Jobs, unemployment rate, inflation, economics, and interest rates oh my 😵‍💫

Every week we get a variety of data reports that give us an update on how the economy is doing.

Some are more important than others.

For example, reports on the labor market, inflation, and GDP (how our economy is measured) all have the potential to really move interest rates and the stock market.

In general, we're used to seeing stocks and bonds move in opposite directions. 

When people are confident about the economy, they usually go into growth mode and buy stocks.

As money flows into the stock market, it leaves the bond market and interest rates increase - trying to lure money back into bonds. This is just like when your bank account increases your interest rate and you're more incentivized to keep money in your savings.

The opposite is true when the economy looks like it might take a turn for the worse.

Investors get fearful, sell stocks, and buy bonds which have historically been a "safer" investment because they pay you a fixed amount of interest while you own them. 

Interest rates decrease because the bonds no longer need to incentivize people as much to put money in that market.

That's a 10,000 foot overview of how it usually works.

All roads lead to the Fed's rate cuts 😳

Nowadays, investors aren't necessarily focused on how the economy is growing when we get these economic reports.

Instead, they're trying to figure out if the report means the Fed is more or less likely to cut Interest rates.

A slower economy, more layoffs, declining prices, etc. would lead to the Fed cutting the Federal Funds Rate in order to stimulate the economy.

The Fed is more likely to raise interest rates or keep them elevated if the economy is growing, there's positive job growth, and/or prices are rising.

And you guessed it..if the Fed cuts rates the market expects the 10-Year Treasury and mortgage rates to decline and vice versa. Lower rates means cheaper borrowing costs and supercharged growth.

Investors turn their focus to the jobs report 🧐

Consumer spending is the largest factor in our economic growth - accounting for 68% of our GDP. This means that if people keep buying things at a growing rate, our economy will generally be growing as well.

To spend money (currently), you typically need a job providing you an income.

The Bureau of Labor Statistics (BLS) puts out a monthly job report called the non-farm payrolls that carries the most weight with investors.

With any report, the various economists estimate what they think we'll get on the report and then everyone reacts once the actual numbers are released.

It's very much like sports betting as you put money down up front expecting a certain outcome and then win or lose depending on what actually happens.

To give you an idea of how close the general consensus is compared to the official numbers, I've charted the difference every month since last December:

Missed expectations cause major moves 🎢

If jobs data comes in under the forecasted amount, it means fewer jobs were created than experts projected and the economy is considered to be weaker-than-expected.

This would imply more Fed rate cuts and mortgage rates usually decline following the news.

An important point here is that rates decline in anticipation of future rate cuts. You get the benefit of the cuts before they even happen.

On the other hand, a strong jobs report signals a hot job market and more reason for the Fed to keep rates where they are or raise them.

As you can see in the graphic above, the experts have only been close to the actual number one time in the past 13 months (November of 2024). 

In general, we've had a rollercoaster of a year because the data has come in so drastically different than expectations and mortgage rates have whipsawed because of it.

On top of that, 8 of the last 13 months were surprises to the up-side which generally pushed treasury yields and mortgage rates higher.

Hopefully, we'll get fewer surprises in 2025, but I wouldn't bet on it..

✅ Opportunities for real estate pros

There's a few main points that are important to take away from this information.

• 🤩 You grow your expertise by better understanding the "why" behind interest rates. You don't need to know every little reason behind the movement of rates, but having a basic understanding that rates are related to investors putting their money either in stocks or bonds and the implications of growth or recession is huge. At the very least, even if your clients don't understand it after you discuss it, they will feel more confident that you had an answer and trust you more.
  
  
• 🤑 Extreme expectations create opportunities. We've had 2 times in the past couple years where the markets expected 6 Fed rate cuts in the near future. Each of those times, mortgage rates declined significantly in advance of any actual rate cuts. People who seized the opportunity and took action got a much better deal than those who waited for the official rate cut.
  
  
• 🔮 We can't predict or control the reports. We can control our communication and actions before and after the reports. You don't need to start playing fortune teller and advising clients to take certain actions ahead of or after specific reports as you gamble which direction things will pan out. Instead, the point of all this is for you to help make your clients more aware of risks if they're close to going under contract or choosing to refinance. It's like a pilot letting the plane know there may be some turbulence ahead. The ride doesn't always get bumpy, but if it does, everyone's expecting it so fewer people get bent out of shape. Remember: while rates could go down, locked rates have no risk of rising and causing a client to miss out on accomplishing their goals.

Here's to growing your expertise in 2025 and making it the best year you've ever had! 🚀

Dr. Alex Stewart
Founder