Economic Commentary – Week of December 13, 2013

    WEEK OF DECEMBER 13, 2013
    It was a very intensive few weeks for U.S. economic data.

    U.S. Employment Report for November 2013 (most important economic report of every month):
     Employers created 203,000 jobs last month, above the 188,000 expected
     Unemployment Rate fell to a 5-year low of 7 percent
     Labor Force Participation Rate (LFPR) managed to tick up to 63%, still at lows not seen since the late 1970s
     Broad-based gains in most employment sectors/gains with higher paying jobs

    2013 Third quarter U.S. Gross Domestic Product (GDP)
     2013 3Q GDP rose 3.6%, above expectations/best level in the last 18 months
     Gains mostly coming from a large buildup in inventories.
     If sales average, could set the stage for a disappointing 2013 4Q GDP report

    Housing News:
     CoreLogic reported Oct. 2013 home prices rose by 12.5% versus Oct. 2012
     20th straight month of home price gains
     October’s 2013 New Home Sales surged a big 26%, above market expectations

    What does this mean for the economy and for home mortgage loan interest rates:
     The Federal Reserve may begin scale back $85 billion in extra mortgage backed securities and U.S. Treasuries Mid Dec. 2013/
    end of January 2014
     The Fed’s decision will be based on upcoming economic data impacting 2014 rates; next Federal Reserve Policy meeting is
    next week; Dec. 17/18th
     Stock/Bond markets pricing in The Fed’s impending stimulus reduction action
     10 Year U.S. Treasury bonds at slightly up in yield, but trading in narrow range; Currently at 2.87%; range last two weeks:
    2.76% to 2.93%
    Housing Related News:

    MBA (Mortgage Bankers Association) Purchase Applications (for the December 6, 2013 week): An increase in mortgage rates
    held back mortgage applications in the December 6 week which, after steep declines in the prior week, inched up only 1% higher for
    purchase mortgage applications and 2% higher for refinance mortgage loan applications. The purchase index is down 10% year-overyear,
    and it remains somewhat sluggish, which is a negative indication for underlying home sales. The average 30 year fixed rate
    interest rate was 4.625% for conforming mortgages ($417,000 or less). (Slightly negative report)

    Pending Home Sales Index for October 2013: The pending home sales index was down.6% in October, down for the 5th month in
    a row, pointing to further declines for final sales of existing homes, which have fallen for 2 months in a row. The year-over year comparison
    is down 1.6%. Higher mortgage rates were a factor in pulling down sales. Part of the weakness for October 2013 report may be
    attributable also to the partial government shutdown for 16 days (Slightly negative report)

    New Home Sales for October 2013: New home sales surged 25.4% in October to a very solid 444,000 annual rate. This is the highest rate
    since early this year. Tight inventory of housing has been limiting sales all year. Due to the big jump in sales, supply at the October
    sales rate fell sharply to only 4.9 months of supply from 6.4 months. The median price dropped a sharp 4.5% in October to $245,800
    (Mostly positive report)

    Construction Spending for October 2103: Prior up .6%, consensus for October up .5%, actual up .8%. Construction outlays
    made a comeback in October (up 3.9%) but it was from the public sector activity, following 1.9% decrease in September. In the private
    sector, residential outlays dipped .6% in October, following a 1.7% increase in September. On a year-ago-basis construction spending was
    up 5.3% in October. (Neutral report)

    Other Important Economic Reports/Meetings:

    U.S. Employment Situation for November 2013 MOST IMPORTANT REPORT OF THE MONTH): The highly anticipated November
    2013 U.S. Employment Report revealed that employers created 203,000 jobs last month, above the 188,000 expected. The previous two
    months’ were also revised upward by a total of another 8,000 additional jobs. The U.S. unemployment rate fell to a 5-year low of 7
    percent (down from 7.3% the previous month), while the Labor Force Participation Rate (LFPR) managed to tick up to 63%, though it
    is still at lows not seen since the late 1970s. The Labor Force Participation Rate is a measure of how many people are looking for work. All
    in all this was a good jobs report, with broad-based gains in most employment sectors and gains with higher paying jobs. It is a little
    too early to state that the labor market is out of the woods, yet. (Positive report)

    Gross Domestic Product for the Third Quarter of 2013 (July-September): The second reading of third quarter U.S. Gross Domestic
    Product (GDP) showed that third quarter GDP rose by 3.6 percent, above expectations (of 2.8% to 3.1% growth) and the best level
    in the last 18 months. Looking closer at the report shows that the gains mostly coming from a large buildup in inventories. This is
    important to note because a build-up in inventories could set the stage for a disappointing read in the 2013 fourth quarter gross domestic
    product (GDP) report. Overall, Demand is still sluggish and forward momentum will depend on how much of these inventories are
    worked off in the fourth quarter (Neutral report)

    Initial Jobless Claims (for the week of December 7, 2013): Adjusting for the holiday season can make for wild swings in jobless
    claims, which showed a huge 68,000 jump for the December 7 week to 368,000 in initial claims. Jobless claims are now at their highest
    point since the government shutdown in early October. The four-week average is the best handle on jobless market and it shows a
    much less severe 6,000 increase in jobless claims to 328,750, nearly 20,000 below the month-ago trend, to point at improvement in
    the jobs market. Looking at the bigger picture, claims are probably improving modestly and hinting at improvement in the jobs market
    (Neutral report)

    Producer Price Index (PPI) Sentiment for November 2013:
    PPI: Prior -.2%, Actual for November 2013: -.1%; Less food and energy: +.1%; Year-over-year 1.3%
    Low inflation and thus some possible room for The Federal Reserve to continue accommodative monetary policy (low interest rates).

    Consumer Sentiment for Dec. 2013: Prior 75.1, Consensus: 75.5; Actual 82.5
    Consumer sentiment is building quickly this holiday season, up to a 82.5 reading for early December, versus 75.1 for final November.
    The best reading since July.

    Brian R. Jessen
    Senior Vice President of Mortgage Lending, Guaranteed Rate

    P: 847.943.2169
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