The U.S. economy continued to show signs of weakening in August, with the labor market experiencing a gradual downturn marked by slowing job growth and a rising unemployment rate. This trend may intensify as the federal government’s deferred resignation program, introduced in February, comes to an end on September 30. Despite these headwinds, there are indications that the job market could stabilize in the near term. Business sentiment surveys suggest hiring intentions are improving, and the Federal Reserve is expected to adopt a more supportive monetary stance in the coming months to bolster employment. n nAlthough inflation remains slightly above the Federal Reserve’s 2 percent target, the central bank’s dual mandate—balancing price stability with maximum employment—is shifting focus toward labor market support. With growing concerns about job losses outweighing inflation risks tied to tariffs, the Fed is likely to begin cutting interest rates, moving toward a neutral policy stance. While such cuts could lower short-term borrowing costs, mortgage rates may remain high due to the central bank’s ongoing reduction of asset-backed securities holdings. Additionally, potential declines in tariff revenue could worsen the fiscal outlook, possibly pushing long-term interest rates—including those on mortgages and government bonds—higher over time. n nCapital markets remained largely unchanged in August as investors awaited clearer economic signals. Long-term interest rates dipped slightly in response to expectations of looser monetary policy, a trend that continued into early September following a weak August jobs report. The Federal Open Market Committee is scheduled to meet again on September 16 to reassess policy direction. n nInternationally, the U.S. continues to attract significant foreign investment, which helps maintain favorable borrowing conditions for businesses, homebuyers, and governments. Fears that the global trade conflict beginning in April 2025 would disrupt capital flows have so far not materialized. Data from June shows a surge in net foreign inflows into long-term U.S. assets, suggesting that global investors still view American markets as attractive despite ongoing trade tensions. However, the full impact of trade policies may unfold over the coming months and years. n nAt the Fed’s annual Jackson Hole summit in late August, Chair Jerome Powell signaled a shift toward a more accommodative monetary framework. He announced the end of the “average inflation targeting” approach, under which the central bank previously allowed inflation to run above target to balance past shortfalls. The new stance implies a preference for keeping inflation near 2 percent without overshooting, reflecting a more cautious, dovish outlook. This change has contributed to lower projected interest rate paths. n nThe national labor market has slowed due to economic deceleration and policy uncertainty, resulting in reduced hiring. However, layoffs have remained relatively stable, limiting the rise in unemployment. Business surveys now indicate improved hiring expectations, particularly from the Federal Reserve Banks of Atlanta and Dallas, suggesting that labor market conditions could rebound if current trends hold and monetary policy becomes more supportive. n nIn contrast to the broader national trend, Texas has shown signs of economic recovery. Most metropolitan areas in the state experienced employment gains in July after declines in June. Survey data from the Federal Reserve Bank of Dallas reveals renewed optimism across major sectors. Year-over-year employment growth also indicates that Texas is outpacing the national average. n nStatewide, employment rose by 0.1 percent in July, exceeding the U.S. average. Every major Texas metro area saw monthly job growth except Houston and Lubbock. San Antonio and Brownsville-Harlingen recorded notable increases. Within industries, goods-producing sectors—excluding construction—suffered losses in June, with Mining and Logging showing a sustained decline, likely due to falling oil prices. Meanwhile, most service sectors added jobs, though Education and Health Services lagged despite recent national gains. n nLooking ahead, business outlooks in Texas are improving. The proportion of firms planning to hire over the next six months rose in services and retail, while remaining steady in manufacturing. Fewer manufacturers expect to reduce staff, though retail firms slightly increased plans to cut jobs. Overall, survey results point to a potential labor market recovery in the near term, though continued weakness in hiring could still push unemployment higher. n nHousing markets show mixed trends. The FHFA’s first-quarter 2025 house price index reveals a slowdown in national price growth, dropping from 4.8 percent to 3.7 percent year-over-year. In Texas, growth fell from 2.7 percent to 1.7 percent. Austin and San Antonio saw price declines of 0.9 percent and 0.2 percent, respectively, while Dallas and Houston posted gains of 0.6 percent and 2.3 percent. Mortgage rates dipped slightly in August, falling 16 basis points to 6.56 percent, but remain high. Elevated borrowing costs and broader economic sluggishness continue to dampen housing activity. n nThe mortgage spread—the difference between 30-year mortgage rates and the 10-year Treasury yield—narrowed by 6 basis points to 231, still well above the historical range of 150–175. This suggests that if capital markets normalize, mortgage rates could fall further relative to Treasury yields, potentially by 75 to 100 basis points. n— news from Texas Real Estate Research Center
