We Miss You BLS

Federal Shutdown Begins and Impacts Loom

What an odd week: The Federal Government shut down Wednesday morning at midnight after Congress failed to pass legislation that would fund all departments or a continuing resolution that would maintain the status quo. A shutdown requires federal employees to be furloughed, and that will significantly curtail agency operations. Some employees are exempt from the furlough, including those performing emergency services that protect life and property, as well as those involved in minimal staffing to wind down agency operations, and other work classified as “excepted” by the Office of Management and Budget (OMB)and agency heads. Unfortunately, that leaves a large number of people who aren’t working and aren’t being paid.

Shutdown Duration History and Financial Fallout

No one knows how long this will last, but the longest shutdown occurred during the first Trump administration (2018-2019), lasting 35 days. In 2013, under President Obama, it lasted 16 days, and in 1995-96, under President Clinton, it lasted 21 days.

In all prior shutdowns, government employees did eventually get full back pay. Unfortunately, government contractors may not receive back pay, which affects a huge number of people. That could cause major pain for anyone who does not have reserves to float their payments for the next couple of paychecks. We could see an uptick in delinquency rates, as savings rates are already at decade lows.

Key Economic Reports Delayed by Shutdown

How does this affect mortgages and mortgage rates? First, we didn’t get several important economic reports due to the shutdown. The Bureau of Labor Statistics (BLS) Jobs report for September has been delayed, as have been the weekly jobless claim numbers that normally come out on Thursday. We may also miss important inflation reports from the BLS, CPI, and PPI, as well as the BEA’s PCE inflation report.

Mortgage Process Disruptions from Federal Closures

The next big problem with the shutdown will be how it affects the home buying process for many buyers and sellers. The National Flood Insurance Program (NFIP) under FEMA cannot issue new or renewal flood insurance policies. Any homes in a flood zone won’t be able to close if they haven’t already been issued their new policy. Refinances will also be delayed if renewals can’t be issued. This can delay people taking advantage of the lower rates at a time when many really need the help.  

USDA and IRS Shutdown Effects on Loans

The USDA’s Rural Development (RD) program is a mortgage program used by many first-time buyers to do 100% financing. The RD offices are closed and will not issue the required conditional commitments during the shutdown.

There are also delays expected for IRS requests, such as the processing of 4506-C and 4506-T forms to receive transcripts of tax returns. These are required for self-employed borrowers on virtually all full documentation loan programs.

JOLTS Report Shows Weak Labor Market

Despite missing some important updates, we did get some very important date points this week from private parties, ADP and Challenger-Gray, as well as some prior to the shutdown, JOLTS. 

Rates saw significant improvement this week after very weak employment data. Job Openings and Labor Turnovers (JOLTS) showed little change in job openings at 7.2M, a very weak level. The hiring rate also hit a fresh low at 3.2%, the lowest since 2013, removing Covid. The quits rate set a recent low too at 1.9%, the lowest since 2014, removing Covid.

ADP Report Signals Job Loss and Fed Cuts

The ADP Employment Report for September was the biggest report of the week, since we didn’t see the BLS. It was a very bad report for jobs, though good for interest rates, as it leads to an almost certainty of an additional Federal Reserve rate cut at the end of the month. 

ADP showed that 32,000 jobs were LOST in the private sector. The market was expecting GAINS of 50,000. Also, the prior month was revised lower to a net LOSS of 3,000 jobs. Job growth has been negative for the last 3 of 4 months, a clear sign of weakness. Fed rate futures (prediction markets) have a 100% rate cut in October and a 92% rate cut in December.

Challenger Report Highlights Layoffs and Low Hiring

The Challenger, Gray, and Christmas Job Cuts Report isn’t always an important report. In the absence of the normal data, it is more important.  It showed that planned layoffs Year to Date are the highest since Covid, while planned hiring are the lowest since 2009, during the great recession.  

Looking Ahead: Key Reports to Watch Next Week

It is tough to know which reports we will see next week, as the shutdown will guide that:

Tuesday, October 7: Trade balance

Wednesday, October 8: FOMC Meeting Minutes

Thursday, October 9: Initial and Continuing Jobless Claims

Friday, October 10: University of Michigan Consumer Sentiment.