KEY DATA: Starts: -8.7%; Permits: -1.6%/ Prices (National, Over-Year): +4.3%; Over Month: +0.2%/ Confidence: -8.9 points/ Phil. Fed (NonMan.): +11.7 points; Orders: +8 points
IN A NUTSHELL: “Some segments of the economy may be starting to improve from the early year slump, but you cannot say the same thing for housing.”
WHAT IT MEANS: We are closing in on the end of the first quarter and the data are coming in somewhat less negative than they had been. I am not saying the economy rebounded in March, but at least the general malaise eased. That cannot be said about residential real estate. Housing starts crumbled in February and so far this year, new building activity is down nearly nine percent. This pace was well below expectations. Activity was down sharply in three of the four regions, with only the Midwest posting a gain. But that came after an incredibly weak January, so weather was likely the major factor there. Will housing come back? It just may, at least a little. While permit requests also faded, they are still running well above the level of starts and builders don’t like to pay for the permits for no reason at all. So, looks for starts to improve over the next few months.
But don’t look for construction to surge. Home price increases are continuing to decelerate. While the S&P CoreLogic Case-Shiller national index edged upward a touch in January, the rise over the year eased again. The increase was the smallest since April 2015. Four years tends to indicate a trend. Similar decelerations have been seen in all the other major home price indices. That points to a softening in demand, especially since supply is not booming.
As for the consumer, they are happy but hardly jumping for joy. The Conference Board’s Consumer Confidence Index dropped sharply in March as both the current conditions and expectations components were off. This was a disappointing report as confidence was expected to rise a little.
Meanwhile, it looks like services activity may be recovering. The Philadelphia Fed’s Non-Manufacturing Index popped in March, led by strong gains in new orders, sales and backlogs. Firms were back in hiring strongly, but they are being forced to pay more for their workers. The only disappointing part of the survey was in the investment numbers, which are mediocre at best. Small service providers may have gotten tax breaks but they have likely used it to hire and/or just stay in business.
MARKETS AND FED POLICY IMPLICATIONS: The economy is not falling apart. It is also not booming. Thursday we get the revisions to fourth quarter GDP and they are likely to show that growth was softer than the 2.6% gain initially estimated. Look for something in the 2.25% range. This quarter is currently coming in below 2% and could be pushing the 1% level. While a rebound in the spring and summer is hardly out of the question, those growth rates will likely be more in the 2.5% range than 3% or more. Essentially, the sugar high is just about over and we are back to normal growth. But the risks are more toward the downside than the upside. Consumers are feeling fine, not great, and the tight labor markets are helping them grow their paychecks. Nevertheless, they are not buying big-ticket items, so don’t expect spending to surge. Firms have shown little interest in investing heavily. The sugar-daddy federal government is running out of lollipops as the deficit should near one trillion dollars this fiscal year and break it next year. And the world economy is in a global slowdown. Even the delivery of the Mueller Report didn’t create any investor exuberance, so what will cause growth to accelerate is beyond me, so investors need to start focusing on what an economy that mirrors the 2011-2016 period means, but one that no longer has the Fed pumping huge amounts of liquidity into the system.