Redfin Economists’ Weekly Take: Potential Government Shutdown Looms Ahead of Key Jobs Report

Last Week In A Nutshell

A quiet week with rates drifting slightly higher as Fed officials sounded cautious on future rate cuts.

Upcoming Attractions

• • Potential government shutdown: As of Monday morning, the government looks more likely than not to shut down Tuesday at midnight. The immediate impact of a short, run-of-the-mill shutdown to both the housing market and financial markets would be minimal. But the ultimate impact depends on the length of the shutdown and which federal workers remain on the job.
  • Labor Market:
    • Jobs Report (Friday): Forecasters expect 50,000 jobs created in September with the unemployment rate staying at 4.3%.
    • JOLTS (Wednesday): Expected to show about 7,170 job openings, similar to last month’s level.
    • ADP Report (Wednesday): Expected to come in around 50,000 for September. This data is too noisy to rely on for gauging the state of the labor market or for predicting the jobs reports, but sometimes temporarily moves markets before the official jobs report is released.
    • UI Claims (Thursday): Expected to stay at its currently low level (around 225,000) having recovered from the fake spike a few weeks ago.
  • Economic Data:
    • ISM Services Index (Friday): Expected to remain roughly flat from last month’s 52.0 reading.
  • Housing Market:
    • Case-Shiller (Tuesday) – Expected to fall 0.2% month over month, but this data is only through July. Redfin’s home price index has data through August (see below).

Last Week’s Highlights

There were few economic headlines last week as the macroeconomic data, especially PCE inflation, came in largely as expected.

• • Fed speak: 
    • With the exception of Governor Miran, the long list of Fed speakers last week sounded caution about the dual risks facing the central bank. All hesitated to commit to any pre-set path, deferring to the upcoming data releases.
    • Apart from rate policy, Vice Chair Bowman also commented on balance sheet policy, flagging that relying only on runoff (i.e. not reinvesting maturing MBS) may not be sufficient to shrink the balance sheet soon enough. She floated the option of active sales of agency MBS to tilt the Fed’s portfolio toward Treasuries. This comes on the heels of a widely discussed PIMCO proposal to halt MBS runoff in order to bring mortgage rates down.
  • New home sales: New homes sales rose unexpectedly by 20.5% to 800,000 in August from 664,000 previously. Any response to lower mortgage rates would show up sooner in new home sales than existing home sales as it is based on contract signings rather than closings. But this series is notoriously noisy and indeed, the confidence interval is +/- 21.8, meaning the increase is statistically insignificant.
  • Existing home sales: Existing home sales came in at 4.00 million for August, a small decline from 4.01m in July. It’s too soon to see an increase in closed sales due to lower mortgage rates, but there are also no reliable statistics showing an increase in housing demand after mortgage rates fell in August.

Diving a Little Deeper

• • Government shutdown:
    • The odds of a shutdown appear to be between 50%-75%, but we often find ourselves in this position right before a last minute deal is made.
    • If the government shuts down, about 40% of federal civilian workers (roughly 900,000) are expected to be furloughed, but all federal workers would not receive pay until funding is restored. In the past, politicians have often targeted the first military pay day (October 15 in this case) as a deadline to reopen.
    • It is possible that the current administration would make different decisions than previous administrations regarding which functions are essential. The Office of Management and Budget has issued a memo instructing agencies to make reduction-in-force plans for any programs for which funding has lapsed and are not consistent with the administration’s priorities.
    • The economic growth effects of a government shutdown are small and negative (about 0.15 percentage points) on GDP growth in the current quarter, but also positive when the government re-opens.
    • The furloughed federal government employees might temporarily raise the unemployment rate. The September jobs data released October 3 will not be affected as that data has already been collected. The release of that report may be delayed, however. The October data (to be released November 7) may also be affected if the shutdown extends beyond October 18 (the end of the reference week during which data is collected). Furloughed workers should be categorized as “unemployed on temporary layoff,” but in past shutdowns, many have been miscategorized as “employed but not at work.” There should be no impact on the payrolls data and little impact on UI claims data as furloughed workers are not supposed to file claims, as they have to repay any benefits once they receive backpay.
    • Beyond the jobs report, the CPI report and any other reports from the Bureau of Labor Statistics and Bureau of Economic Analysis scheduled to be released during the shutdown are likely to be delayed until after the shutdown ends. Any reports for which data collection is interrupted will also be delayed in the weeks to come. Weekly UI claims data (collected by the Department of Labor from state UI offices) should continue as will data reports from the Federal Reserve, which does not rely on congressional funding.
    • The impact on financial markets, including rates, has historically been small and mixed. There has often been a small decline in ten year yields as the government shuts down, but no response when the government reopens.

• • Housing market:
    • Redfin Home Price Index:
      • U.S. home prices rose 0.2% from a month earlier in August on a seasonally adjusted basis.
      • On a year-over-year basis, home prices rose 3.1%, the slowest rate recorded in Redfin Home Price Index (RHPI) data going back to 2012.
      • 26 of the 50 most populous U.S. metros saw month-over-month price declines.
    • Share of Mortgages with Rates Above 6% Climbs to 10-Year High as Americans Adapt to New Normal:
      • 80.3% of mortgaged U.S. homeowners have a rate below 6%, down from a record 92.7% in the second quarter of 2022.
      • Just over half (52.5%) of mortgaged homeowners have a rate below 4%, down from 65.1% in 2022.
      • Increased housing supply shows that the mortgage rate lock-in effect is easing, but many buyers are still waiting for rates to drop to 6% or below to make a move.

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