It has been a few months now since the Federal Reserve started its monetary tightening journey. The fed funds rate has been pushed up by three straight hikes of 75 basis points each, with more rate increases planned in the months ahead. Fed Chairman Jerome Powell's goal is to slay inflation and cool the labor market. How is that working out so far? In my view, most of the impacts have hit the wrong targets.
Let's start with the housing sector. Housing activity has been slammed as the average 30-year mortgage rate has gone from slightly more than 3% to begin the year and is now approaching 7%. Mortgage applications have dropped nearly 30% from a year ago and inventory continues to grow, as do cancellation rates for home builders. Applications to refinance have fallen a huge 84% from the same time last year.
Durable goods and the automotive sectors are taking hits as well as loan rates rise and as the consumer has lost considerable buying power to the ravages of inflation for five straight quarters and counting now. Shares of used-car seller CarMax (KMX) lost a quarter of their value in trading on Thursday after the company reported a debacle of the second quarter that badly missed both top- and bottom-line expectations. Unit sales fell more than 10% on a year-over-year basis while provisions for loan losses jumped $40 million.
Powell's efforts don't seem to be affecting the jobs market yet, at least on the surface. We have had a couple robust monthly jobs reports from the Bureau of Labor Statistics over the summer and the weekly unemployment claims numbers are back down to pre-pandemic levels. That said, I think the strength in the jobs markets is significantly overstated.
While the BLS did record 526,000 jobs created in July and another 315,000 more in August, there are disturbing trends if one digs into the numbers. As I have stated numerous times in recent months, Americans are working a record number of second part-time and in some cases full-time jobs in order to make ends meet as inflation has eroded their buying power. This theme was cited by Liz Sonders, the chief investment strategist at Charles Schwab, in the Financial Times earlier this week.
Sonders noted that the government's Household Survey showed 442,000 jobs created in August. However, if you account for part-time jobs in the survey, full-time jobs actually shrunk by just over 240,000 positions. August was the third straight month this situation has occurred. This trend is also playing out in the average work week, which either has flat-lined or fallen in five of the past six months.
It was reported on Thursday that PepsiCo (PEP) potentially is looking to implement significant layoffs. I think this will be a theme in the fourth quarter as companies try to maintain profit margins against ebbing demand, inflation and continued supply chain issues.
To summarize, my biggest fear is the Federal Reserve will overcorrect and overlook the emerging weakness in some of jobs numbers. This could send the country into a significant recession and push equities deeper into the red. Fed governors have been out lately and making speeches assuring the public they can get inflation under control without deep-sixing the economy. Color me a skeptic. After all, this is the same inept crew that assured us that inflation was temporary and transitory throughout most of 2021, as did most of the current administration.
My apologies for ending the third quarter on a sour note, but my view is both the economy and markets will remain under a dark cloud at least through the end of 2022. Investors should act accordingly.