KEY DATA: Housing Market Index: 55 (up 2 points)
IN A NUTSHELL: “Builders may not be irrationally exuberant but the rise in confidence is an indication that the housing market is getting better.”
WHAT IT MEANS: The housing market has been adding to growth but the recent data have not created any great feeling that the sector will lead the way toward much stronger economic activity. That still seems to be the case but at least it now appears that residential construction should continue adding to growth. The National Association of Home Builders/Wells Fargo Home Builders Index rose in August, making it three consecutive months that builders’ optimism increased solidly. The level is not yet back to where it was last August, when it hit a nearly eight year high, but it is getting close. The three components, current sales, future sales and traffic, were all up. Only the traffic measure remains at a low level, which is clearly a concern. Apparently, the limited traffic is turning into sales, though. Regionally, optimism was mixed. Gains were posted in the Northeast and especially the Midwest, but were down somewhat in the South and West. The weakest link remains the Northeast, where builder confidence may be rising but it still is in the “not very good” range.
MARKETS AND FED POLICY IMPLICATIONS: The housing sector has been sending mixed messages since the winter weather cratered activity. Sales have been improving in fits and starts while construction has wandered aimlessly. The trend may be up, but not with any vigor. The Home Builders seem to be saying that activity could start picking up again. Of course, that is only one voice. Fannie Mae’s economists toned-down their view of the housing market for the second half of the year, indicating that “With respect to housing’s contribution to growth this year, we have downgraded our outlook following the disappointing housing activity seen during the first half of the year“. I guess the simplest thing to say is that housing will add to growth but not be the driving force behind any major upturn in economic activity. Anything that implies less than stellar growth helps those at the Fed who want to watch and wait, and that includes the Fed Chair. As for the markets, the Home Builders and Fannie Mae reports will probably just add to the view that rates are not going up anytime soon. Of course, there are geopolitical concerns that seem to ebb and flow, as well as Chair Yellen’s talk on Friday in Jackson Hole. Past Fed Chairs have used this forum to send messages about the future direction of policy. It is fervently hoped that we will get some idea about Yellen’s thinking on how a tightening in the labor market translates into inflation issues and the need to raise rates. Wage pressures only matter to the extent they create inflation concerns and we have no idea about the speed of that transmission process and what that may mean for Fed policy. In other words, the era of “better communication” continues with very little good communication.