August Market Report: Answering 2 Big Economic Questions

The economy is now in a state where all it takes is one semi-surprising jobs report for mortgage rates to jag sharply in the right direction.

The early August report showed that U.S. employers added 114,000 jobs in July, which was less than expected, and unemployment rose to 4.3%, the highest level since 2021.

It’s all caused quite a bit of concern about the economy. 

“When people think the economy is going into a recession, they run for the hills, sell their stocks and go buy treasury securities because they’re ‘risk-free’ pulling yields and mortgage rates lower” says Zillow Senior Economist Orphe Divounguy. “But investors may have made too much of one single jobs report.” 

Following the report, major indexes suffered the biggest one-day losses in nearly two years; experts called for the Fed to issue an emergency rate cut, and searches for the word “recession” spiked.

Naturally, buyers and sellers have questions. Here are two that keep coming up.

Is a recession coming?

The unemployment numbers looked worse than they actually were for two reasons, according to Divounguy. First, that 4.3% rate contained a swath of temporary layoffs. Second, a persistent increase in the labor supply has also contributed to the increase in the unemployment rate.

'When more people enter the job market and don't find jobs right away, the unemployment rate goes up,' Divounguy says. “By no means does a higher unemployment rate translate to a crashing labor market. In fact, the U.S. economy is expanding, but it’s growing at a slower pace than it had been.”

While the labor market has been slowly cooling for the past couple of years, permanent layoffs remain low. Inflation is also moderating to the Fed’s target of 2%.

“It's a situation where the economy is cooling but is not crashing,” Divounguy says. “So recession fears may be overblown.”

We just saw mortgage rates fall. Will that continue?

“So long as the labor market remains on solid ground and permanent layoffs remain low, then mortgage rates aren't expected to decline much further in 2024,” says Divounguy. 

Since market expectations of a cooling economy and Fed interest rate cuts may already be reflected in current mortgage rates, rates may be already near their lowest point this year. 

“Those long-lead buyer clients who’ve been waiting in the wings are who need to hear this most,” Divounguy says. “Because it’s the popular narrative that Fed rate cuts mean mortgage rate cuts, we may all need reminding now and again: It’s the anticipation of Fed cuts that most often has the greater influence than the cuts themselves. That drop in mortgage rates you heard is on the way? It may already be here.”