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Economic and Market Review

By: Ryan McCarroll
Risk Analyst


The well publicized rise in interest rates during the past four months appears to have placed at least a temporary dent in the housing recovery’s momentum. New home purchases fell by just over 13% in July while new starts for single family homes were down 2.2%. In addition, the index for mortgage applications fell 13.5% to its lowest level since 2008. In spite of all this, these data points are volatile and can produce a considerable amount of noise. A more definitive trend will need to emerge before any conclusions should be drawn regarding the longer term impact on the housing recovery.

Meanwhile, auto sales, another sector sensitive to rising interest rates, showed continued strength with solid numbers in August. Total vehicle sales were just over 16 million units on an annualized basis. This was the highest reading in nearly six years and a 17% increase over 2012. Strong sales are one reason that S&P upgraded Ford’s credit rating to investment grade and changed GM’s outlook to positive.

The August employment report came in soft for the second straight month, increasing uncertainty regarding the timing of the Fed’s seemingly imminent “taper”--buying less than $85 billion in securities each month as part of a quantitative easing program. 169 thousand jobs were added compared with the 180 thousand expected by economists. The June and July figures were both revised downward by a combined 92 thousand jobs. As was the case in July, the unemployment rate inched lower to 7.3%, but the decrease is largely attributable to the decrease in the labor force participation rate. In fact, labor force participation is at its lowest level since 1978. With inflation concerns subdued for the moment, the employment market will continue to be the overriding concern for the Fed. All of this has some market participants thinking the decision to taper security purchases could be pushed to October or perhaps begin on a smaller scale.

In addition to soft employment readings, several other key question marks remain for economic growth in the near term. Perhaps most covered are the geopolitical risks surrounding the possible U.S. strike in Syria. This could have important implications on oil prices and consumer demand. The ongoing fight in Congress over the debt ceiling and whether to pass a resolution to fund the government should also cause near term volatility. Finally, the upcoming selection of the next Fed Chairman will begin to garner more attention and should add unwanted uncertainty.

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