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The great slowdown: Why inflation, housing and the labor market might be showing a recession — or something else

Massive job growth, employer demand for labor and a booming housing market are all starting to come off the post-covid boom.

And the biggest and most uncertain economic condition of them all, inflation, has no simple answer.

But across all of these varied sectors of the economy, there is a common thread emerging from the tangled yarn of data and experience, a kind of slowing down as the economy downshifts from the frenetic year-plus of lighting fast recovery from the mass contraction of the winter and spring of 2020.

The labor market appears to be softening — particularly in tech

The labor market is slowing down. This may sound like an odd thing to say when, in June, 372,000 new jobs were created, following 384,000 in May and 368,000 in June. In 2021, the average number of new jobs created per month was 562,000, while in the first quarter of 2022, it was 539,000. When you look at other data besides the net number of jobs created, the slowdown, even if it’s not necessarily recessionary, becomes more apparent. The number of new unemployment claims picked up in the last week, a sign that more companies are seeing the need to shed employees.

“Initial unemployment claims … are clearly trending up now,” Indeed economist AnnElizabeth Konkel told Grid. “When you zoom out and look at the longer-term trend, it has been rising since spring of this year.”

Konkel has seen evidence of the tech slowdown on Indeed. “We are seeing software development job postings continue to cool as well as IT and help desk and information design and documentation,” she said. “We’re seeing a cooling off in tech job postings, it’s apparent something is happening in the labor market, it is this cooling.”

“I will be watching what’s happening with consumer spending in almost a week from now. If dollars don’t flow into business, that’s going to impact hiring decisions,” Konkel said.

There’s a chance inflation is slowing down — or will soon

There’s a chance inflation is slowing down — or will in the back half of the year. There’s been a mild but real flatlining or even outright decline in inflation expectations, whether measured by what financial markets expect inflation to be over the next five years or what consumers expect over the next year.

This could be due to the Federal Reserve taking dramatic action in terms of rate hikes, bringing up interest rates fast and indicating that they will continue to do so until the inflation numbers get substantially better.

There are also some technical reasons why the inflation picture — at least on the so-called core side, which does not include food and energy because those are affected by volatile commodities prices — might improve, according to Employ America’s Executive Director Skanda Amarnath.

“The real thing to watch from here is do we get inflation relief on the goods side,” Amarnath said, pointing to piled-up inventories by retailers that could get dramatic price cuts in the back-to-school and holiday shopping season. The manufacturing issues that plagued makers of everything from clothing to home goods “appear to be closer to the rear view,” Amarnath said. “There’s more reason for optimism, for retailers to clear out inventory; we can see more discounting and price cuts.”

Another major factor in goods inflation — the massive run-up in car prices, especially used cars, as car manufacturers were not able to make as many cars as consumers demanded due to the chips crisis — may be cooling off, Amarnath said. “Autos you can see the weekly data is a little more forward-looking. That weekly data is starting to turn now. Give it two months before it filters into CPI.”

But headline inflation may still be pulled up by food, energy and rent. “It remains to be seen where commodities go from here. I’m still concerned with the energy outlook,” Amarnath said. “Commodity shocks are with us.”

Housing prices are still high, but the growth is slowing

While this hasn’t brought home prices down, it’s starting to at least slow down the growth, Tucker said, while in some markets like San Francisco; Seattle; San Jose, California; and Austin, Texas, home prices have begun to actually fall.

For the three West Coast cities, which have some of the highest prices in the country, Tucker attributed the decline in prices to buyers simply being chased out by higher interest rates.

“These are markets where a lot of the homebuyers are only able to qualify to pay very high prices when mortgage rates are exceptionally low. The bulk of that marginal homebuyer distribution got shut out when rates rose,” Tucker said.

As for Austin, it had some of the steepest price increases in 2020 and 2021 and may be a harbinger for other hot markets.

“I think that monthly pace of price growth will decelerate again next month, and that will probably bring more metro areas into that stalled-out or slightly declining group in terms of price levels,” Tucker said.

But at the same time, new housing construction has begun to fall off, as builders see a cooler housing market. In June, builders started construction on fewer homes than analysts expected.

“Purchase applications and new home sales come down; those are leading indicators for new single-family home construction. As demand is coming down, builders are going to balance supply with demand; starts are following suit,” said Dustin Jalbert, a lumber analysts for Fastmarkets, told Grid. “[There is a] lot more room for single-family starts to fall in third quarter.”

This is a reversal from the past two years, where, despite having trouble finding workers or supplies, housing construction took off in order to try to meet the massively increased demand for new homes.

“We had this tremendous boom on the new construction side,” Jalbert said, “[There was] so much demand from prospective and new homeowners, given the preference changes and accelerated migration patterns that we saw. For the better part of two years, we’ve been in this building boom.”

Now, homebuilders face a different picture.

“In June, we began to see a moderation in demand and an increase in cancellations due to the rapid rise in mortgage rate and continued inflationary pressures across most of the economy. The supply of both new and resale homes at affordable prices remains limited,” David Auld, the chief executive of the homebuilder D.R. Horton, told analysts on an earnings call Thursday.

Whether it’s inflation, jobs or housing, the respective markets may have slowed down and chilled out, but it doesn’t mean things are much better.

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