The jobs report takes a bit of heat off of Thursday’s selloff, which was predicated in part on some nonsense out of Europe and more importantly some kind of growing consensus that the economy is getting hot enough that it might force the Federal Reserve to start raising rates a bit earlier than expected, given a sharp and unexpected rise in the employment cost index on Thursday. And while it’s fair to suggest the stock market has gotten a bit ahead of itself when the Fed is rapidly moving toward the end of its stimulus policies, it’s also possible that stocks have gotten ahead of themselves for a far more prosaic reason – the economy isn’t strong enough to support the kind of valuations we’re seeing in equities right now.
That’s not to say we’ve got bubbles all over the place in stocks – they’re pretty few and far between – but credit standards in various places have loosened, and if the Fed starts raising rates we’re going to see a pretty quick reversal of that before long. There are significant signs of concern emerging in places like the high yield market, which has dropped off sharply in recent days, particularly among the weakest credits, and the housing and auto markets, which are better leading indicators than the jobs data, also suggest that the slack credit standards may end up hitting a wall before long.
Jim Kochan at Wells Fargo Fund Management pointed out that with the U-6 unemployment rate picking up to 12.2 percent this month, it conforms to what Fed Chair Janet Yellen has said in the past – that the “report is consistent with Ms. Yellen’s view that it is too early for the Fed to be contemplating a ‘liftoff’ in the fed funds rate.” That’s caused the expectations for a rate hike – per CME Fed Watch – to back off a bit, with April odds now down to 37 percent (from 43 percent a couple days ago) and June down to 52 percent from 58 percent a couple of days ago.
As the labor market improves, there are growing concerns about leading economic areas that point to a slackening in activity and will serve as the real test of the economy’s ability to survive as monetary policy recedes from the picture and interest rates start to rise (even with the Fed still at near-zero and expected not to raise rates until April at least, if not thereafter).
The Detroit team of Bernie Woodall, Ben Klayman and Paul Lienert teamed up for a piece that notes how a minority of groups are seeing real concerns about credit standards being loosened to a point that suggests auto sales demand is being driven by too-easy money. People have long talked about how auto loans tended to be on average about five years – matching approximately a value of a car (to a point) and now the average loan has risen to about 66 months, which means there are plenty more people offering terms to seven or eight years.
Cars are made to last longer than years ago, but it still represents an extension of debt payments over a longer period of time that’s worrisome. Car sales figures are due out later today – July auto sales are expected to show a slight dip to a 16.7 million annualized rate from 17 million in June, and full-year forecasts are set to hit their highest rate since since 2006. Similar action can be seen in the housing market as well, where the four-week moving average of the MBA’s purchase index has been steadily declining for several weeks now. That’s probably to some extent a summer effect but that index now sits far below levels seen in mid-2013 when it rose to a four-year peak.
That said, again – it’s a bit early to conclude that the leading areas of the economy have given up the ghost and we’re now headed for an inexorable descent into a recession – housing and auto sales fluctuate quite a bit, and even in expansions sharp declines can be seen. The 12-month moving average of U.S. housing starts are still on an uptrend from a year-over-year basis.
On the other hand, the 12-month average of existing home sales has slipped to 4.908 million. Sales of existing homes have had long periods of stagnation amid economic expansions before – they were weak from mid-1994 to mid-1995 and were slack from mid-1987 to mid-1989 as well. The most recent experience in housing – boom-and-bust – seems overstated of yet. So give it a few months.