KEY DATA: Deficit: down $4.6 billion (-9.5%); Exports: +0.2%; Imports: -1.8%/ Home Prices (Monthly): 1%; Over-Year: 7%
IN A NUTSHELL: “It was nice to see the trade deficit shrink so much, especially given all the other factors that seem to have slowed growth early this year.”
WHAT IT MEANS: After the huge rise in the trade deficit was reported for January, it looked like growth would be greatly restrained by the foreign sector. Well, maybe not so much. The trade deficit narrowed sharply in February. Imports were down, led by large drops in demand for foreign vehicles and cell phones. Swings in Chines activity around the Chinese New Year may have been at work here. We did buy more foreign food, capital and consumer goods as well as oil. On the export side, weakness in aircraft shipments and the unwinding of the soybean anomaly was offset by increases in sales of oil, vehicles and pharmaceuticals. Adjusting for prices, it looks like the first quarter trade deficit is pretty much the same as it was in the final quarter of last year. While I wouldn’t be surprised if the deficit widened in March, the total impact on growth should be relatively minor.
Housing prices continued on their inexorable upward trend in February. According to the latest report by CoreLogic, costs soared and are up sharply since February 2016. And that is raising questions about the sustainability of the market since it was indicated that much of the pressure is coming from the lower end of the market. If mortgage rates rise sharply, new-buyer affordability may be hurt. That said, I still believe that we need the “churn” in homes to rebound. With equity rising in most metro areas and many hitting new highs, the ability to sell is improving. Now we just need the desire to find a new home to also make a return appearance. For the price increases to be slowed, the inventory of homes on the market has to rise sharply. Otherwise, we could start seeing new local bubbles forming. Indeed, by CoreLogic’s calculations, in February, 102 markets were considered to be overvalued.
MARKETS AND FED POLICY IMPLICATIONS: Growth in the first quarter is likely to be modest, once again. At least now it looks like it may not be pathetic. Given the January trade numbers, we could have seen something close to 1% but I suspect it will be in the 1.5% to 20% range. In other words, the more things change, the more growth stays the same. Given that expected growth rate, it is hard to see how we can be creating 237,000 jobs per month, as we did in January and February. That does not bode well for Friday’s jobs report. Meanwhile, the accelerating price gains in home prices have yet to bring out the sellers and we are already starting to see the return of some housing bubblets (I am not ready to call them bubbles just yet). Economic uncertainty remains a concern and now there are rumblings of attempts to revive the Republicancare bill. So add political uncertainty to the mix. Nevertheless, investors seem to be confident that everything will turn out just fine.