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As US Economy Stagnates, 30-year Mortgage Rate Soars

Published: August 23, 2023
A for sale sign is seen in front of a home on May 30, 2019 in Miami, Florida. (Image: Joe Raedle/Getty Images)

According to S&P Global’s U.S. Composite PMI Index which was released on August 23 and tracks manufacturing and service sectors, the U.S. economy stagnated in August, while the Mortgage Bankers Association (MBA) announced that the 30-year mortgage rate soared to its highest level since December 2000, painting a difficult picture for the U.S. economy in the coming months. 

In August, S&P’s PMI Index fell to a reading of 50.4, down from 52 in July, the largest drop since November 2022.

While August’s performance was the seventh straight month of growth for the U.S. economy, it was only slightly above the 50 level, the level that separates expansion and contraction.

The worrying metric is being blamed on weak consumer demand for both goods and services.  

Service sector business activity growth, an engine of the U.S. economy, was the slowest since February at 51.00 in August, and the Manufacturing PMI fell even deeper into contraction territory at 47.0 down from 49.0 in July, the fourth straight month of contraction. 

Chris Williamson, chief business economist at S&P Global Market Intelligence told Reuters, “A near-stalling of business activity in August raises doubts over the strength of U.S. economic growth in the third quarter. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.”

In recent months a strong labor market and resilient consumer spending has eased fears of a recession, which led to upward revisions of GDP growth forecasts. However, this more recent data has revealed an increasingly reserved picture. 

Meanwhile, weakening consumer demand is hitting revenues for businesses, as new business and orders contracted for companies across all sectors.  

“New business in the service sector declined for the first time in six months, falling to 49.2 from 51.0 the month prior,” Reuters reported. 

Both manufacturing and service sector businesses have tamed price hikes in a bid to attract more customers and have slowed hiring to compensate for soaring input costs.

The Fed is expected to see these numbers as favorable as it aims to cool activity in a bid to address inflation.


30-year mortgage rate soars

Meanwhile, the most popular mortgage product in the U.S., the 30-year mortgage, saw its rate soar to levels not seen in over two decades. 

“The Mortgage Bankers Association said the average contract rate on a 30-year fixed-rate mortgage climbed 15 basis points to 7.31% in the week ended Aug. 18,” Reuters reported. 

In an otherwise resilient, albeit struggling economy, the housing market has stood out as the sector most impacted by the Fed’s aggressive interest rate hikes as it aims to tame inflation. 

However, borrowing costs are soaring, causing home sales to tumble all last year and an expected recovery this year has yet to materialize. 

Sales of previously owned homes, accounting for the majority of U.S. residential real estate transactions, fell for a second month in July to the lowest pace since January.

The MBA data indicates that an improvement is still some ways away.

Joel Kan, MBA’s deputy chief economist, said, “Homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power. Low housing supply is also keeping home prices high in many markets, adding to the affordability hurdles buyers are facing.”

In addition, applications to refinance existing loans fell to their lowest levels since December, MBA data revealed.

The vast majority of homeowners are paying rates struck before the Fed began hiking interest rates in 2022, resulting in lower refinancing activity which is also contributing to the lack of housing supply as there is no incentive to move. 

Reuters contributed to this report.