November 4, 2023 | Employment, Labor Market, Federal Reserve Survey, Interest Rates and Adjustable-Rate Mortgage Demand Spikes

Smart Investing with Brent & Chase Wilsey

Employment

While the employment numbers missed expectations, it is a big positive for interest rates as the labor market is slowing and should provide evidence for the Fed that their hiking cycle can end. The headline number showed nonfarm payrolls increased by just 150,000 in the month of October vs the expectation for an increase of 170,000. The prior two months were also revised lower by a total of 101,000 jobs. While this may sound like bad news the key takeaway here is the labor market is softening, but it is still doing ok. Areas of strength were health care and social assistance (+77,200), government (+51k), construction (+23,000), and leisure and hospitality (+19,000). While I generally don’t like to see government jobs leading the way in employment reports, hiring has lagged in the sector and has now finally returned to pre-covid levels. Manufacturing was a major loser in the month as 35,000 jobs were lost. While this may sound troubling, 33,000 of those lost jobs came from motor vehicles and parts which can be attributed to the UAW strike. With the resolution now in place with the auto manufacturers, we should see most of these jobs come back next month. Also, another positive on the inflation front was average hourly earnings which increased 0.2% in the month versus expectations for 0.3%. Compared to last year average hourly earnings were up 4.1%, which would mark the smallest year over year increase since June 2021.

Labor Market

Even with a softening labor market, there are still plenty of jobs out there. The Job Openings and Labor Turnover Survey (JOLTs) showed there were 9.55 million available positions in the month of September, which means the ratio of job openings to available workers still stands at an impressive 1.5 to 1. The number of layoffs in the month also headed lower and stood at just 1.5 million compared to 1.7 million in the month of August. As a reminder, before Covid in 2019 layoffs averaged over 1.8 million per month.

Federal Reserve Survey

A recent Federal Reserve survey said the average American is now worth $1 million, which is up 42% from $749,000 back in 2019. Now you may be thinking that includes multi-millionaires and billionaires, this is why the median wealth gives one a better idea of where America stands. From 2019 to 2022 median wealth hit $193,000 which is an increase of 37% adjusted for inflation. 16 million American families or a little over 12% now have wealth exceeding $1 million which is up from 9.8 million in 2019. These millionaires have received over 90% of their wealth from owning stocks, which is above the 87% home ownership rate. It was also discussed that for the most part they became wealthy over time and it did not happen quickly. A lesson for the younger generation, don’t be in a hurry to make big returns and lose your money. Be smart by investing in good quality equities and using taxpayer advantaged programs like IRAs and 401(k)s. Also, it is important to look where you will be in 30 years not 30 days.

Interest Rates

While I believe over the next couple years rates will decline from these levels, I’m not optimistic it will be a major decline. One reason for that is the elevated government deficit. It was announced the treasury will be auctioning off $776 B of debt in the final quarter of 2023 and $816 B in the first quarter of 2024. This comes as the government recently announced the fiscal 2023 budget deficit would be about $1.7 T, which is an increase of $320 B compared to the prior year. It is important to remember that the debt market is based on supply and demand. If there is not enough demand at lower interest rates, to absorb the remaining supply of bonds the interest rate would need to climb.

Financial Planning: Adjustable-Rate Mortgage Demand Spikes

It’s no secret that mortgage rates have climbed to their highest levels in over 2 decades. This has caused many potential home buyers to consider adjustable-rate mortgages as their initial interest rates can be significantly less. While 30-year fixed loan rates reach 8%, the rate for a 5/1 ARM loan hovers around 6.75%. These have a fixed rate for the first 5 years of the loan before becoming variable. Borrowers then have the idea of using an adjustable-rate mortgage to lock in the lower initial rate, simply to refinance before the fixed term ends, hopefully at a lower rate in the future. However, while the rate can look more attractive, these loans generally come high higher point costs. A point is an extra fee attached to a mortgage that is due at closing. Currently mortgage rates are priced based on the assumption that borrowers will look to refinance as soon as mortgage rates fall. Since ARMs have a lower initial rate and therefore less interest, extra point fees are added to make up for the fact they will likely be refinanced. Home buyers must look not only at the interest rate, but also the point cost, and how long they expect to have that loan before moving or refinancing. With mortgage rates at their current highs, it may make sense to accept a higher rate temporarily if the ultimate plan is to refinance in the next few years.