KEY DATA: New Home Sales: +4.5%/ Existing Home Sales: -4.9%/ Phila. Fed (NonMan.): -0.7 point; New Orders: +0.9 point
IN A NUTSHELL: “The housing market is wandering aimlessly and that is hardly a sign of a strong economy.”
WHAT IT MEANS: We get our initial look at first quarter growth on Friday, but regardless of what it comes out as there is little reason to think the economy is booming along. This week’s so-so numbers leading up to the GDP release were the housing sales data. Today we got the new home sales numbers and they were really good, at least when you consider where they had been. Demand jumped in March to a level not seen since November 2017. It looks like sales bottomed in October of last year and there has been a fairly steady improvement since then. As for the details, a strong rise in the Midwest offset a sharp drop in the East. There were solid gains in the South and West. Sales prices firmed as inventories remained low.
Yesterday, the National Association of Realtors indicated that existing home demand faded in March. The softening in sales was in every region. But the fall off in sales came after a sharp rise in February, so it is not clear what is going on with the existing home market. The average sales pace for the first three months of the year was well below the pace posted in 2018, so it really cannot be said that demand is improving.
Maybe the clearest indication that the economy is in good shape but growth is not re-accelerating could be seen in the Philadelphia Fed’s nonmanufacturing index. It was largely flat in April, but level was still quite solid. Optimism remains high. Indeed, a greater proportion of the respondents indicated they thought that their firm’s business conditions would improve than said it would remain the same. Few expected they would see their own business suffer a reduction in activity. MARKETS AND FED POLICY IMPLICATIONS: First quarter growth looks like it came in near the same 2.2% pace that we saw in the fourth quarter. The unknowns and likely drivers of improved growth are inventories and trade. Unintended inventories increases appear to have occurred and those will have to be worked off. The uncertainty over tariffs – and the hopes that might be lifted – may have led to strange patterns in imports. Regardless, whether the number is better than worse than forecast, the underlying pattern of growth remains near the 2% or so trend rate. That is consistent with a housing market that is basically going nowhere. As for investors, the focus seems to have returned to earnings, not politics or economics and so far, the profits reports have been decent. Meanwhile, back at the Fed, I suspect the members would be smart to keep their heads down, especially if growth comes in above consensus. With labor costs high, productivity low and energy prices rising, inflation is not going to decelerate. Which raises the question: Why did Chair Powell rush to hoist the white flag in December?