When Bad News Is Good News, It's Time Builders Buckled Up

Say this much for the October employment report – whose headline number fell short of consensus expectations: It's one of two monthly economic events this week that bolstered equity investors, ignited a rally in Treasury yields, brought mortgage rates down off their highs, and signaled both resilience and softness in almost precisely the balance "Goldilocks trade" believers would desire.

The other event, of course, was word that the Fed would hold its Funds rate and that the Treasury Department would issue less long-term debt.

Core Logic chief economist Selma Hepp writes:

Today's jobs report confirms the nation's economy is still resilient despite rapid and appreciable tightening of financial conditions. Going forward, moderation of job gains is expected though the imbalance between labor supply and demand suggests wage growth will take more time to loosen up. Overall, employers are less selective on the qualification requirements for positions and remote work continues to be used to attract talent from a national pool. There is no obvious reason for this trend not to continue.”

This particular month's weakening employment trends tell some observers the Federal Reserve must be done with its cycle of funds rate hikes, a Wells Fargo chief economist even declaring, "Put a fork in it – they are done."

Fed members themselves, however, are saying, not so fast, we still need to see what happens with inflation.

A former Federal Reserve economist's view comes closer – albeit, maybe not quite as satisfactorily bearish nor bullish – to our own take.

Claudia Sahm, an economist at the Federal Reserve from 2007 to 2019, and the architect of a trusted recession indicator, said the report did not suggest “a good direction” for the labor market. But she added that unemployment would have to tick higher over a longer horizon for it to be clear that recession risks were heightened." – Talmon Joseph Smith, New York Times

We'll admit the week's data points, while not a big downer in themselves, only serve to whet our appetite to look back at them from a vantage point of a year from now – that "longer horizon" Sahm mentions – to understand more clearly whether they're blips or a trend.

A pre-pandemic "normal," feeding into a break-out generational demographics-driven mid-decade for market-rate homebuilding, continues to be what we hear most often as the "ear-to-the-ground" scenario of choice among homebuilding operators, strategists, and key stakeholders.

We'd still like to understand better than we do now how resilient business hiring and household income growth will remain – what with the known domestic, global, environmental, technological, and economic shocks and stresses rumbling around right now – before we conclude 2024 and 2025 will amount to improvement in business conditions.

Why do we hesitate?

Axios, in its customary short-form elegance, captures our "sneaking suspicion" to a Tee.

For months, the "vibes" — anecdata, CEO surveys and the like — have pointed to a cooldown underway in the U.S. labor market. The official data, especially on growth in employers' payrolls, has mostly not.

Why it matters: In October, they finally converged. With the new jobs numbers, there's little doubt that the labor market is shifting into a lower gear. That should diminish inflation pressures and make the Fed more confident it is done raising interest rates.

What's more, a Wall Street Journal piece suggests that housing may suffer a blow from another Fed rate increase, or take a hit to demand thanks to rising unemployment.

... Signs that the labor market is tightening further could lead some officials to worry that recent declines in inflation might reverse. Those policy makers might argue for the Fed to raise interest rates as soon as its next meeting, Dec. 12-13.

There are signs, however, that the job market could lose momentum in 2024. Both the number of new hires and the number of people who voluntarily quit their jobs trended down since the beginning of last year, while the number of layoffs has held steady, according to the Labor Department."

So, cause for jubilance in the [non-real] Wall Street investment economy being bad news for the real economy has dangerous implications for homebuilders – whether it amounts to even higher mortgage rates and borrowing costs, or on the flip side, rising rates of unemployment, misery, and income-related demand destruction.

Reading Morgan Housel's latest post on the Collaborative Fund site – entitled "Wild Minds" – reminds me of a personality and character set we recognize among homebuilding's business and operations community of leaders.

People who are capable of achieving incredible things often take risks that can backfire just as powerfully.

What kind of person makes their way to the top of a successful company, or a big country?

Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.

What kind of person is likely to go overboard, bite off more than they can chew, and discount risks that are blindingly obvious to others?

Someone who is determined, optimistic, doesn’t take “no” for an answer, and is relentlessly confident in their own abilities.

Remind you of anyone?

Let's make a point of talking this time next year, and see who best prepared for what was to come in 2024, and how they did it. That will be a fascinating business story.