David Joy: Another round of good news for the economy

 Last week’s economic data offered almost unequivocal evidence of firming activity. Everything from the number of new jobs in November, to manufacturing activity, new home sales in October, automobile sales, consumer confidence, and even third quarter GDP, were all better than expected. If there was any tarnish on the latest batch of reports it was that service sector activity slowed modestly in October, and personal income growth remained muted.

 These reports, in particular those regarding jobs and housing, make next week’s Fed meeting a little more interesting as they raise the odds of tapering, although March still seems like the more likely timeframe.

 Rather than being unnerved by the possibility of an earlier taper following the jobs report issued by the Bureau of Labor Statistics on Friday, stocks rallied on the news and the S&P 500 gained 1.1%. That was not enough, however, to offset four down days to start the week, and the index suffered a fractional decline of 0.04%, its first losing week since Oct. 4.

Bond yields were stable following the jobs report, but only after having already climbed 13 basis points to 2.87% between the previous week’s close and the end of trading on Thursday. Since the Fed meeting on Oct. 29, the yield on the ten-year has climbed a total of 35 basis points.

The November jobs report was notable on a number of fronts. The unemployment rate fell to 7.0%, its lowest rate in five years, and down sharply from 7.8% at the beginning of this year. The underemployment rate also fell to its lowest in five years at 13.2%. The private sector created 196,000 new jobs, on top of the 214,000 created in October. The two-month average of 205,000 is appreciably better than the 158,000 average of the third quarter.

The manufacturing sector added the most jobs in eighteen months. And the labor force participation rate rose for only the third time this year, and for the first time since back-to-back gains in May and June, although it remains barely above the cycle low of 62.8% in October.

It seems like a stretch to suggest that these numbers are enough to convince the Fed to commence tapering next week. Nevertheless, the trend is moving in the right direction, and a few additional months of confirming data would likely be more than enough evidence to support such a decision.

Home sales follow mortgage rate trends

The data on new home sales was also notable last week. Due to the government shutdown, the new home sales reports for September and October were released simultaneously. After a first quarter average of 449,000 new homes per month, and a second quarter average of 442,000 units, the average in the third quarter fell to 369,000 after the September report showed a sharp decline to 354,000. This trend followed the pattern of mortgage rates.

According to Freddie Mac, in the first quarter the average monthly commitment rate on thirty-year single family mortgages was 3.50%. In the second quarter it was 3.69 percent. In the third quarter, however, it jumped to 4.44% as concerns over an expected Fed tapering in September drove market rates higher. As those fears were not realized, and bond market yields retreated somewhat, the average mortgage commitment rate for October was 4.19%, providing a window of opportunity for buyers deterred by rates in the mid 4% range. In November, the rate was 4.26%, suggesting the possibility of another strong month for sales.

In previously released data, existing home sales did not show the same strength in October as new home sales did. After robust activity in both July and August, activity slumped in September, and continued to soften in October. November sales data should be quite telling when it is released onDec. 19 for existing homes and on Dec. 24 for new homes.

Lastly, the deadline for the congressional budget reconciliation committee isthis Friday. News reports suggest there is a good possibility of a modest agreement actually being reached. That, itself, may be nothing short of a miracle. What is being considered would allow federal spending to rise modestly, as the scheduled sequester spending cuts would be modified. But even a modest agreement would give additional support to the Fed’s consideration of tapering QE, as it would slow the fiscal drag it so often mentions when discussing current conditions.

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