A Disconnect Between Housing and Jobs
There is plenty of evidence as of late that the housing market is improving. Sales and prices for both new and existing homes are on the rise. Since housing starts remain below trend and since household formation is growing, one could reasonably surmise that the recent improvements in the housing market are poised to continue.
However, the fate of the housing market is closely tied to the employment market. People are more likely to buy homes if they are employed and if they feel secure in their jobs. No matter how low mortgage rates go, people don’t buy homes if they fear that they might get fired in the near future.
This is why the recent improvements in the housing market are a bit perplexing. Yes, the unemployment rate is falling, but the employment participation rate shows no sign of improvement. In addition, initial jobless claims are still too high and the gains in nonfarm payrolls are too low.
The recent announcements out of American Express and Morgan Stanley add to the worries about jobs. American Express said it plans to reduce head count by 5,400. That’s equivalent to 8.5% of its workforce. Morgan Stanley will eliminate 1,600 jobs, about 3% of its total workforce. This is on top of a 6% workforce reduction in 2012.
The fact that these two major companies are still trying to reduce costs by reducing head count means that they are not particularly optimistic about their prospects for growth in the near future. For them, the economy still feels like it is in a recession. Because both American Express and Morgan Stanley are in the financial services industry, there might be a tendency on the part of some analysts to hope that their problems are isolated. I don’t agree with this assessment. If the economy were truly improving, I would expect to see stronger growth from these kinds of firms. As for the housing market, the recent signs of strength cannot continue if major employers keep cutting their ranks.
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