The Key To Mortgage Rates: Fed Phone Calls?

Today’s jobs report showed positive growth, with 177,000 jobs added and an unemployment rate of 4.2%. Mortgage rates went up a tad today, but the spreads improved, which was a positive. As market drama calms down, we should see some improvement with the spreads, something I discussed in this recent episode of the HousingWire Daily podcast.

While this is encouraging, the Federal Reserve focuses on broader indicators that have economic implications, particularly in light of potential high-velocity events like a global trade war. Early signs suggest that a few sectors are already feeling the effects. As a result, the Fed may revert to its post-COVID-19 labor strategy and use insights from telephone calls to understand the labor market better.

First, let’s take a closer look at the report’s details, as we do have some signs of labor softness in key sectors.

From BLS: Total nonfarm payroll employment increased by 177,000 in April, and the unemployment rate was unchanged at 4.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in health care, transportation and warehousing, financial activities, and social assistance. Federal government employment declined.

This report shows a loss of manufacturing jobs, and although construction jobs increased, residential construction labor slightly declined. As we approach 2025, before the implementation of Godzilla tariffs, the labor forecast was for a job growth trend of 133,000-151,000 monthly this year. After negative revisions to the previous jobs report, we are running at 147,500 per month, so this looks right.

Let’s examine our recession labor trigger models. We focus on two key data lines.

1. Residential construction labor

We’ve noticed a slight month-to-month decline, which we’ll monitor closely as we approach 2025. This area was initially considered a wild card, especially with the potential impact of tariffs. Fortunately, mortgage rates have remained below 7.25% this year, which has helped mitigate potential challenges. While the month-to-month decline is something to watch, if mortgage rates can go lower, that should help the builders.

2. Jobless claims

This week, jobless claims experienced a significant spike. However, upon reviewing the report, it’s clear that two states were the main contributors to this increase: New York and Maine. This kind of fluctuation occurs occasionally and trends usually return to normal. Nonetheless, we will monitor this data over the next few months. We will face labor issues if the trend moves towards 323,000 in the four-week moving average, but since 2022, we have cautioned people not to go into a recession camp until then, which has proven to be correct.

We focus on these two labor triggers in the economy and recessions. But what about the Fed? With all this chaos, will they change how they look at labor?

Answer the phone — it might be the Fed

It might seem unusual, but the Federal Reserve has indicated that during the unprecedented times of COVID, they consistently reached out to businesses to inquire about their hiring practices. Even with a substantial amount of recessionary data in 2022, the Fed considered this to provide a more nuanced perspective that might counterbalance traditional economic indicators that typically raise concerns.

So, in addition to monitoring jobless claims and job openings, it’s worthwhile to keep an eye on the Fed’s proactive outreach in the coming months. They are likely seeking real-time data that may not be readily available to us until they share their insights during public engagements or press conferences. This will be something to keep an eye on for mortgage rates going out.

Conclusion

The U.S. labor market has demonstrated considerable resilience since June 2020, successfully navigating various challenges. As we transition into a new phase of the economic cycle influenced by the trade war, it is prudent to consider the potential implications for various financial data carefully.

Our focus will remain on essential indicators, including consumption data, jobless claims and the employment of residential construction workers, as these are essential to understanding the economic landscape. Furthermore, I will be watching the remarks made by Federal Reserve presidents, particularly if they suggest that their ongoing evaluations, gathered through consultations, indicate a possible shift in the labor market.