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[Getting Graphic] As Payroll Drops, The Fed May Overshoot The Sick Sector

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: LA Times

A gain of 75,000 in non-farm employment in May [BLS] [1] is less than half of what was expected. Analysts wonder whether the Fed can prevent a deep economic slowdown [LA Times] [2]. The benchmark 10-year treasury dropped below 5% on Friday indicating investor view the economy as weakening.

Bernanke’s seemingly hawkish views (anti-inflation) comments today upset the equity [3] markets. An analyst said Being inflation-vigilant when you’re acknowledging an economic slowdown is not what investors want.

There is concern that the Fed may still choose to raise rates at the June meeting anyway amid concerns of an inflation threat. Bernanke in a speech on Monday [4] said:

As had been expected, recent readings also indicate that the housing market is cooling, partly in response to increases in mortgage rates. To be sure, the data on home sales and construction have been somewhat erratic from month to month, reflecting weather conditions, statistical noise, and other factors. However, overall, housing activity has softened relative to the high levels of last summer, and the rate of house-price appreciation appears to have lessened. A slowing of the real estate market will likely have the effect of restraining other forms of household spending as well, as homeowners no longer experience increases in the equity value of their homes at the rapid pace seen in recent years.

According to the available data, business investment appears to have risen briskly, on net, so far this year. In particular, investment in nonresidential structures, which had been weak since 2001, seems to have picked up appreciably, raising the possibility that increased nonresidential construction may absorb some of the resources released by the slowing housing sector.

This seems to infer that the Fed thinks that the business sector will offset the drop in the consumer sector but the (seemingly always pessimistic) UCLA Anderson Forecast said:

UCLA Anderson Forecast Director Edward Leamer said all the speculation about what the central bank and its new chairman, Ben S. Bernanke, should do about rates was folly because of a real estate slowdown that was well underway.

“I don’t think the Fed, at this point, has much control,” Leamer said.

“We have a sick sector, the housing sector, and there’s not a whole lot of medicine the Fed can provide.”