Mid-Year Economic Update

A balancing act of job growth and inflation

By Patrick Duffy

The good news for the economy is that by the end of May 2021, over 40% of the U.S. population had been fully vaccinated against COVID-19, which has been accompanied by a surge in demand for everything from homes and new automobiles, to airline tickets and live events. The bad news, while temporary, is that a giant economy waking up from a historic, year-long-plus slumber is going to do so unevenly, which means challenges for supply chains, labor market shortages and higher inflation through the rest of the year.

For its part, the Federal Reserve is attempting to thread a needle of driving unemployment rates down for all Americans while also keeping an eye on the longer-lasting, inflationary impacts of an overheating economy. It is this newfound focus on the former at the short-term expense of the latter which is continuing to rattle both markets and pundits, but at this point the hoped-for consensus is that inflation will subside by the end of the year.

Following a slight lull in economic growth during April as measured by the Chicago Fed, an early May survey of purchasing managers by IHS Markit showed demand robust enough to absorb higher costs for both goods and services. In turn, this provoked inflation for PPE, fuel, metals and freight, which has already shown up in the Fed’s preferred inflation gauge for a broad-based indicator, the core PCE Price Index, which rose 0.7% in April and 3.1% year-over-year. Should this index remain above 3.0% in future months, the Fed will face increasing pressure to curtail its monetary stimulus and hike interest rates — even if its ultimate goals on unemployment levels have not been met.

Given the disappointing jobs update for April, when just one-fourth of the expected gains were reported, it was widely assumed that generous unemployment benefits related to the pandemic were alone thwarting the recovery, but it’s a bit more complicated than that. According to an analysis by the Indeed Hiring Lab, for those states which indicated in early May that they’d be curtailing these benefits early, clicks on online job postings rose by 5% on announcement day compared to the average for the last two weeks of April. However, this increase was also temporary, lasting no longer than eight days after these announcements.

Consequently, it’s more likely that the ebb and flow in the employment recovery has more to do with perceived health risks for the unvaccinated, caregiving challenges for children still learning remotely and the time it takes to recruit and screen appropriate candidates, negotiate offers, onboard and train new hires and figure out how post-pandemic workplaces will operate. By this fall, we should have a much better overview on the long-term recovery of the job market.

…a return to a more normalized market absent multiple bidding wars may again gradually tip the scales from sellers towards buyers.”

For now, the housing market remains on a tear due to extremely strong demand meeting limited inventory, but there are some early warning signs of pushback from consumers facing sticker stock, which for them could mean scaling back expectations or even having less to spend at builders’ design centers.  Builders, facing not just higher costs for materials, but sometimes actual shortages, are in many cases strictly limiting new releases in order to better protect their margins from higher production costs.

Thanks to mortgage rates still considered low, home prices continue to rise, with the Case-Shiller national index up 13.2% year-over-year in March, for the sharpest annual increase since December 2005.  Investors and second-home buyers are also back in the hunt, who the NAR reported purchased 17% of homes in April, up from 10% a year before.

However, due to new rules issued by FannieMae and FreddieMac, which limit their inventories of mortgages on second homes and investment properties to no more than 7% of their portfolios, the result has been higher rates and fees for these types of loans, as well as the share of all-cash sales rising to 25% in April, up from 10% the same month of 2020.

Although low mortgage rates and rising incomes have helped to keep overall affordability levels on the NAHB/Wells Fargo Home Opportunity Index in check, that still does not tell us the trade-offs buyers are making in terms of product type, location and size. Fortunately, although no one is predicting a housing market collapse thanks to stringent underwriting criteria and healthy equity levels, a return to a more normalized market absent multiple bidding wars may again gradually tip the scales from sellers towards buyers. 


Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at pduffy@metrointel.com or at 310-666-8288.