Category Archives: National Association of Home Builders Index

Economic Indicators, National Association of Home Builders Index, Producer Price Index

October Producer Price Index and November Home Builders’ Index

KEY DATA: PPI: +0.2%; Goods: -0.4%; Services: +0.5%: Food: +1.0%; Energy: -3.0%/NAHB: up 4 points

IN A NUTSHELL:  “While wholesale inflation remains modest, what energy is giving, food is taking away.”  

WHAT IT MEANS:  The economy is solid, jobs are being created and the unemployment rate is nearly at full employment, so the Fed has to shift its attention to something else if it is to come up with the next rationalization of why it is keeping rates low.  Right now, the FOMC seems to be locked into low compensation gains, but there is also the issue of inflation, or its lack thereof, to fall back on.  Some members have already expressed that concern.  When it comes to current and future consumer costs, wholesale prices seem to be telling a confusing story.  The Producer Price Index rose a little more than expected in October.  The large drop in energy costs was supposed to cause the index to decline but there were offsetting increases.  In particular, food prices continue to rise sharply and over the year, they are up a whopping 6%.  In addition, the index presents a variety of services prices, a key differentiation.  Since services comprise 63.5% of the index, this break down better mirrors the economy. The category called “final demand trade services”, which looks at retailing and wholesaling, surged.  As a result, the services component rose strongly.   Excluding energy, wholesale costs have increased by a moderate 2% over the year.  That said, the inflation pipeline is not showing any major problems ahead, even when energy is excluded.

On the housing front, home builders are smiling again.  The National Association of Home Builders’ Housing Market Index jumped in November.  The sales conditions, future sales and traffic components were all up.  The only weakness was in the Midwest.  It will be interesting to see if the current bad weather changes things.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is suffering from wandering-eye syndrome.  First the members were worried about growth and jobs.  When those issues dissipated, they started focusing on the unemployment rate.  When that blew through their target they started talking about wage inflation.  Worker compensation remains muted but even if it starts to move up, there are rumblings that low inflation could become an issue.  In other words, if the Fed wants to keep rates low, they will find something out there that would defend their stance.  However, inflation is inching upward, even as it remains below its desired level.  The rise in producer prices points to a further modest uptick in household costs, but as I have said many times, the pathway from wholesale to consumer prices is hardly straight.   Meanwhile, the economy looks really good and the increase in the Homebuilders’ Housing Market Index reinforces the view that conditions are getting even better.  Thus, I am sticking to my belief that the Fed will start raising rates this spring.  Meanwhile, in the land of make believe, investors may look at the data and say there isn’t enough inflation for the Fed to do anything in the near term and with the economy improving, it is pedal to the metal, or whatever they say.

Economic Indicators, National Association of Home Builders Index

August National Association of Home Builders Index

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.