Job Report Confusion

The labor market showed mixed results after the Bureau of Labor Statistics (BLS) report was released this morning.

The Headline number showed that there were 261,000 new job creations in the month of October. However, the secondary model, upon which the Unemployment Rate is based, showed that there were 328,000 jobs LOST in the month. Since the Unemployment Rate is based on the latter, we saw this rise from 3.5% up to 3.75%.

Although mortgage interest rates initially moved higher upon the release of the report, once markets were able to take a deeper dive into the Headline report, they found that 455,000 gains were attributed to the Birth/Death modeling component of the report.

Since companies have a shelf life, the model they use to project job gains will estimate the birth/death rate, which is far from an exact science. This takes away some of the market’s perception of credibility of the strong Headline number. As a result, mortgage bonds have recovered their losses and are now improving. Whether they hold on to their gains is yet to be known.

The Labor Force Participation Rate also declined by 22,000, which was disappointing. We would like to see more people return to the workforce as both Covid fears and stock portfolios decline. Adding more workers to the workforce helps reduce wage inflation and helps fill the gap for companies desperately needing workers.

It is estimated that 21,000,000 jobs in the US economy are tied to the housing market. This industry is taking a disproportionate loss compared to the rest of the labor force. In fact, as we saw in this morning’s jobs report, most other industries continue to show job gains while those related to mortgage and housing got hammered.

If the Fed continues to push rates higher, many parts of the labor force that are tied to housing will break, including the mortgage industry.According to Housing Wire:

“Up to 30% of the 1,000 largest independent mortgage banks are projected to disappear by the end of 2023 via sales, mergers or failures in the wake of the double whammy of still-rising inflation and interest rates.” This is truly scary to consider. Hopefully, Jerome Powell will help provide some level of stability and support to mortgage bonds to help find a balanced market.

Given the likelihood of continued volatility, there is a significant risk in floating. Do so only if you are able to monitor the market closely.

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