new homes and soggy retail sales. We see the effect of expected tariffs in the sharp increase in the nation's imbalance of trade through January, which moved from an already-wide $98.1 billion in December to a whopping $131.4 billion to start the year. Exports did manage to rise, but by just $3.3 billion; imports exploded by more than ten times that figure, rising $36.6 billion in January. Goods imports alone surged $33.5 billion, as businesses looked to stockpile what goods they could before cost increases kick in this year from changing trade policies. Higher costs from increased levies (if or when they come) will likely mask any softening in ordering volume and also serve to keep the trade deficit elevated, as it is measured in dollars, not units ordered.

The Institute for Supply Management revealed that after breaking a 26-month string of softness, manufacturing activity managed a second consecutive above-par month in February. The ISM's overall manufacturing index posted a 50.3 value for the month, a 0.6-point decline from January, but still above the breakeven level of 50. Looking under the headline figure, the picture doesn't seem quite as bright, though. The gauge covering new orders slumped by 6.5 points, falling from a solid 55.1 to a sub-par 48.6 last month, and the employment metric moved from an encouraging 50.3 in January back down to 47.6 for February. The trend for input costs was also less than encouraging, as the 62.4 for February was up for a second month in a row and the highest monthly figure since June 2022.

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Part of what buoyed factory activity recently was a pickup in new orders at the tail end of 2024 and to start 2025. The January increase in particular helped lift activity. This week, the Census Bureau reported that overall factory orders rose in that month by 1.7%, driven higher by a 0.3% increase in orders for non-durable goods but lifted considerably further by a 3.2% gain in those for durable goods. While a lot of that was transportation related, the "core" measure of orders (no military or aircraft spending) still managed a 0.8% increase, the fifth such positive reading in the last six months.

The slump in January retail sales was also likely the cause of the ballooning of inventory levels at wholesaling firms. A 1.3% decline in sales saw stockpiles of goods at these intermediaries rise by 0.8% to start 2025, with holdings of durable goods expanding by 0.9% and non-durable goods stock rising by 0.7%. These increases more than reversed drawdowns in December, and lifted the inventory-to-sales ratio back up to 1.33 months of supply at the present rate of sale. The January I/S ratio returned to levels suggesting that manufacturers can expect to see fewer or smaller orders in the near term.

The larger and more important service side of the economy expanded at a slightly faster rate in February, so that's a bit of good news. The ISM's service-business barometer edged 0.7 points higher last month, landing at 53.5, a value reflective of a modest-to-moderate level of activity. New orders for services also crept higher with a 0.9-point increase to 52.2, and the employment measure sported a 1.6-point bump, this component's best showing since August 2023. The increase here may be due to the additional slack in the labor pool of late, which may be making it somewhat easier for employers to find folks to fill jobs as opposed to adding workers in advance of an expected ramp-up in sales. To that end, the ISM report noted that seven industries reported an increase in hiring and seven reported a decrease. Prices paid firmed back up a little and remain elevated, but at a mark of 62.6 is about in the middle of the three-month range.

The employment report for February was nothing to get too excited about, but didn't show any specific weakness that should spark additional concern. Last month, 151,000 new jobs were filled, a figure fairly close to expectations. Looking backward, there was a 18,000 downward revision to January's originally-reported figure, weakening hiring in the first month of the year to just 125,000 positions filled, but this was mostly offset by another 16,000 being added to December 2024 in that month's final revision. The unemployment rate ticked back up by a tenth percent to 4.1% last month, covering ground it has largely trod in each of the last six months again. The labor pool contracted by 385,000 persons in February, dropping the labor force participation rate back to 62.4%, the lowest it has been since January 2023, while wages expanded by 0.3% in February to maintain a 4% annual pace. Overall, the report was fair enough, but given plenty of uncertainly, the prospects for a surge in hiring seem diminished at the moment. The report also noted that federal government employment declined by 10,000 in February, and this figure seems likely to increase going forward for at least a while.

Announced layoffs as tracked by the outplacement firm of Challenger, Gray and Christmas captured the government layoff announcements, which considerably increased the total of job cuts in February. The 171,017 reductions in the workforce dwarfed January's 49,795 cuts, and would have bested it easily even absent more than 62,000 of the total attributed to government layoffs. Another third of the total came from layoffs the retail and tech sector, and the remainder were scattered among other industries. The February figure was the largest number of job cuts since July 2020 (pandemic effects); discounting that period, you would have to go back to February 2009 to find a similar number.

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What we still don't yet see are these layoffs showing up in the unemployment picture; at some point, they will. In fact, initial claims for unemployment benefits actually saw a decline of 21,000 in the week ending March 1, dropping from 242,000 back to 221,000, retreating from a three-month high back to roughly where they had been since mid-December.

Worker productivity expanded by an upwardly-revised 1.5% annual rate in the fourth quarter of 2024, a bit better than the 1.2% originally estimated, but only about half the rate seen in the third quarter. It was the smallest gain in output per hour worked since the first quarter of 2023. As would be expected, less productivity means greater labor impact on costs, and per-unit labor costs rose 2.2% for the period, rebounding from a 1.5% decline in the third quarter. Even with the smaller gain, productivity levels remain fair, and rising productivity does mean that workers can be paid more without undue effect on inflation.

After a surge at the end of 2024 and a bit of a stall to start 2025, sales of new vehicles found a little bit of traction in February, rising to a 16 million annualized rate. The trend for new vehicle sales has generally been improving overall since the pandemic hard stop a few years back but has yet to return to pre-pandemic levels despite an aging fleet of cars and trucks on the road. High vehicle prices, higher financing costs and tighter borrowing conditions are likely damping sales. Those headwinds don't seem likely to do anything but intensify amid expected tariffs and delinquencies on outstanding auto loans moving higher.

New consumer borrowing picked up in January after pausing in November and December. Overall outstanding balances for consumer credit accounts rose by $18.1 billion, split nearly evenly between a $9.1 billion increase in loans for things like cars and education purposes and a $9 billion bump in balances in revolving credit accounts (credit cards). Of course, that was in January; since then, consumer moods have mostly soured, and of late, stock markets have swooned, which can have a damping effect on consumer spending -- a kind of reverse "wealth effect" -- and this may damp consumer borrowing to some degree in the months ahead.

Spending on new construction projects eased by 0.2% in January. Outlays for residential projects declined by 0.4%, their first stumble since October, as gains fostered by then-lower mortgage rates have worn away. Non-residential spending was unchanged from December while public-works projects eked out a 0.1% gain in spending for the month. The spring housing season is upon us, but inventories of new homes for sale are high and sales remain modest, so there may not be much of an uptick in residential spending soon. Meanwhile, uncertainty regarding materials costs may slow non-residential building, too. Spending on public-works projects probably pushes forward into the spring, but outlays for construction projects don't seem to have much by way of tailwinds at the moment.

Disappointing economic news of late helped mortgage rates to decline again, and they seem to have hit a little but of a sweet-ish spot for borrowers. The fall in rates helped applications for mortgage credit to rise by 20.4% in the week ending March 1, according to the Mortgage Bankers Association. Requests for funds to purchase homes popped 9.1% higher, erasing a decline the prior week, while those to refinance existing mortgages leaped 37% and was 83% higher than the same week last year (even though rates are at roughly the same levels now as then). Cash-out refinancing seems to be the most likely reason, as it's difficult for many homeowners to improve on the rate they already have.

While the overall tenor of the economic data and that from the labor markets certainly hasn't been stellar, it also hasn't been dire. It does feel as though things are in kind of a transition phase, although transition to what isn't wholly clear. Instead, the economy and labor markets just seem more unsteady, or at least less reliably stable overall than they have been for the last couple of years. Price pressures (and worries about more to come) are as evident as they can be, serving to darken consumer moods, and cooling labor markets may only add to that concern.

We're less than two weeks away from the next Fed meeting. There's about a zero percent chance of a policy move, but how Fed members perceive the current environment and how their collective outlook may affect future policy decisions will be instructive.

Next week sees a much lighter calendar of economic data, but it's not without impactful releases, as the February Consumer and Producer Price Indexes are due out. That will join the Job Openings and Labor Turnover Survey release, so labor trends and prices will drive markets next week. As far as mortgage rates go, it would appear that the greater than expected decline in them this week will reverse a little bit next week. Based upon the modest firming in yields at the end of the week compared to its beginning, we think that the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac will rise by perhaps three basis points; we're not quite certain about this, but we'll know next Thursday at noon.

Can mortgage rates find any space to decline meaningfully as we head into the spring housing season? See what we think in our latest Two-Month Forecast for mortgage rates covering late February through late April.

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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