Friday, August 7, 2009

The good news from an economic and stock market perspective is that the July headline nonfarm payroll loss was considerably less than expected - which, on the other hand, was definitely bad news as far as the near-term prospects for lower mortgage interest rates is concerned.

The Labor Department reported employers cut 247,000 jobs in July, far less than the 320,000 most economists had projected. The job loss in July represents the slowest pace of job destruction since August of 2008. Last month's fob losses were spread across most sectors of the economy, but the pace of firings appears to have slowed substantially. With fewer workers being laid off, the national unemployment rate eased to 9.4% in July from 9.5% in June - marking the first time the jobless rate has fallen since April of last year. To round out the much improved story from the labor sector - the government revised May and June figures to show 43,000 fewer jobs were lost during those months than had been previously reported.

Those readers that were watching as the July nonfarm payroll data hit the news wire saw mortgage interest rates immediately jump dramatically higher - before improving notably from their worst levels of the day. Following the early "out-of-the-gate" knee-jerk investor reaction -- calmer, cooler traders were quick to pick-up on the fact that the workforce fell by 422,000 workers in July, far exceeding June's decline of 155,000 - an indication that large numbers of unemployed workers have become so disillusioned with current labor market conditions they have simply quit looking for work. My personal opinion is that the full story here is yet to be told.

Boiling all this economic double talk down to its "bare essence", here is the core "so what" factor from today's labor market report. While it is true that employers cut fewer jobs in July than at any other time since last summer, unemployment remains stubbornly high, which means consumers will likely remain very conservative with their spending. Since consumers drive more than 80% of all domestic economic activity the pace of future economic growth will remain extremely anemic - a condition that will significantly limit the velocity of increase for mortgage interest rates over the foreseeable future.

Looking ahead to next week, the members of the Federal Open Market Committee huddle up in a two-day meeting on Tuesday and Wednesday, Uncle Sam will be thrashing around in the credit markets over the middle three-days of the week looking to borrow $75 billion in the form of three- and 10-year notes and a smattering of 30-year bonds. In terms of economic reports Thursday's July Retail Sales numbers and Friday's Consumer Price Index will draw considerable mortgage investor attention.