KEY DATA: Home Sales: +5.7%; Prices: +0.3%/ Orders: -2%; Excluding Transportation: 0%/ Claims: +3,000
IN A NUTSHELL: “A revitalized housing sector, coupled with soaring vehicle sales, should help turnaround the soft manufacturing sector.”
WHAT IT MEANS: The more data we get, the more we see that the U.S. economy is solid enough to withstand a rate hike. Maybe most encouraging is the housing market. The real question in this sector had been the new housing component. The biggest bang for the buck comes from home construction and you don’t get new homes built unless people are buying them. Well, they are doing that. New home demand rose solidly in August after a surge in July. So far this quarter, sales are up by over 8% from the second quarter average. Housing starts should continue climbing. Three of the four regions posted gains, with only the Midwest down. There was a huge rise in the Northeast, which was good to see since it has been lagging. The one thing that could slow sales going forward is the dearth of product. The inventory of homes for sale remains pretty low. As for prices, they have largely flat lined.
The manufacturing sector has been wandering in the desert lately and it is not clear if it has found its way out yet. Durable goods orders fell in August, driven partly by a slowdown in both civilian aircraft and vehicle sector demand. Boeing sales always bounce around. What was surprising, and likely to change, was the drop in the vehicle component. This year’s sales could be the second highest sales on record and the August pace was one of the highest ever. The orders decline was not a reflection of any weakness in the sector. Still, this report was nothing to brag about. Declines in orders were posted in computers, communications equipment, fabricated metals and electrical equipment. Business capital spending, excluding aircraft and defense, was also off slightly.
On the labor front, the tightening continues. Unemployment claims are at rock bottom. Firms need to find a way to get people to apply and then take their offers, as the openings are there.
MARKETS AND FED POLICY IMPLICATIONS: Janet Yellen speaks at 5:00 PM today and I am not sure if that is good or bad. The Fed Chair has a chance to explain in detail what the FOMC members were thinking when they decided to punt. They might only want to make sure no Chinese or emerging market collapse was in the works but we just don’t know. She needs to do an awful lot better at communicating what are the key factors that will drive the Fed’s rate hike decision. As for economic conditions, at least in the U.S. they are fine. European manufacturing growth is still decent, though the Euro Zone’s Purchasing Managers’ Index eased a touch. What the VW scandal means for Europe is anyone’s guess, but the Fed cannot change the course of events. So, it comes down to China, I think. If the Fed Chair doesn’t roll back the impression that it is all about China, the market roller coaster ride will continue, possible for quite some time.