Aaron Bruenger

The ADP Employment report was released today showing that private employers shed 254,000 jobs in September, worse than the -200,000 that was expected. The decline was the smallest since July of 2008, but still a troublesome number.


There are 150 million people in the workforce, and that number grows by about 1.5 million people per year - due to population growth. To keep pace with that, the US needs to create about 125,000 jobs a month. So, a loss of 200,000 jobs is actually means we are falling 325,000 jobs behind for just one month...which is enormous.


Now consider that nearly 10% of the work force is unemployed - that's 15 million people - a huge number of folks who are without jobs. If you haven't looked for work in four weeks, you are removed from the ranks of "officially unemployed" list. This brings the actual Unemployment rate to about 11%. If you consider those who have had to settle for part time work, because full-time positions were not available - it brings the real rate of unemployment to about 17%.

The market's positive spin when a lousy jobs number comes out, just because it beat expectations, is quite interesting considering historical numbers. During the past 20 years, the average growth rate has been 91,000 jobs per month - and the very best 10 years were from 1991 - 2000, when we averaged 150,000 per month.

The Federal Reserve Board has spoken by issuing a statement after their most recent meeting. From a market perspective, they said nothing. Rates will stay the same. The economy is improving from the severe downturn, but consumer consumption is restrained. This will make the recovery weak. We knew all of this going into the meeting. So, the question is, what does this mean to the markets? In reality, the markets hate surprises, so when the Fed does not give us any surprises, this is a good thing. This is true even when the news is bad. In this case the news was neutral.

If we look a bit deeper, we see that the Fed is moving into a balancing act stage. They must start to remove the stimulus from the equation before things get out of hand. But the economy and psyche of the markets is not strong enough to withstand even the news of such. Therefore, the Fed announced that they will continue purchases of mortgage-backed securities and Treasuries into the first quarter even though they were scheduled to end by the end of the year. This gives the Fed the flexibility to wind down purchases without making an announcement that the program is over.

The president of the St. Louis Federal Reserve Bank is worried about falling into a "trap" in which deflation remains a danger and home loan interest rates remain low for an extended period of time. To avoid that trap, he said recently in a speech that the Fed needs a new policy rule that makes clear how it's going to respond to the situation.

The Federal Reserve kept interest rates near zero on Wednesday and said the economy is improving. But the Fed also pointed out ongoing job losses could dampen a recovery. As a result, the Fed kept its federal funds rate, an overnight lending rate that guides rates on various consumer and business loans, in a range of 0% to 0.25%. Rates have been at that level since December.

The Federal Reserve also said it is slowing the pace of a program to lower mortgage rates and prop up the housing market. It will stretch out its goal of buying $1.45 trillion in mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae until the end of the first quarter of 2010.

As you may or may not know, Mortgage-Backed Securities (MBS) dictate long term home loan interest rates. When these bonds go up in value, home loan rates conversely go down.

Who is more likely to default on their home loan, someone with a high credit score or a low credit score? Research has found that homeowners with high scores when they apply for a loan are 50% more likely to "strategically default" -- abruptly and intentionally pull the plug and abandon the mortgage -- compared with lower-scoring borrowers. Check out findings from the report from this article from the Los Angeles Times.

High U.S. unemployment keeps pushing up the rate of mortgage delinquencies for both good and marginal credit borrowers alike. Even though the housing market and economy are still tentative, homebuilder Lennar Corp feels the housing market feels materially better than the hopelessness that had existed over the past few years.

Many experts point to low interest rates as one of the main reasons why the housing market has been able to reverse its downward trend. The Federal Reserve has been able to keep mortgage rates near historic lows, it's unclear how long that will last. There's considerable uncertainty beyond the fall because the Federal Reserve at some point will stop buying mortgage-backed securities that have helped to keep rates low. Economists widely believe the central bank will keep interest rates between 0% and 0.25% at the conclusion of its two-day meeting beginning today.

The government is spending tens of billions to incent consumers to spend their money purchasing homes, cars and even energy-efficient improvements to their houses. Certainly we are seeing the results of these programs. Last month the "cash for clunkers" program contributed to a 2.7% gain in retail sales. Existing and new home sales have also been strong for several months now. However, there is a debate as to the long-term efficacy of these programs.

There is no doubt that the results are encouraging but will these results help us move out of the recession? The answer we believe is yes. However, these programs will contribute to the "stop and start" recovery we are expecting to occur. When incentives end, there will be a noticeable drop in demand. We must understand the fact that the government can't keep up these incentives forever. In the long run, a sustainable recovery is all about a building of confidence and the incentives should help us do exactly that.