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    Businesses added 208,000 jobs in September, better than expected, ADP reports

    Businesses added 208,000 for the month, better than the 200,000 Dow Jones estimate and ahead of the upwardly revised 185,000 in August, according to ADP.
    Trade, transportation and utilities saw a jobs gain of 147,000, while professional and business services and education and health services also posted large increases.

    The U.S. labor market showed strength in September, with private companies adding more jobs than expected, payroll services firm ADP reported Wednesday.
    Businesses added 208,000 for the month, better than the 200,000 Dow Jones estimate and ahead of the upwardly revised 185,000 in August.

    Those gains came even as goods-producing industries reported a loss of 29,000 positions, with manufacturing down 13,000 and natural resources and mining losing 16,000.
    However, a big jump in trade, transportation and utilities helped offset those losses, as the sector saw a jobs gain of 147,000.
    Professional and business services added 57,000, while education and health services picked up 38,000 and leisure and hospitality grew by 31,000. There also were losers within the services sector, as information declined by 19,000 and financial activities saw a loss of 16,000 positions.
    By size, companies employing 50-499 workers led with a 90,000 gain, while large firms added 60,000 and small businesses contributed 58,000.

    The tight job market saw another month of sizeable pay hikes, with annual pay trending up 7.8% from a year ago, according to ADP, which compiles the report in tandem with the Stanford Digital Economy Lab. Those changing jobs saw a median change in annual pay of 15.7%, down from 16.2% in August for the biggest monthly drop in the three years ADP has been tracking the data.

    ADP’s report comes two days before the closely watched nonfarm payrolls report issued by the Bureau of Labor Statistics.
    The estimate for the Friday report is a growth of 275,000 jobs. Though ADP revised its methodology over the summer, the August total, which was revised up sharply from the originally reported 132,000, was still well shy of the BLS count of 315,000 added jobs.
    Federal Reserve officials are watching the jobs numbers closely as the central bank looks to stem high inflation.

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    US National Debt Tops $31 Trillion for First Time

    America’s borrowing binge has long been viewed as sustainable because of historically low interest rates. But as rates rise, the nation’s fiscal woes are getting worse.WASHINGTON — America’s gross national debt exceeded $31 trillion for the first time on Tuesday, a grim financial milestone that arrived just as the nation’s long-term fiscal picture has darkened amid rising interest rates.The breach of the threshold, which was revealed in a Treasury Department report, comes at an inopportune moment, as historically low interest rates are being replaced with higher borrowing costs as the Federal Reserve tries to combat rapid inflation. While record levels of government borrowing to fight the pandemic and finance tax cuts were once seen by some policymakers as affordable, those higher rates are making America’s debts more costly over time.“So many of the concerns we’ve had about our growing debt path are starting to show themselves as we both grow our debt and grow our rates of interest,” said Michael A. Peterson, the chief executive officer of the Peter G. Peterson Foundation, which promotes deficit reduction. “Too many people were complacent about our debt path in part because rates were so low.”The new figures come at a volatile economic moment, with investors veering between fears of a global recession and optimism that one may be avoided. On Tuesday, markets rallied close to 3 percent, extending gains from Monday and putting Wall Street on a more positive path after a brutal September. The rally stemmed in part from a government report that showed signs of some slowing in the labor market. Investors took that as a signal that the Fed’s interest rate increases, which have raised borrowing costs for companies, may soon begin to slow.Higher rates could add an additional $1 trillion to what the federal government spends on interest payments this decade, according to Peterson Foundation estimates. That is on top of the record $8.1 trillion in debt costs that the Congressional Budget Office projected in May. Expenditures on interest could exceed what the United States spends on national defense by 2029, if interest rates on public debt rise to be just one percentage point higher than what the C.B.O. estimated over the next few years.The Fed, which slashed rates to near zero during the pandemic, has since begun raising them to try to tame the most rapid inflation in 40 years. Rates are now set in a range between 3 and 3.25 percent, and the central bank’s most recent projections saw them climbing to 4.6 percent by the end of next year — up from 3.8 percent in an earlier forecast.Federal debt is not like a 30-year mortgage that is paid off at a fixed interest rate. The government is constantly issuing new debt, which effectively means its borrowing costs rise and fall along with interest rates.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Why the Federal Reserve won't be so quick to ease up on its fight against inflation

    The consequences for the Fed not bringing inflation under control could be severe. Unemployment could spiral with the lowest earners sustaining the biggest impact.
    Economist Joseph Brusuelas said a worst-case scenario would look something like a 5.5% unemployment rate and 3.5 million jobs lost.
    That the Fed goes too far and stifles the economy too much is the principal fear of the central bank’s critics.
    “I really think the war on inflation has been won. We just don’t know it,” said Leuthold Group strategist James Paulsen.

    Jerome Powell, chairman of the US Federal Reserve, speaks during a Fed Listens event in Washington, D.C., US, on Friday, Sept. 23, 2022. Federal Reserve officials this week gave their clearest signal yet that they’re willing to tolerate a recession as the necessary trade-off for regaining control of inflation.
    Al Drago | Bloomberg | Getty Images

    Think of Federal Reserve Chairman Jerome Powell as a gymnast sprinting across the mat, spiraling, turning, churning, then twisting through the air and trying to make sure he still lands perfectly on his feet.
    That’s monetary policy in this era of rapid inflation, swooning economic growth and heightened fears over what could go wrong. Powell is that gymnast, standing on the economic version of an Olympic mat, and having to make sure everything goes right.

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    Because if things go wrong, they could go very wrong.
    “They have to stick the landing,” said Joseph Brusuelas, U.S. chief economist at RSM.. “It’s the lower end of the economic ladder that is going to bear the burden if the Fed doesn’t stick the landing correctly. They lose jobs and their spending goes down and they have to draw on savings and 401(k)s to make ends meet.”
    Consumers pressured by consistently rising prices already are dipping into savings to cover costs.
    The personal saving rate was just 3.5% in August, according to the Bureau of Economic Analysis. That was just above a 3% rate in June that was the lowest in 14 years, dating back to the early days of the financial crisis.

    Prices for everyday items have been surging at an extraordinary clip. Eggs were up 40% from a year ago in August, butter and margarine soared nearly 30% and gasoline, even with a 10.6% decline in the month, was still more than 25% higher than the same point in 2021.

    The consequences for not bringing that under control could be severe, just as they could be if the Fed goes too far in its quest to regain price stability for the U.S. economy.
    Brusuelas said a worst-case scenario would look something like a 5.5% unemployment rate and 3.5 million jobs lost as companies have to lay off workers to deal with the economic deceleration and surging costs that would come should inflation run rampant.

    The risk of failure

    As it stands, the economy is quite likely headed for a recession anyway. The question is how much worse it can end up.
    “It’s not a matter of are we going into recession or not, it’s when we’re going to have it and the degree of intensity of the recession,” Brusuelas said. “My sense is we’re in a recession by the second quarter of 2023.”
    The Fed cannot just keep raising rates as the economy weakens. It must hike until it reaches an equilibrium where it slows down the economy enough to correct the multifaceted supply/demand mismatches but not so much that it causes deeper, unnecessary pain. According to the Fed’s most recent outlook, policymakers expect to keep going into 2023, with benchmark rates about 1.5 percentage points from the current level.
    “If the Fed overdoes it, you’ll have a much deeper recession with higher unemployment,” Brusuelas said.
    That the Fed goes too far and stifles the economy too much is the principal fear of the central bank’s critics.
    They say there are tangible signs that the 3 percentage points of rate hikes so far in 2022 have accomplished their goal, and the Fed now can pause to let inflation recede and the economy recover, albeit slowly.

    “The Fed could quit today and inflation’s going to be back to acceptable levels next spring,” said James Paulsen, chief investment strategist at The Leuthold Group. “I really think the war on inflation has been won. We just don’t know it.”
    Paulsen looks at things such as falling prices for commodities, used cars and imported goods. He also said prices on technology-related items are declining, while retail inventories are rising.
    On the jobs market, he said the balance of payroll growth this year has come from the supply side of the economy that the Fed wants to stimulate, rather than the demand side that fueled the inflation explosion.
    “If they want to, they can cause a needless recession,” Paulsen said. “I just don’t know why they want to do that.”
    Paulsen is not alone in his criticism. There are spreading calls around Wall Street for the central bank to dial down its policy tightening and watch how the economy progresses from here.
    Wells Fargo head of equity strategy Christopher Harvey said the Fed’s messaging, particularly from Chairman Jerome Powell, that it is willing to inflict “some pain” on the economy is being interpreted as the central bank willing to keep going “until something breaks.”
    “What is troubling is the apparent downplaying of capital market signals as the Fed trudges toward its 2% inflation target,” Harvey said in a client note. “Therefore, those signals will need to get louder (i.e. even lower equities and wider spreads) before the Fed reacts. This also implies the recession likely will be longer/more severe than current fundamentals and market risk indicate.”

    Human costs

    No less an authority than the United Nations issued an agency report Monday in which the UN Conference on Trade and Development warned of the ramifications that the rate hikes could have globally.
    “The current course of action is hurting vulnerable people everywhere, especially in developing countries. We must change course,” UNCTAD Secretary-General Rebeca Grynspan told a news conference in Geneva, according to a Reuters account.
    Yet the data suggest the Fed still has work to do.
    The upcoming consumer price index report is expected to show that the cost of living continued to climb in September. The Cleveland Fed’s Nowcast tracker of the items in the broad-based basket of goods and services the Bureau of Labor Statistics uses to compute the CPI is showing another 0.5% gain excluding food and energy, good for a 6.6% year over year pace. Including food and energy, headline CPI is projecting to rise 0.3% and 8.2% respectively.
    While critics argue that those kinds of data points are backward-looking, the Fed faces an added optics issue after it downplayed inflation when it first started rising significantly more than a year ago, and was late to act.

    That puts the burden back on policymakers to keep tightening to avoid a scenario like the 1970s and early ’80s, when then-Chairman Paul Volcker had to drag the economy into a tough recession to stop inflation once and for all.
    “This is not the ’70s by any stretch of the imagination, for a whole lot of reasons,” said Steve Blitz, chief economist at TS Lombard. “But I would argue that they’re still being overly optimistic at which the inflation rate is going to decelerate on its own.”
    For their part, Fed officials have stuck to the company line that they are willing to do whatever it takes to halt price surges.
    San Francisco Fed President Mary Daly spoke emphatically about the human consequences of inflation, telling an audience Tuesday that she has been hearing about it from her constituents.
    “Right now, the pain that I hear, the suffering that people are telling me what they’re going through, is on the inflation side,” she said during a talk at the Council on Foreign Relations. “They’re worried about their day-to-day living.”
    Specifically addressing the wage issue, Daly said she one person told her, “I’m running fast and falling behind every single day. I’m working as hard as I can and I’m falling further behind.”

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    Economists Nervously Eye the Bank of England’s Market Rescue

    The Bank of England stepped in to save a critical market this week. Economists say it was necessary but also worry about the precedent.When the Bank of England announced last week that it would buy bonds in unlimited quantities in an effort to stabilize the market for U.K. government debt, economists agreed it was probably a necessary move to prevent a cataclysmic financial crisis.They also worried it could set a dangerous precedent.Central banks defend the financial stability of the nations in which they operate. In an era of highly leveraged and deeply interconnected markets, that means that they sometimes have to buy bonds or backstop lending to prevent a problem in one area from spiraling into a crisis that threatens the entire financial system.But that backstop role also means that if a government does something to generate a major shock, politicians can be fairly confident that the local central bank will step in to stem the fallout.Some economists say that is essentially what happened in the United Kingdom. Liz Truss, the new prime minister, proposed a huge package of tax cuts and spending during a period of already high inflation, when standard economic theory suggests governments should do the opposite. Markets reacted forcefully: Yields on long-term government debt shot up, and the value of the British pound fell sharply relative to the dollar and other major currencies.The Bank of England announced that it would buy long-term government debt “on whatever scale is necessary” to prevent a full-blown financial crisis. The move was particularly striking because the bank had been poised to begin selling its bond holdings — a plan that is now postponed — and has been raising interest rates in a bid to bring down inflation.Economists broadly agreed that the bank’s decision was the right one. The rapid rise in interest rates sent shock waves through financial markets and upended a typically sleepy corner of the pension fund industry, which, left unaddressed, could have carried severe consequences for millions of workers and retirees, destabilizing the country’s entire financial system.“You saw very substantial market dislocation,” said Lawrence H. Summers, a former U.S. Treasury Secretary who is now at Harvard. “It’s a recognized role of central banks to respond to that.”To some economists, that was exactly the problem: By shielding the U.K. government from the full consequences of its actions — both preventing citizens from feeling the painful aftereffects and keeping government borrowing costs from shooting higher — the policy demonstrated that central bankers stand ready to clean up messy fallout. That could make it easier for elected leaders around the world to take similar risks in the future.Those concerns eased somewhat on Monday when Ms. Truss partly backed down, reversing plans to abolish the top income tax rate of 45 percent on high earners.But she appears poised to go forward with the rest of her proposed tax cuts and spending programs, putting the Bank of England in a delicate spot.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Mortgage Market: The uptick in interest rates roiled Britain’s mortgage market, leaving many homeowners calculating their potential future mortgage payments with alarm.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.The “partial U-turn” from Ms. Truss “still leaves the Bank of England with a set of near-impossible choices,” analysts at Evercore ISI wrote in a note to clients. “The only way to alleviate this is for the government to take much bigger steps to restore credibility — but there is little sign this is imminent.”There’s a reason that the interplay between monetary policy and politics in the United Kingdom is garnering so much attention. Central banks have for decades closely guarded their independence from politics. They set their policies to either stoke the economy or to slow it down based on what was necessary to achieve their goals — in most cases, low and stable inflation — free from the control of elected officials.The logic behind that insulation is simple. If central bankers had to listen to politicians, they might let price increases get out of control in exchange for faster short-term growth that would help the party in power.Now, that independence is being tested, and not just in the United Kingdom. Central banks around the world are raising interest rates to try to fight inflation, resulting in slower growth and making it harder for governments to borrow and spend. That is likely to lead to tension — if not outright conflict — between central bankers and elected leaders.It is already beginning. A United Nations agency on Monday warned that the Federal Reserve risked a global recession and significant harm in developing countries, for instance. But the United Kingdom’s example is stark because the elected government is carrying out policy that works against what the nation’s central bank is trying to achieve.“One always worries that actions like these can affect incentives going forward,” said Karen Dynan, a Harvard economist who served as a top official in the Treasury Department under President Obama. “It’s basic economics: People respond to incentives, and fiscal policymakers are people.”Part of the issue is that it is hard for central bankers to single-mindedly focus on controlling inflation in an era when financial markets are fragile and susceptible to disruption — including disruptions caused by elected governments.Before 2008, the Fed had never used mass long-term bond purchases to calm markets in its modern era. It has now used them twice in the span of 12 years. In addition to last week’s moves, the Bank of England also turned to mass bond purchases to calm markets in 2020.Bank of England officials have stressed that the policies they announced last week are a temporary response to an immediate crisis. The bank plans to buy long-dated bonds for less than two weeks and says it will not hold them longer than necessary. The Treasury, not the bank, will be responsible for any financial losses. The bank said it remained committed to fighting inflation, and some economists have speculated that it could raise rates even more aggressively in light of the government’s growth-stoking policies.If the bank is able to hold to that plan, it could mitigate economists’ concerns about the longer-run risks of the program. If interest rates rise again and it gets more expensive for the government to borrow, Ms. Truss will still need to grapple with the costs of her proposed programs, just without facing an imminent financial crisis.But some economists warn that the Bank of England may find the situation harder to extricate itself from than it hopes. It may turn out that the bank needs to keep buying bonds longer than expected, or that it cannot sell them without threatening another crisis. That could have the unintentional side effect of giving the British government a helping hand — and it could demonstrate that it is hard for a big central bank to remove support from its economy when the elected government wants to do the opposite.Liz Truss, Britain’s prime minister, will still need to grapple with the costs of her proposed programs, but she won’t be facing an imminent financial crisis because of the Bank of England’s actions.Alberto Pezzali/Associated PressMs. Truss’s policies — particularly before her partial reversal on Monday — would work directly against the bank’s efforts to cool growth, stoking demand through lower taxes and increased spending. The rapid rise in bond yields last week suggested that investors expected inflation to rise even further.Under ordinary circumstances, these conditions would lead the Bank of England to do even more to bring down the inflation it had already been fighting, raising interest rates more quickly or selling more of its bond holdings. Some analysts early last week expected the bank to announce an emergency rate increase. Instead, the brewing financial crisis forced the bank to do, in effect, the opposite, lowering borrowing costs by buying bonds.While lowering rates and stoking the economy was not the point — just a side effect — some economists warn that those actions risk setting a dangerous precedent in which central banks can only tighten policy to control inflation if their national governments cooperate and do not roil markets in a way that threatens financial stability. That situation puts politicians more in the driver’s seat when it comes to making economic policy.Guillaume Plantin, a French economist who has studied the interplay between central banks and governments, likened the dynamic to a game of chicken: To avoid a financial crisis, either Ms. Truss had to abandon her tax-cut plans, or the Bank of England had to set aside, at least temporarily, its efforts to raise borrowing costs. The result: “The Bank of England had to chicken out,” he said.Policymakers have known for decades that when the government steps in to rescue private companies or individuals, it can encourage them to repeat the same risky behavior in the future, a situation known as “moral hazard.” But in the private sector, there are steps governments can take to offset those risks — regulating banks to reduce the risk of collapse, for example, or wiping out shareholders if the government does need to step in to help.It is less clear what monetary policymakers can do to prevent the government itself from taking advantage of the safety net a central bank provides.“There is a moral hazard here: You are protecting some people from the full consequences of their actions,” said Donald Kohn, a former Fed vice chair and a former member of the Bank of England’s Financial Policy Committee, who agreed that it is necessary to intervene to prevent market dysfunction. “If you think about the entities that benefited from this, one was the chancellor of the Exchequer, the government.”Some forecasters have warned that other central banks might have to pull back on their own efforts to fight inflation to avoid destabilizing financial markets. Some investors are speculating that the Fed will have to end its policy of shrinking government bond holdings early or risk stirring market turmoil, for instance.Not all of those scenarios would necessarily raise the same concerns. In the United States, the Biden administration and the Fed are both focused on fighting inflation, so any reversal by the central bank would probably not look like bowing to pressure from the elected government.Still, the common thread is that financial stability issues could become a hurdle in the fight against inflation — especially where governments do not decide to go along with the push to rein in prices. And how worrying the British precedent proves will depend on whether the Bank of England is capable of backing away from bond buying quickly.“Is this just an exigent moment that they needed to respond to, or does it give the fiscal authority room to be irresponsible?” said Paul McCulley, an economist and the former managing director at the investment firm PIMCO. “The question is who blinks.”Joe Rennison More

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    Job Openings Fell in August, but Turnover Was Little Changed

    Government data showed 10.1 million openings, a decline from 11.2 million in July. Overall hiring, quitting and layoffs were fairly steady.Employers continued to ease off the number of jobs they were hiring for in August, but not by much, adding to the picture of a labor market that’s cooling but still short of available workers.About 10.1 million positions were open at the end of the summer, down from 11.2 million in July, the Labor Department reported Tuesday. That still left 1.7 unemployed workers for each available job, around the highest proportion on record.The job openings rate — calculated by dividing the number of job openings by the sum of employment and open jobs — was 6.2 percent, down from a revised 6.8 percent in July. The number and share of people being hired and leaving their jobs remained about level.Federal Reserve officials have theorized that rather than prompting employers to lay people off, rising interest rates would instead subdue the economy by simply reducing their need for additional workers. So far, that’s happening — but very slowly.“Our perspective is really distorted,” said Diane Swonk, chief economist at the accounting firm KPMG. “It’s still not anything like what we saw prepandemic. It’s cooling from a boil to a rolling simmer. And that’s not enough.”Ms. Swonk referred to data released by the job search website Indeed, which shows a consistently elevated level of new job postings, even though demand for retail workers in particular has leveled off.“They’ve come off their peak, but they’re still plateauing at a high level,” Ms. Swonk said. The share of people quitting their jobs is also an indicator of workers’ confidence that employment opportunities abound. About 4.2 million people gave notice in August, slightly more than during the previous month. That left the rate of people quitting their jobs — the number of people voluntarily leaving their jobs divided by total employment — only slightly below the 3 percent it reached at the end of last year, the highest reading on record.One of the largest drops in openings came in the financial sector, where mortgage brokers have been losing work as rising interest rates are subduing the housing market, although openings in rental and leasing activities rose. Retail openings also dropped, as companies prepared for a softer holiday season.Even while slowing down job postings, companies have been holding on to workers. After rising slightly in the first half of the year, the number of initial claims for unemployment has been trending lower since midsummer as employers have tried to stay fully staffed. In the release by the Labor Department on Tuesday, layoffs ticked up slightly to 1.5 million in August, but remained lower than their historical average.“Simply put, companies slashed payrolls by more than was necessary during the height of the pandemic and are struggling to restore staffing levels to where they were before Covid-19 hit,” Bob Schwartz, an Oxford Economics senior economist, wrote in a note last week. More

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    Job openings plunged by more than 1.1 million in August

    Job openings in August totaled 10.05 million, a 10% drop from the 11.17 million reported in July and more than a million less than expected.
    The Job Openings and Labor Turnover numbers are watched closely by the Federal Reserve, which is trying to reverse runaway inflation that has been pushed by the tight labor market.

    The number of job openings plunged by more than a million in August, providing a potential early sign that the massive U.S. labor gap is beginning to close.
    Available positions totaled 10.05 million for the month, a 10% drop from the 11.17 million reported in July, according to a Bureau of Labor Statistics release Tuesday. That was also well below the 11.1 million FactSet estimate and was the biggest one-month decline since April 2020 in the early days of the Covid pandemic.

    The number of hires rose slightly, while total separations jumped by 182,000. Quits, or those who left their jobs voluntarily, rose by 100,000 for the month to 4.16 million.
    The Job Openings and Labor Turnover numbers are watched closely by the Federal Reserve, which is trying to reverse runaway inflation through a series of five interest rate increases this year that thus far have totaled 3 percentage points.
    One primary area of interest for the central bank has been the ultra-tight labor market, which had been showing about two job openings for every available worker. That ratio contracted to 1.67 to 1 in August.
    The job market has been a primary driver of inflation, as the outsized demand for the scarce labor pool has helped drive up wages sharply. Average hourly earnings rose 5.2% over the 12-month period through August. But adjusted for inflation, real earnings actually declined 2.8%.
    “Job openings took a major dive in August, falling by more than about 1 million, but they still total more than 10 million. That and other data point to a jobs market that’s still challenging for employers,” said Robert Frick, corporate economist at Navy Federal Credit Union. “But judging by the drop in openings and the high number of Americans who entered the labor force in August, almost 900,000, the worst of the tight labor market is over.”

    Health care and social assistance saw the biggest drop in vacancies, falling by 236,000. The “other services” category saw a decline of 183,000, while retail was down 143,000.
    Aligning labor supply with demand has been a big goal for the Fed, which uses rate increases to slow the flow of money through the economy. The labor market has shown little reaction to the moves, with weekly jobless claims recently hitting a five-month low and the unemployment rate at 3.7%.
    August did see a sharp bump in the labor force, which increased by 786,000, pushing up the participation rate by 0.3 percentage point to 62.4%, tied for highest of the year. The rate remains one full percentage point below where it was in February 2020, just prior to the pandemic.
    Markets still expect the Fed to push forward with a fourth consecutive 0.75 percentage point interest rate hike at its next meeting.
    Tuesday’s release comes ahead of Friday’s nonfarm payrolls report for September, which is expected to show a gain of 275,000, according to Dow Jones.

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    Mortgage mayhem sparks fears of a housing market crash in Britain

    There are growing fears of a housing market crash in the U.K., after a swathe of tax cuts announced by the government sent interest rate expectations soaring, driving up lending rates for homebuyers.
    A number of banks suspended mortgage deals for new customers, and many have now returned to the market with significantly higher rates.
    Oxford Economics estimates that if interest rates remain at the levels currently being offered, house prices are approximately “30% overvalued based on the affordability of mortgage payments.”

    U.K. mortgage rates have skyrocketed since Finance Minister Kwasi Kwarteng’s mini-budget on Sept. 23, prompting banks to pull mortgage products threatening a deepen an expected housing market downturn.
    Dan Kitwood | Getty Images

    LONDON — There are growing fears of a housing market crash in the U.K., after a swathe of tax cuts announced by the government sent interest rate expectations soaring, driving up lending rates for homebuyers.
    Finance Minister Kwasi Kwarteng’s so-called mini-budget on Sept. 23 spooked markets with £45 billion ($50.5 billion) of debt-funded tax cuts, triggering a massive spike in government bond yields. These are used by mortgage providers to price fixed-rate mortgages.

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    The Bank of England responded to the market mayhem with a temporary purchase program of long-dated bonds, which brought some fragile stability to the market. However, Oxford Economics Chief U.K. Economist Andrew Goodwin suggested that there could be more pain ahead — particularly when it comes to the housing market.

    “Though the BoE’s temporary bond buying programme triggered falls in swap rates, they remain high, and a number of banks have already responded by significantly increasing interest rates on their mortgage products,” Goodwin said in a note Friday.
    “A scenario whereby house prices crash, adding to the already-strong headwinds on consumer spending, is looking increasingly likely,” Goodwin added.

    ‘30% overvalued’

    Oxford Economics estimates that if interest rates remain at the levels currently being offered, house prices are approximately “30% overvalued based on the affordability of mortgage payments.”
    “The high prevalence of fixed rates deals will help to cushion the blow in terms of existing mortgagors, but it’s hard to see how a sharp drop in transactions and a marked correction in prices can be avoided,” Goodwin said.

    Kallum Pickering, senior economist at Berenberg, noted that the housing market had already begun a downturn in recent months, owing to a broad-based demand slowdown linked to rising borrowing costs and a hit to real incomes.
    “But following the panic selling in the gilt market and fears that the BoE could raise the bank rate to 6.0% by early next year, banks have started to pull mortgage deals in a rush,” Pickering said in a note Monday.
    A number of banks suspended mortgage deals for new customers, and many have now returned to the market with significantly higher rates.
    “Some banks have upped the rate offers on their five year fixed 75% loan-to-value mortgages to the 5.0-5.5% range, with close to 6% for new mortgages. That is almost 200bp above the August average for comparable mortgages,” Pickering added.

    Interest rate expectations

    Looking ahead, whether the fixed rates on mortgages remain elevated or begin to moderate will depend on the trajectory of interest rates expectations.
    These have come off previous highs of over 6% after the government U-turned on its plan to scrap the top rate of income tax, but analysts do not expect this to quell the market’s skittishness.

    The Bank of England has already hiked interest rates six times so far this year, from 0.25% at the end of 2021 to 2.25% currently. Markets are now pricing in an eventual rate of over 5% for most of 2023.
    This is likely to come as a shock to many households after years of low interest rates.
    DBRS Morningstar Senior Vice President Maria Rivas noted that given the combination of expected further interest rate rises and a slowing economy, banks will likely remain cautious when underwriting and pricing residential mortgages and other loan products in the months to come.
    “For U.K. borrowers in particular, we consider the challenges may become evident sooner rather than later, given the nature of the U.K. market, where the majority of mortgages are based on short-term fixed rates of 2 to 5 years,” Rivas said.
    Berenberg expects the eventual hike to average mortgage rates to be close to two percentage points. Pickering argued that this should not pose any “serious financial stability risks” to the U.K., given that British banks are well-capitalized and average household finances remain “solid” for now.
    “However, higher mortgage rates will amplify the housing downturn in the near term – hurting consumption via negative wealth effects – and drag on the recovery thereafter as households continue to pay a higher interest burden,” he said.

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    Less Turnover, Smaller Raises: Hot Job Market May Be Losing Its Sizzle

    Unemployment is low, and hiring is strong. But there are signs that frenzied turnover and rapid wage growth are abating.Last year, Klaussner Home Furnishings was so desperate for workers that it began renting billboards near its headquarters in Asheboro, N.C., to advertise job openings. The steep competition for labor drove wages for employees on the furniture maker’s production floor up 12 to 20 percent. The company began offering $1,000 signing bonuses to sweeten the deal.“Consumer demand was through the roof,” said David Cybulski, Klaussner’s president and chief executive. “We just couldn’t get enough labor fast enough.”But in recent months, Mr. Cybulski has noticed that frenzy die down.Hiring for open positions has gotten easier, he said, and fewer Klaussner workers are leaving for other jobs. The company, which has about 1,100 employees, is testing performance rewards to keep workers happy rather than racing to increase wages. The $1,000 signing bonus ended in the spring.“No one is really chasing employees to the dollar anymore,” he said.By many measures, the labor market is still extraordinarily strong even as fears of a recession loom. The unemployment rate, which stood at 3.7 percent in August, remains near a five-decade low. There are twice as many job openings as unemployed workers available to fill them. Layoffs, despite some high-profile announcements in recent weeks, are close to a record low.But there are signs that the red-hot labor market may be coming off its boiling point.Major employers such as Walmart and Amazon have announced slowdowns in hiring; others, such as FedEx, have frozen hiring altogether.Americans in July quit their jobs at the lowest rate in more than a year, a sign that the period of rapid job switching, sometimes called the Great Resignation, may be nearing its end. Wage growth, which soared as companies competed for workers, has also slowed, particularly in industries like dining and travel where the job market was particularly hot last year.More broadly, many companies around the country say they are finding it less arduous to attract and retain employees — partly because many are paring their hiring plans, and partly because the pool of available workers has grown as more people come off the economy’s sidelines.The labor force grew by more than three-quarters of a million people in August, the biggest gain since the early months of the pandemic. Some executives expect hiring to keep getting easier as the economy slows and layoffs pick up.“Not that I wish ill on any people out there from a layoff perspective or whatever else, but I think there could be an opportunity for us to ramp some of that hiring over the coming months,” Eric Hart, then the chief financial officer at Expedia, told investors on the company’s earnings call in August.Taken together, those signals point to an economic environment in which employers may be regaining some of the leverage they ceded to workers during the pandemic months.The State of Jobs in the United StatesEconomists have been surprised by recent strength in the labor market, as the Federal Reserve tries to engineer a slowdown and tame inflation.August Jobs Report: Job growth slowed in August but stayed solid, suggesting that the labor market recovery remains resilient, even as companies pull back on hiring.Factory Jobs: American manufacturers have now added enough jobs to regain all that they shed during the pandemic — and then some.Missing Workers: The labor market appears hot, but the supply of labor has fallen short, holding back the economy. Here is why.Black Employment: Black workers saw wages and employment rates go up in the wake of the pandemic. But as the Federal Reserve tries to tame inflation, those gains could be eroded.That is bad news for workers, particularly those at the bottom of the pay ladder who have been able to take advantage of the hot labor market to demand higher pay, more flexible schedules and other benefits. With inflation still high, weaker wage growth will mean that more workers will find their standard of living slipping.But for employers — and for policymakers at the Federal Reserve — the calculation looks different. A modest cooling would be welcome after months in which employers struggled to find enough staff to meet strong demand, and in which rapid wage growth contributed to the fastest inflation in decades.Too pronounced a slowdown, however, could lead to a sharp rise in unemployment, which would almost certainly lead to a drop in consumer demand and create a new set of problems for employers.Leila and David Manshoory have struggled for months to recruit workers for their fast-growing skin care and beauty brand, Alleyoop. In recent weeks, however, that has begun to change. They have begun to get more applications from more qualified candidates, some of whom have been laid off by other e-commerce companies. And notably, applicants aren’t demanding the sky-high salaries they were last spring.“I think the tables are turning a little bit,” Mr. Manshoory said. “There are people who need to pay their bills and are realizing there might not be a million jobs out there.”Alleyoop, too, has pared its hiring plans somewhat in preparation for a possible recession. But not too much — Mr. Manshoory said he saw this as a moment to snap up talent that the three-year-old company might struggle to hire in a different economic environment.“You kind of want to lean in when other people are pulling back,” he said. “You just have more selection. There’s a lot of, unfortunately, talented people getting let go from really large companies.”The resilience of the labor market has surprised many economists, who expected companies to pull back on hiring as growth slowed and interest rates rose. Instead, employers have continued adding jobs at a rapid clip.Klaussner Home Furnishings, which has about 1,100 employees, is testing performance rewards to keep workers happy rather than racing to increase wages.Eamon Queeney for The New York Times“There are some signs in the labor market data that there’s been a bit of cooling since the beginning of the year, or even the spring, but it’s not a lot,” said Nick Bunker, director of North American economic research for the career site Indeed. “Maybe the temperature has ticked down a degree or two, but it’s still pretty high.”But Mr. Bunker said there was evidence that the frenzy that characterized the labor market over the past year and a half had begun to die down. Job openings have fallen steadily in Indeed’s data, which is more up to date than the government’s tally.And Mr. Bunker said the decline in voluntary quits was particularly notable because so much recent wage growth had come from workers moving between jobs in search of better pay.Recent research from economists at the Federal Reserve Banks of Dallas and St. Louis found that there had been a huge increase in poaching — companies hiring workers away from other jobs — during the recent hiring boom.If companies become less willing to recruit workers from competitors, and to pay the premium that doing so requires, or if workers become less likely to hop between jobs, that could lead wage growth to ease even if layoffs don’t pick up.There are hints that could be happening. A recent survey from another career site, ZipRecruiter, found that workers had become less confident in their ability to find a job and were putting more emphasis on finding a job they considered secure.“Workers and job seekers are feeling just a little bit less bold, a little bit more concerned about the future availability of jobs, a little bit more concerned about the stability of their own jobs,” said Julia Pollak, chief economist at ZipRecruiter.Some businesses, meanwhile, are becoming a bit less frantic to hire. A survey of small businesses from the National Federation of Independent Business found that while many employers still had open positions, fewer of them expected to fill those jobs in the next three months.More clues about the strength of the labor market could come in the upcoming months, the time of year when companies, including retailers, traditionally ramp up hiring for the holiday season. Walmart said in September that this year it would hire a fraction of the workers it did during the last holiday season.The signs of a cool-down extend even to leisure and hospitality, the sector where hiring challenges have been most acute. Openings in the sector have fallen sharply from the record levels of last year, and hourly earnings growth slowed to less than 9 percent in August from a rate of more than 16 percent last year.Until recently, staffing shortages at Biggby Coffee were so severe that many of the chain’s 300-plus stores had to close early some days, or in some cases not open at all. But while hiring remains a challenge, the pressure has begun to ease, said Mike McFall, the company’s co-founder and co-chief executive. One franchisee recently told him that 22 of his 25 locations were fully staffed and that only one was experiencing a severe shortage.A Biggby Coffee store in Sterling Heights, Mich. Until recently, staffing shortages at some locations were so severe that many of the chain’s 300-plus stores had to close early some days.Sarah Rice for The New York Times“We are definitely feeling the burden is lifting in terms of getting people to take the job,” Mr. McFall said. “We’re getting more applications, we’re getting more people through training now.”The shift is a welcome one for business owners like Mr. McFall. Franchisees have had to raise wages 50 percent or more to attract and retain workers, he said — a cost increase they have offset by raising prices.“The expectation by the consumer is that you are raising prices, and so if you don’t take advantage of that moment, you are going to be in a pickle,” he said, referring to the pressure to increase wages. “So you manage it by raising prices.”So far, Mr. McFall said, higher prices haven’t deterred customers. Still, he said, the period of severe staffing shortages is not without its costs. He has seen a loss in sales, as well as a loss of efficiency and experienced workers. That will take time to rebuild, he said.“When we were in crisis, it was all we were focused on,” he said. “So now that it feels like the crisis is mitigating, that it’s getting a little better, we can now begin to focus on the culture in the stores and try to build that up again.” More