Forecast Update: Construction Spending, Mortgage Purchase Applications, Jobless Claims, Unemployment

A weekly analysis of the economic data released during the past week, and how current economic conditions are affecting the real estate market.

• Construction spending increased in November by 0.4 percent, for the third consecutive month,
  but is still 6 percent below the November 2009 level.
• Construction spending is being driven by public non-residential spending which increased by 3.3 percent from November 2009. In contrast, private non-residential and private residential spending decreased by 16.5 percent and 5.3 percent respectively over the same time frame.
• The market for new construction is still suffering from excess supply, and the construction taking place is largely government office space. ISM’s manufacturing index increased by 0.7 percent in December to 57.0. An index value in excess of 50 suggests both manufacturing and overall economic expansion.
• The increase was largely attributable to an increase in new orders and production, which increased by 7.6 percent and 10.4 percent to 60.9 and 60.7 respectively.
• The manufacturing index is closely linked to GDP growth, and the strengthening of the manufacturing sector portends positive overall economic growth.

• The Census released new data on factory orders this morning which rose 0.7 percent between October and November. This increase was stronger than expected and reflected improved demand for both durable and non-durable goods. Strength in fabricated and primary metals along with computers and electronics led the report higher. Industrial machinery and volatile aircraft orders fell sharply. Non-durable goods rose a healthy 1.7 percent, while orders for capital goods excluding aircraft rose 1.1 percent.
• Shipments of goods rose, while unfilled orders and total inventories eased suggesting the need for orders in the future.
• November’s strong reading for factory orders indicates that businesses are investing again and buying capital goods. This trend is important as it suggests confidence on the part of business that will drive the expansion of the economy and hiring. Job growth is key for the health of the housing market.

• Purchase applications fell 0.8 percent the week of December 31, following a 3.1 percent gain in the prior week
• Refinancing applications increased 3.9 percent last week following a 7.2 percent drop the week prior.
• The average 30-year mortgage has risen nearly to five percent, up nine basis points to 4.93 percent.
• ADP released their survey data this morning from U.S. businesses. Results of the survey show an increase in private payrolls of 297,000 for December. This follows a gain of 92,000 in November. The gain for December is three times higher than many economists have predicted for the month.
• The service-providing sector rose by 270,000 in December–the largest monthly increase in the history of the report.
• Medium sized businesses, those with fewer than 500 and more than 50 employees increased the most at 144,000 workers. Small businesses, those with fewer than 50 employees added 117,000 workers in December.

• The number of workers filing jobless claims increased slightly in the week ending January 1, by about 18,000 to 409,000. However, the 4-week average of new claims, which smooths rather volatile weekly data shows a continued decrease in new claims, falling by 3,500 to 410,750. Last week’s drop in new claims to below 400,000 was the first since July 2008. Falling below 400,000 suggests more jobs are being created than being lost.
• The number of continuing claims also fell by a significant 47,000. The largest increase in claims was in California, following layoffs in the transportation, construction, service, and manufacturing industries. Florida saw the largest drop in claims following better job market in construction, trade, and service industries and in agriculture.
• The job market has solidly turned the corner for the better. Monthly net job gains of 200,000 or more are possible based on recent trends, translating into at least 2 million new jobs this year. The unemployment rate could fall to 9 percent by year end.

• The unemployment rate unexpectedly fell dramatically from 9.8 to 9.4 percent in December. In the same month, payroll jobs rose by only 103,000, though this included growth of 5,900 in the real estate industry. The leisure and hospitality, and health care industries saw the biggest job gains in the month while the construction, local government, and membership associations and organizations saw the largest declines in employment.
• The difference between the picture from the unemployment rate and the number of payroll jobs can be explained by looking at the data. The Employment Situation Summary released monthly is based on data from two separate surveys, the Household Survey and the Establishment Survey, which covers businesses. Household Survey data is used to compute the unemployment rate while payroll jobs from the Establishment Survey are considered a better indicator of the change in the number of jobs. These series differ in part because the Establishment Survey does not cover the self-employed, unpaid family workers, agricultural workers, and private household workers.
• The December Household Survey showed better growth in jobs than the Establishment Survey though it also showed that the number of individuals not participating in the labor force continues to climb. These two factors explain the decrease in the unemployment rate. The survey showed an increase in the number of employed of 297,000 and a decrease in the number of unemployed of 556,000. At the same time, those not participating in the labor force increased by 434,000, the difference between the change in employed and unemployed plus some population growth. The labor force participation rate of 64.3 percent is the lowest rate since 1984. As the labor market improves, discouraged workers and other non-participants in the labor force may jump back in. For this reason, the unemployment rate may tick up in the future even as the number of jobs improves.