All posts by joel

May New and Existing Home Sales and April Housing Prices

KEY DATA: New Home Sales: +2.9%; Existing Home Sales: +1.1%; FHFA Prices (Over-Year): +6.8%:

IN A NUTSHELL: “The slowing in the housing market may be ending as demand is picking up and prices keep surging.”

WHAT IT MEANS: The housing market has been a puzzle recently, with sales and starts tumbling. That may no longer be the case. New home sales jumped up in May and the gain was on top of a sharp upward revision to the April sales pace. The rise in purchases over the year was nearly 9%, indicating that conditions are indeed getting better. That said, the increases were not well distributed across the country. The robust surge in sales in the West and strong gain in the South were almost entirely wiped out by double-digit declines in the Northeast and Midwest. As for prices, they hit record highs. The nearly 17% rise from the May 2016 median price level undoubtedly overstates the gain, so let’s don’t get too carried away. Nevertheless, supply remains limited and it is likely that the pressure that has been building for so long on prices will not go away anytime soon.

Earlier this week, two other reports on housing were released. The National Association of Realtors released their report on existing home demand and it too showed that demand is rebounding. Unlike the new home numbers, sales rose across the nation. And similar to the new home market, a lack of supply is keeping pressure on prices, which were up nearly 5% over the year.

There are many different reports on home prices, which is difficult to quantify given the changes in prices don’t necessarily measure the rise or fall in the cost of the same unit. Still, all the indices are showing the same thing: Prices are on the rise. The Federal Housing Finance Agency’s index posted another sharp increase in April and over the year. This index had decelerating during most of 2014 but has been on a slow but steady rise since.

MARKETS AND FED POLICY IMPLICATIONS: I don’t know how many times I have written that if it isn’t for sale, it is hard to buy and the housing market is clearly suffering from a lack of inventory. Just today I was cold-called by a realtor asking if I was interested in selling my house. That is how desperate things have gotten. Locational mobility has declined sharply and even those whose homes are now above water are hesitant to sell. Builders face cost and regulatory issues and those factors, plus more rational lending practices, is keeping new construction down. There is no simple solution to the problem, so don’t expect housing sales to surge. What should continue to rise are prices. For the Fed, that is good news as it will keep non-food and energy consumer costs from decelerating further and allow for additional rate hikes this year, assuming the economy keeps growing at a moderate pace. Investors, though, don’t seem to worry about economic fundamentals, so what, if anything, will slow the markets is unclear.

May Housing Starts and June Preliminary Consumer Confidence

KEY DATA: Starts: -5.5%; 1-family: -3.9%; Permits: -4.9%; 1-Family: -1.9%/ Confidence: down 2.6 points

IN A NUTSHELL: “The downward trend in home construction does not bode well for growth either this quarter or this year.”

WHAT IT MEANS: Business leaders and owners, whether they are involved with small or big businesses, are exuberant. But the optimism doesn’t seem to be translating into surging economic activity. The latest signal that the economy is bumping along comes from the home construction numbers. Housing tarts fell sharply in May, with both single-family and multi-family activity declining. This was the third consecutive decline in activity. There were big reductions in home building in the Midwest and South, while conditions were flat in the Northeast. Only the West posted a gain, and it wasn’t anything great. The level of starts is the second lowest over the past eighteen months. While permit requests are falling as well, they are still running a little above starts, so we might see some improvement in construction in the next couple of months. Still, don’t expect the rate to be anything great.

Consumer confidence continues to fade. The University of Michigan’s Consumer Sentiment index fell fairly sharply in the first part of June. Both the current conditions and expectations components were down. Consumers are still quite optimistic, but the bloom is off the rose when it comes to the euphoric outlook that people had after the election. Indeed, the expectations index was the lowest since October 2016 and is up only modestly since last June. The current conditions index is actually below its June 2016 number. As for inflation, while near-term expectations were stable, people now believe inflation will be higher over the next five years. That was surprising given the recent slowing in price increases. 

MARKETS AND FED POLICY IMPLICATIONS: I have been expecting second quarter growth to be pretty solid, somewhere in the 3% range. But the data that have come in recently raise doubts whether that handle could be reached. Housing has been a key driver of growth over the past two quarters, but that doesn’t look like it is the case during the current quarter. In addition, the slide in vehicle sales doesn’t bode well for second quarter consumption. And with businesses waiting for some indications about the shape of tax changes, we shouldn’t expect capital spending to be great either. Put that all together and I suspect most forecasters will be marking down their second quarter GDP growth estimates. I am. That is important because now that the Fed has moved twice this year, we need some economic strength to have confidence that process will continue. Living in Philadelphia, I have learned to “trust the process”, but Fed policy is different from sports management. The Fed appears to want to continue raising rate at a steady pace and once it begins shrinking its balance sheet, to do so consistently as well. For both of those things to happen, the economy has to expand at least at the trend rate of roughly 2% to 2.25%. We may not get there during the first half of the year if second quarter growth turns out to be 2.5% or less. That cannot be ruled out. As for investors, there is no reason to be bullish unless you think there will be significant tax changes, be it real reform or the more likely tax cuts (the two are very, very different). Given the chaos in Washington, you tell me what is going to happen and we both will know.

May Producer Prices and Small Business Optimism

KEY DATA: PPI: 0%; Over-Year: +2.4%; Goods: -0.5%; Energy: -3%; Services: +0.3%/ NFIB: Unchanged

IN A NUTSHELL: “With inflation at reasonable levels and small businesses optimistic, tomorrow the Fed can do what it is expected to do, which is raise rates again.”

WHAT IT MEANS: The Fed is starting its two-day meeting today and it would take a blockbuster number for the Fed to change course. Today’s reports don’t qualify as they were in line with what we all know and expect from the data: Inflation is not a threat but business leaders are exuberant. Wholesale costs were flat in May as declining food and energy prices offset moderate increases in other goods and services. Excluding energy, goods costs were up moderately with the pace over the year pretty much at the Fed’s target. Indeed, if you look at the details and the special indices, most rose since last May by somewhere between 1.5% and 2.5%. In other words, at least when it comes to producer prices, inflation is right where it needs to be for the Fed to make any move it wants to make.

If inflation is pretty much on the mark, what about growth? The disappointing first quarter will likely be followed by a better second quarter. But going forward, it will take businesses expanding more aggressively to move the expansion into higher (not necessarily high) gear. If you believe the business optimism numbers, the corporate sector is ready and willing to do its part. We already knew that CEO confidence was soaring and that exuberance is being matched by small business owners. The National Federation of Independent Business’ Confidence index was flat in May. However, that is misleading. It remained near record highs. Respondents think it is a great time to expand and they are extremely hopeful that business conditions and earnings will improve. They are hiring and hope to hire more workers, but they cannot find qualified applicants. No surprise there.

MARKETS AND FED POLICY IMPLICATIONS: The Fed will announce its decision tomorrow afternoon and we are likely to see another tick up in rates. The markets have given the FOMC a free pass so it might as well take it. But it isn’t just the funds rate that will be watched. It is clear the members want to start reducing the Fed’s balance sheet and we need to look for any signals on when that might start. We need to also watch for indications that the process of normalization will continue on a consistent basis. The view on the economy is important in making any judgment on how many more times the Fed may move this year. Today’s data should have made few waves with investors. It’s tomorrow’s statement, press conference and economic projections that most people will be watching closely.

May NonManufacturing Activity, Employment Trends and Revised First Quarter Productivity

KEY DATA: ISM (NonManufacturing): -0.6 point; Orders: -5.5 points; Hiring: +6.4 points/ Employment Trends: +0.7%; Productivity: 0% (up from -0.6%)

IN A NUTSHELL: “The economy is neither accelerating nor slowing, but the labor market is looking up.”

WHAT IT MEANS: The Fed is meeting next week and since the members continue to say they are data driven, we need to look closely at the last set of numbers that will be released before the decision is released on June 14th. One of the more important private sector numbers is the Institute for Supply Management’s (ISM) reports on manufacturing and nonmanufacturing. Last week, ISM found that manufacturing production moderated in May. Today the supply managers indicated that the remainder of the economy, which is most of the economy, also slowed. The details of the report, however, seemed to point to continue decent growth in this sector. Orders grew much more slowly, but they had surged in April, so the level is still quite solid. Indeed, they were up enough to cause backlogs to expand and firms to hire a lot more workers.

While the May jobs report was less than many expected, realistically, it was what should have been expected. The huge ADP payroll gain forecast created a bullish view of the number that dominated the discussion. But as noted on Friday, the report still points to a solid labor market and today’s numbers reinforce that view. Not only did the ISM hiring index jump in May but so did the Conference Board’s Employment Trends Index. The Chief Economist said it best: “Employment will likely grow fast enough to continue tightening the labor market.”

If the economy is to accelerate to the 3% or more growth that the administration projects, productivity will have to surge. While the government revised upward the first quarter number, on a year-over-year basis, the 1.2% rise is half as fast as it needs to be to reach the growth target.

MARKETS AND FED POLICY IMPLICATIONS: With the employment report behind us, the next two big ones before the FOMC announcement are retail sales and consumer prices. They will be released the morning of the 14th and it is not likely they will be so disturbing that the Fed will not raise rates. For those at the Fed who may have been concerned about the jobs report, today’s data should calm the weak kneed. The labor market is just fine. In addition, the economy is growing at a pace enough to create more jobs and reduce the unemployment rate further. The only “worry” is the decline in energy costs, which is pushing inflation further away from the target. Thankfully, we haven’t seen cut backs in the energy patch and it was that sector’s downturn that slowed growth significantly. But the real question is when will the next rate hike occur? Consumers are becoming debt burdened but wage gains remained stubbornly low. Uncertainty about government policy is hardly helping businesses make expansionary long-term plans and that too is likely slowing things. And finally, the magic of sequestration is keeping government spending in line and the next budget is a huge question mark, so it is hard to see where fiscal policy will help out. Put that together and 2017 looks like it will come in at trend, maybe 2¼%, enough to support at least one more increase after next week’s likely hike. Rate hikes don’t seem to worry investors. Actually nothing seems to worry investors and today’s data should not do anything to cause concern to suddenly appear.

May Employment Report and April Trade Deficit

KEY DATA: Jobs: +138,000; Private: +147,000; Revisions: -66,000; Unemployment Rate: 4.3% (down -0.1 percentage point); Wages: +0.2%/ Trade Deficit: $2.3 billion wider

IN A NUTSHELL: “The lack of workers and modest economic growth are holding back job gains.”

WHAT IT MEANS: This week, I warned that the payroll report could be well below expectations and it turns out that was indeed the case. Job gains In May were significantly below consensus and almost half what the closely followed ADP report estimated. Nevertheless, the report was not weak. Yes, there were some real issues we saw in the data. The brick and mortar retail sector is reeling from Internet competition and jobs are disappearing. The slowdown in vehicle sales has led to manufacturers cutting back payrolls. Meanwhile, construction, health care, finance and restaurants are still adding workers at a very solid pace. So far this year, the economy has created an average of 162,000 per month, which is more than enough to keep the unemployment rate falling. And, it is more than enough to allow the Fed to raise rates on June 14th.

On the unemployment front, the headline rate fell to the lowest level in sixteen years, while the really stupid unemployment rate hit its lowest level since November 2007, just before the Great Recession officially hit. In other words, no matter how you measure it, the labor market is tight. While the participation rate fell, it is still at the average over the last three years. Similarly, nothing should be read into the decline in the labor force since it had been surging at an unsustainable pace for several months. It is now growing at a more trend level. While the low level of available workers should be leading to higher wage gains, that was not the case in May. Average hourly earnings rose modestly – only 1.8% on an annualized basis.

The tree that fell in the forest today was the April trade deficit. It widened as exports fell but imports rose. That is not something we want to see. Even adjusting for inflation, it looks like trade could slow growth this quarter.

MARKETS AND FED POLICY IMPLICATIONS: I cannot to brag that I said this week that the employment number should be in the 140,000-range. I didn’t estimate that lower number because of some great model I developed. I made that estimate because the lack of qualified workers due to the low unemployment rate simply didn’t support the high job gains that had been previously reported. The reality is that the May payroll increase should simply be viewed as bringing us in line with firms should be adding given the overall state of the economy. With the downward revisions to March and April, we now are where we should be. Yes, the three-month average fell to 121,000 but the data have been hugely volatile lately, so let’s wait a while before saying hiring has slowed dramatically. The decelerating job gain trend is something investors and the Fed will watch as it could also be signaling a moderation in growth. Indeed, if the trade deficit does widen and vehicle sales stay as soft as they were in April and May, second quarter growth may not be snapping back as solidly as expected. But with investors essentially giving the Fed a free ride in two weeks, I would be surprised if the FOMC doesn’t move in two weeks.

May Help Wanted Online and April Pending Home Sales

KEY DATA: HWOL: +195,600/ Pending Sales (Over-Month): -1.3%; Over-Year: -3.3%

IN A NUTSHELL: “The decline in pending home sales is another sign that the housing market is slowing.”

WHAT IT MEANS: For well over a year, firms cut back on their advertising for open positions. That pattern changed in February and the Conference Board’s measure of online want ads has now increased for three consecutive months. The increases were spread across the entire country with forty-eight of the fifty-two metro areas surveyed posting gains. All twenty of the largest areas were up. Similarly, the rising demand for labor was seen in most occupations as all ten of the largest categories experienced increases. If the job gains are slowing down, and we will know better about that on Friday, it is likely because of a shortage of qualified workers rather than weakening demand.

Another day, another sign of issues in the housing market. Pending home sales, which are signed contracts, fell in April. That was the second consecutive month that the National Association of Realtors leading indicator of sales declined. The pace of purchases has also dropped from one year ago, not a positive sign for the market. Looking across the nation, three of the four regions were down in April, with only the West showing a rise. Over the year, every region was in the red.

MARKETS AND FED POLICY IMPLICATIONS: Friday we get the employment report and today’s data, which are really second level numbers, shouldn’t make much of difference to investors or even the Fed. It is interesting that my estimate of about 140,000 new jobs being created in May (consensus is 185,000) is viewed as being disappointing. In reality, it is enough, over time, to keep the unemployment rate declining slowly. The 225,000 per month level that so many are clamoring for would create real problems for the economy. At that pace, given the growth in the labor force, the unemployment rate would be at or below 4% by the end of next year. Since 1980, the rate has been that low just five times and all came in 2000. There hasn’t been an unemployment rate below 3.8% in nearly fifty years – during the Viet Nam War era. We would be entering uncharted waters for the modern economy and anyone who thinks that a labor market bubble couldn’t form is well, probably is a former Fed Chair (Greenspan and Bernanke failed to understand the implications of the tech and housing booms). So let’s hope that we get moderate job gains, even if they disappoint some, because there is only so far the unemployment rate can drop before big problems start appearing. And by the time we see the whites of the problems’ eyes, it will be too late.

April Consumer Spending and Income, May Confidence and March Home Prices

KEY DATA: Consumption: +0.4%; Disposable Income: +0.4%; Prices: +0.2%/ Confidence: -1.5 points/ National Home Prices: +0.3%; Over-Year: +5.8%

IN A NUTSHELL: “With income growth solid, consumers should be able to keep spending at a decent pace.”

WHAT IT MEANS: If there is any possibility that the economy can break out of its 2% growth trend, the consumer will have to play a major role. To do that, wages and salary increases have to accelerate and that may be happening. Incomes grew solidly in April, the third month out of the last four where the increases were strong. That is another sign that the tightening labor market is finally starting to force firms to pay up a little more for workers. And households are taking that money and spending it. Consumption was also pretty good in April as people bought a lot more goods. Unfortunately, the demand for services was largely flat and that component is nearly two-thirds of consumption. Even with the weak services spending, consumption is growing above 2% so far this quarter, which is a good start. As for inflation, prices continue to rise moderately. Actually, the year-over-year rise has decelerated and is now below the Fed’s 2% target.

Consumer confidence has started to wander around. Today, the Conference Board reported that their confidence index fell in May as expectations moderated. Last week, the University of Michigan said that consumer sentiment was largely flat as the current conditions measure declined. Put the two together and it appears that the Trump confidence bump has run its course. Given all the chaos we saw in May, that confidence hasn’t faded sharply is a good sign that people are still holding out hope that things could change.

With the supply of homes limited, is it any surprise that housing prices continue to rise solidly? The S&P CoreLogic Case Shiller national index of home prices was up again in March and over the year, the price increase is approaching 6%. This is somewhat below the Federal Housing Finance Agency’s reading, but both are indicating that the price gains are accelerating. 

MARKETS AND FED POLICY IMPLICATIONS: Did the government change the date for Memorial Day to April? That is the only reason I can explain temperatures in the sixties this past weekend. The government gets blamed for everything else, so why not the unseasonably cool Memorial Day weekend weather on the East Coast? As for the economy, today’s number provide hope that second quarter growth will be a lot better than the anemic, but at least upward revised, first quarter increase. This week we get vehicle sales and the May jobs report and those two should help determine what the quarter will likely look like, though I doubt they will influence what the Fed will do at the next FOMC on June 13-14. I expect vehicle sales to rise a little from the May pace but job gains could be below expectations of about 185,000. I would not be surprised if the payroll rise is around 140,000 and the unemployment rate ticks upward. The average monthly number of jobs added so far this year is 185,000, which I don’t think is sustainable. Something in the 140,000 range would bring the monthly average closer to the 150,000 to 175,000, which is what is believe is reasonable given the growth rate and the shortage of workers. But the number to watch is average hourly earnings. That is really the only measure in the employment report that attempts to gauge wage pressures, and it should be strong. It isn’t a good measure, but it is the best we have on Friday, so look for it.

April Durable Goods Orders and Revised 1st Quarter GDP

KEY DATA: Durables: -0.7%; Excluding Aircraft: -0.4%; Capital Investment: 0%/ GDP: +1.2% (up from 0.7%)

IN A NUTSHELL: “Businesses are just not investing heavily and that could weigh heavily on second quarter growth.”

WHAT IT MEANS: If the economy is going to grow at 3% for as long as the eye can see, businesses better spend lots of money on capital goods. That is the only way productivity, which has largely been going nowhere, will improve. Well, that is not happening. Durable goods orders fell in April, led by a sharp decline in commercial aircraft demand. But even excluding aircraft, orders still fell. Purchases of vehicles, computers and communications equipment did rise, but that was more than offset by declines in machinery, electrical equipment, appliances and metals. But the key in this report is always the measure that best indicates capital spending. For the second consecutive month it was flat and has barely budged this year. That is hardly a sign that firms are confident enough about future growth to start investing in it.

The economy grew in the first quarter by a little more than initially thought. The upward revision was nice to see and came from a pick up in consumer spending and a slightly narrower trade deficit. Still, the report was nothing great and with business equipment spending being revised downward, it reinforces the view that growth remains at the same disappointing level we have seen for the past seven years.

MARKETS AND FED POLICY IMPLICATIONS: The economy is just not picking up any steam. Yes, second quarter growth could be in the 3% range, but that would still only mean the first half growth rate was not much more than 2%. And there are no reasons to believe that either businesses or households will spend more rapidly going forward. Consumer debt levels are rising rapidly and the monthly payments are taking away from spending on other goods and services. Meanwhile, the only animal instincts that are breaking out in the corporate arena are in the equity markets. Executives are more than happy to slowly add workers and rake in higher earnings as the economy slowly expands, but they have shown little willingness to invest in the future or pay their workers more. So, where is the future growth going to come from? Got me. On that happy note, let me say to everyone:

Have a happy and healthy Memorial Day weekend!

April Existing Home Sales

KEY DATA: Sales: -2.3%; Over-Year: +1.6%; Prices (Over-Year): 6.0%

IN A NUTSHELL: “The biggest problem with the housing market is a dearth of inventory, which is keeping sales down and prices up.”

WHAT IT MEANS: What fun it must be to have a house on the market right now. Okay, it is rarely ever fun to be selling a home, but if you have to do it, now would be a good time. Yes, the National Association of Realtors reported that existing home sales fell in April. That mirrored the decline we saw in new home purchases. Demand has bounced around, as it usually does and the March pace was the highest in a decade, so don’t read too much into the April fall off in purchases. Sales rose in the Northeast and Midwest, but those gains were more than offset by drops in the South and West. There was no region, though, that posted outsized increases or declines. But the real story was in inventories. While they remain way too low, they have steadily increased for the past four months. Hopefully, that pattern will continue as there are only 4.2 months of supply on the market at current the sales pace. A normal market would have about six months of supply. The lack of homes being sold has affected prices and the sales pace. With few units available, buyers simply cannot find what they want. When they do, in a growing number of areas, they are finding themselves in bidding wars. That is leading to rising home prices.

MARKETS AND FED POLICY IMPLICATIONS: It is hard to buy a home that is not for sale and that is the issue facing the housing market. Builders are ramping up construction, but they are limited in their ability to meet the demand for more affordable housing due to costs. Meanwhile, people who already own homes are still reluctant to sell them. It may be an issue of a lack of equity, lack of mobility, low mortgage rates that they have locked into or the recognition that they simply don’t have to change location just because they no longer enjoy their current location. Essentially, the “churn” in the market, where existing owners pick up and move, just hasn’t come back and that was the key to the health of previous housing markets. It is unclear what will increase the churn, but until it does return, expect sales to rise only slowly while prices continue to jump. This is not a report that will have any impact on investors. Is anyone really trading on a housing market that is supply restricted? As for the Fed, the housing sales trend is generally up, which is what they care about. And the rising prices add to inflation, which buttresses the members’ view that their dual mandate has been met. A rate hike is coming. I would be surprised if the FOMC doesn’t make a move at either the June or July meeting.

May Philadelphia Fed Manufacturing Index, April Leading Indicators and Weekly Jobless Claims

KEY DATA: Phila. Fed Index: +16.8 points: Orders: -2 points; Expectations: -11.6 points/ LEI: +0.3%/ Claims: -4,000

IN A NUTSHELL: “The manufacturing sector continues to lead the way, creating expectations that second quarter growth could be quite decent.”

WHAT IT MEANS: Have the animal instincts taken over the manufacturing sector? I think it is too early to make that judgment, but it does look as if activity is springing back. Earlier this week we saw that industrial production soared in April. The Philadelphia Fed’s May reading of manufacturer activity in the MidAtlantic district points to continued gains. The overall activity measure soared to one of its highest levels ever. Over the past thirteen years, it was higher only twice, with one of those times coming just this past February. Now the Philadelphia region is not a major player in manufacturing, but the strong performance does hint at good numbers around the nation. The details of the report were not nearly as robust as the overall number. Orders and payrolls expanded solidly, but not quite as rapidly as in April. On the other hand, order books are filling more quickly and shipments soared. Looking forward, though, there was a lot more caution. Expectations dropped sharply and are now pretty much at the average over the past eight years. Managers are hopeful about the future, but are no longer irrationally exuberant.

Another indication that first quarter growth was an aberration was the solid rise in the Conference Board’s Leading Economic Indicator in April. This follows good gains in the previous two months, so growth should be much better through the summer.

The labor market continues to tighten and jobless claims fell again last week. In addition, the percent of the workforce on unemployment insurance continues to set new record lows. Yes, it is nice to say that the economy will grow by 3% or more, but unless firms find the labor to help drive the greater output, it will be difficult to sustain that level of expansion for very long.

MARKETS AND FED POLICY IMPLICATIONS: The appointment of the Special Council makes it is clear the issues facing the Trump Administration will be with us for a long time. These investigations rarely are concluded quickly. So investors need to focus on the actual economy and right now, it can be said that growth looks like it is back on track – for another year of 2% or so growth. The Republican leadership still wants to get a tax cut/reform bill done by the end of the year, but that could be more hopes than realistic expectations. Thus, it is reasonable not to expect any major economic impact from tax changes for another year. And that is why I don’t expect growth to accelerate much this year. But 2% growth, given the sluggish increase in the labor force, will be enough to keep the unemployment rate slowly falling. That means the Fed is likely to raise rates slowly but steadily. As we move closer to the June 13-14 FOMC meeting, look for the members to stake out their positions – i.e., send messages to the markets about what is likely to happen. If there is no hike in June, as most expect, it almost certainly will come at the July25-26 meeting, assuming second quarter growth isn’t totally disappointing.