Mortgage Credit News by Louis S Barnes - June 4, 2021

The all-important employment report due on the first Friday of each month arrived this morning with a soft thud. Another half-million jobs in May, mostly recovered ones is good news, but way below forecasts.
So, less fear of inflation, overheating, and a Fed retreat, the 10-year T-note slipping to the bottom of its four-month range. Please don’t tell anybody, but if we get significant news of weakness, long-term rates can fall.
The job news was not weak, just slower than hoped and feared, and the slowness confirmed by the twin ISM surveys of purchasing managers. The manufacturing survey rose from smoking hot 60.0 to blazing 61.2, and the service sector at the hottest ever measured 64.0, but remember that these surveys reflect the change in activity from the prior month, not level. Inside the overall survey are measures of separate economic aspects, and the employment sector in each report decreased in May, respectively to softer 50.9 and 55.3.
Below is a new theory of jobs, the economy, and housing -- but before that, fire another arrow at the inflation worrywarts.
Inflation -- begin with micro! Not the numbing math of microeconomics, but merchants and their customers. Government agencies and investment firms generate fountains of aggregate data on the economy, which is the sum of individual behavior. But aggregate thinking -- productivity, expectations, employment -- has failed the test of predictive value for at least 25 years. So look elsewhere. Smaller, local, storefront.
The best economist I know, Rich Wobbekind at the Leeds School at CU, conducts annual research on the state of Colorado’s economy. He is a model of beginning at the beginning: he and his students scour the state all year long, one sector at a time, asking “How is business, and what are your plans?” Then they aggregate to a state of the state. His teams do not begin with the Fed, or inflation or interest rates, or Congress and spending and taxes; they learn about those issues from the affected businesses.
Inflation mechanics. Most businesses in the last year have clanked into a Covid-induced “supply shock” of some kind, and the routinely resulting pop in prices, profitable to some but a cost to somebody else. “Elasticity” is the term for market response by both suppliers and consumers: how quickly will a price increase cause an increase in supply, and/or decrease in consumption? Substitution appears from thin air, new suppliers not in the system (fracking), and consumers shifting to other products (to ham from scarce beef).
For a supply shock to become sustainable inflation, rigidity must overtake elasticity. Welcome to the 1970s: long lags to bring on new energy supply and to retire inefficient consumption, and the US labor market free of foreign competition. Voila: wage-price spiral, chasing each other upwards.
Not today. Post-Covid elasticity is rapidly changing the tension in supply chains for everything, rubber-banding from tight to loose to tight. Given start-stop demand impossible to forecast, the same for supply, we’re going to live for a year in herky-jerky over- and under-supply as businesses and their customers recalibrate to optimum supply chains.
A new era for jobs? Beware all announcements of new eras. But once in a while we have been in one for a long time but couldn’t see it, until we’re overrun by it.
Two regional Federal Reserve banks in the last week published new thinking on the job market. San Francisco says employment is weaker than it looks, Dallas says tighter. Do we now have blue versus red Feds? The twelve regionals are mirrors of America at the Fed’s 1912 founding: the only one west of Dallas is SF. West-coast SF has easily the most liberal attitude, and although Dallas is in Texas, its president Kaplan is as straight as a pipeline.
Both are correct and mistaken. Both note the extraordinary drop in the US workforce, during Covid crashing roughly 8.5 million workers -- almost as many and faster than in the Great Recession. SF says that means loose, Dallas says tight because hiring is strong if you have the right skills, and the losses are due to events like bulging retirements. Dallas gives heavy weight to businesses saying they are having a hard time hiring, thus will have to pay more, and inflation yadda-yadda. The strange part of the Dallas research (chart below) is its discovery of unprecedented change, and then ignoring its implications.
This is big: Dallas found in July 2020 that 19.8% of unemployed workers were not willing return to the same job, same pay and hours. Ten months later, 30.9% said no.
SF took a different angle, measuring the deviation in employment data now from the onset of Covid -- the change from a healthy economy and normal as we have known it to something else (chart below). SF concurs with Dallas in the extreme difficulty of businesses to hire in some categories, but also found a dozen categories on the slack side.
New theory. Since we don’t and can’t know how many of the Covid shocks will be persistent, or truly durable, we get to guess. The best fun.
Covid conducted an impossible experiment: under no other circumstances could so many workers be sent home to work or to sit for an entire year, and think about their work -- past, present, and future. With a year to experience alternatives, a lot of workers locked out of face-to-face jobs (retail, restaurant, hospitality...) have decided to do something else. And a many times more got to experience a year of work without going to the office.
Pre-Covid we were busy the way we had always been, but in just the last few years our work and socialization changed too fast to perceive or culture to adapt. Economists suffer with job-classification relics from the 1950s, inconceivably under-measuring IT -- the dominant, fastest-growing, and best work in the economy, and untouched by Covid. What is IT work? Software engineer? Hardly. Would someone please ask the workforce, how many of you do your work on a screen? Or handheld? Versus twenty years ago?
We have had the ability to work remotely for at least 40 years -- phones with little TV screens. says that “teleconference” became a word in 1952, and in common use by 1974. But we and our employers preferred going to the office, except for a few happy-solos. Work has been the same, but our lives changed. In our earbuds and phones, we are not present anywhere, instead teleporting to alternate physical realities. That’s not a driver in the car beside you, just a phone; that’s not a human on the bike ahead of you, just a pair of buds.
In the last very few weeks, vaccines working, masks off, opened up, these words came from many managements: get back in here to work and bring all that gear with you. Now.
The resistance from workers is astounding. Covid gave us a year to apply our new e-lives to our work. If we work on-screen, who cares where it is? We do need a little more space at home. This IT-work shift is the only explanation for the nationwide explosion in demand for single-family homes, and not for condos, apartments, or rentals. Covid is disappearing but housing still roaring, which gives the lie to Covid-fright driving people to the countryside. We are leaving the most dense parts of cities for the countryside because that’s where we can find more square feet for the screens.

The 10-year T-note in 2021, the red extension today’s trading after the just-okay report on jobs:

From the Dallas Fed, a survey of those employed pre-Covid and during Covid, but not as of the month surveyed:

From The San Francisco Fed. The measurement scale is at the bottom, the numeric shifts from historically neutral to more/less “slack” are standard deviations from the mean -- BIG shifts. However, the data is already obsolete, taken from March employment, the most recent availability of all labor data. Note the complete absence of IT: