Federal Reserve Chairman Ben S. Bernanke has something to tout before Congress in hearings this week: job growth in the auto and housing industries.
Consumers rely on loans to buy cars and homes, so these segments of the economy are among the most responsive to Bernanke’s strategy of holding interest rates low and pressing on with bond purchases of $85 billion a month.
“The rate-sensitive sectors, most notably housing and autos, are kicking into a higher gear,” said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania. “This reflects the Fed’s aggressive monetary policy and resulting rock-bottom interest rates,” along with “working off the excesses of the boom and bubble.”
Bernanke and his colleagues on the Federal Open Market Committee have pledged to continue buying bonds until the labor market improves “substantially.” Climbing employment in construction and vehicle manufacturing bolsters the case that asset purchases can help spur the improvement.
Zandi predicts total job growth this year of “close to 2 million,” about the same as last year. “But I expect closer to 3 million more jobs in 2014 and the same in 2015.” Much of the increase will come from “more housing construction, consumer spending driven in part by rising house prices and more auto production.”
Southeast Mortgage of Georgia Inc., headquartered in Lawrenceville, Georgia, plans to add as many as 50 full-time employees this year to its existing work force of 125 people to handle a growing volume of business, said Cal Haupt, president and chief executive officer. Haupt, 49, sees loans originated or refinanced by his company climbing 30 percent this year from $425 million last year.
“I don’t fight the Fed,” Haupt said. “I will sit in their wake and enjoy the rise.”
The average fixed rate on a 30-year mortgage loan was 3.56 percent as of Feb. 21, after falling as low as 3.31 percent Nov. 22, according to data from McLean, Virginia-based Freddie Mac.
Bernanke has kept the target for the federal funds rate near zero since December 2008. The FOMC said two months ago, and repeated in January, that an “exceptionally low range” will be appropriate as long as inflation isn’t forecast to rise above 2.5 percent and unemployment remains above 6.5 percent.
Unemployment was 7.9 percent in January, and the Fed’s preferred price measure, issued by the Commerce Department and tied to consumer spending, rose 1.3 percent for the 12 months through December.
Shares of Ford Motor Co. and auto retailer Penske Automotive Group Inc. will benefit from the Fed’s stimulus, along with housing-related stocks Lowe’s Cos Inc., Masco Corp. and NVR Inc. said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey.
Ford has risen 21 percent since the Fed announced its newest round of bond purchases on Sept. 13. Lowe’s is up 30 percent and Masco has increased 23 percent.
“We are totally convinced that housing is still in the early stage of a recovery that will carry starts to the 1.7-to-1.9 million-unit range at some point a couple of years out, with very strong effects on earnings for these companies,” said Lieberman, former head of monetary analysis at the Federal Reserve Bank of New York. “More recovery is coming” in autos too, he added.
Other beneficiaries of low mortgage rates are “chemical companies that manufacture stuff for the housing market” including Axiall Corp. and Huntsman Corp., Lieberman said.
Bernanke’s two-day testimony, known as Humphrey-Hawkins for the legislation that established the semi-annual appearances, begins tomorrow at 10 a.m. in the Senate and continues Feb. 27 in the House.
While lawmakers criticized Bernanke during past outings -- questioning the effectiveness of his strategy and saying it risked stoking inflation -- the 59-year-old Fed chairman’s FOMC colleagues see his policies gaining traction.
“Most participants” at the central bank’s Jan. 29-30 meeting said the asset purchases have helped “stimulate economic activity, and many pointed, in particular, to the support that low longer-term interest rates had provided to housing or consumer-durable purchases,” according to the minutes.
Automakers sold vehicles at annual pace of 15.23 million in January, up 9.6 percent from a year earlier, according to data from Ward’s Automotive Group.
Sales per dealership probably will climb to a record 839 this year from last year’s record 812, as car makers contain the number of their outlets and boost deliveries for a fourth straight year, according to an estimate last week by Urban Science, a Detroit-based consulting company.
Housing also is showing solid gains, with prices rising 5.52 percent in the 12 months ended November after hitting a nine-year low in January 2012, according to the Case Shiller 20-city index.
Work began in January on an annualized 613,000 single-family houses, and permits for future single and multifamily projects climbed to a 925,000 annual rate, based on Commerce Department data. Both were the highest since 2008.
Auto-employment gains already are evident in data from the Department of Labor, which show the number of people in motor-vehicle and parts manufacturing rising to 789,000 in January from 749,000 a year earlier. Employment at auto dealers increased to 1.11 million from 1.08 million.
More new jobs in housing probably will follow, said Millan Mulraine, director of U.S. research and strategy at TD Securities in New York. He estimates payrolls in construction will climb by about 20,000 a month in 2013, more than double the pace of last year.
“We see it being one of the biggest drivers,” said Mulraine, who predicts total payroll growth will average 150,000 in the first half of the year and 200,000 in the second half. “You’ll also see appliance purchases taking place as people start decorating their new homes.” Employers added an average 181,000 employees a month in 2012.
Home Depot Inc. said Feb. 6 it plans to hire more than 80,000 temporary workers ahead of its busiest season, about 14 percent more than a year ago, as the housing rebound spurs spending on remodeling and landscaping.
The largest U.S. home-improvement retailer is adding mostly seasonal staff, though some will be offered full-time work, said Tim Crow, executive vice president of human resources at the Atlanta-based company. Last year the company gave more than half of 70,000 temporary employees permanent jobs, he said.
“We anticipate good growth in our sales this spring,” the season when “our business pops,” Crow, 57, said Feb. 5 in a telephone interview.
Lowe’s, the second-largest U.S. home-improvement retailer, said Jan. 22 it plans to take on 45,000 seasonal workers, 13 percent more than a year earlier, and add 9,000 permanent employees.
Raymond Houston, 53, landed a job recently as a supervisor at a Home Depot store in Live Oak, Texas, outside San Antonio, after spending 34 years in the U.S. Army. His luck contrasts with the frustration he experienced in several months of submitting applications for mostly government jobs.
“The civilian sector is not doing a lot of hiring right now,” and defense-funded jobs could get even tougher to find because of the automatic federal-budget cuts, he said. “It is going to take a toll throughout the military.”
The fourth quarter of 2012 saw a 22.2 percent plunge in defense spending, the biggest since 1972 during the Vietnam War era, leading the economy to contract at a 0.1 percent annual rate, according to the Department of Commerce. Government outlays dropped 6.6 percent from October through December, subtracting 1.3 percentage points from growth.
Such spending will “continue to fall,” said Paul Edelstein, director of financial economics for IHS Global Insight in Lexington, Massachusetts. “The Fed has an extra job to do because it has to offset some of this austerity.”
The central bank might not be able to offset further reductions, as well as the impact of taxes that rose in January. The automatic U.S. budget cuts known as sequestration would reduce 2013 gross domestic product growth by 0.6 percentage point and pare about 700,000 jobs by the end of 2014, Macroeconomic Advisers estimated in a report last week.
“This makes a weak economy significantly weaker,” Martin Feldstein, an economics professor at Harvard University, told Tom Keene and Sara Eisen Feb. 22 on Bloomberg Television’s “Surveillance.” The former economic adviser to President Ronald Reagan said there’s no chance of delaying the spending reductions.
Higher payroll taxes also are hurting companies including Wal-Mart Stores Inc., the world’s largest retailer, which last week projected that comparable-store sales in the 13 weeks ending April 26 will be little changed.
The tax increase that took effect this year may cause seven out of 10 Americans to curtail spending, especially on big-ticket items such as cars, according to a survey the National Retail Federation released last week.
“That clearly hurts consumption,” Feldstein said of the tax changes. “That is a significant hit to aggregate spending in the economy.”
For now, the Fed’s stimulus has raised household wealth. As the impact spreads, it “should be a positive for the stock market and a negative for the bond market,” Edelstein said. “I think that’s what we’ve already been seeing.”
The Standard & Poor’s 500 Index has risen 6.1 percent since the Fed announced an expansion of its bond-buying program on Dec. 12 and is up about 12 percent in the past 12 months. The yield on 10-year Treasuries was 1.96 percent at 5 p.m. on Feb. 22 in New York compared with 1.7 percent on the day of the Fed’s December meeting, according to Bloomberg Bond Trader data.
The third round of quantitative easing “is having a constructive effect on the economy by bringing down borrowing rates and supporting interest-sensitive sectors,” said Nathan Sheets, global head of international economics at Citigroup Inc. in New York who was formerly director of the Fed’s international finance division.
“The strengthening in housing kicks off positive wealth effects that support the efforts of households -- and banks as well -- to repair their balance sheets,” Sheets said. “In essence, many of the channels that dragged the economy down over the past six or seven years are being thrown into reverse.”