KEY DATA: Starts: -4%; 1-Family: +1.3%; Permits: +8.4%; 1-Family: +1.8%/ Sentiment: -6.3 points
IN A NUTSHELL: “With housing going nowhere and consumer confidence faltering, it is not a major surprise that investors are worried about the economy.”
WHAT IT MEANS: The yo-yo markets have every reason to be bouncing around like crazy. One day the president is General Lee sending General Pickett and his trade war troops straight up the hill and the next he is in retreat. It cannot be ruled out that Trump’s assault on China may end as ignominiously.
The next year will determine if Trump and Lee have something in common. For now, all we can do is look at the data. Today, the numbers are housing starts and consumer sentiment. Starts dropped in July and the decline was in three of the four regions. Only the West posted a rise and that was relatively modest. However, to confuse matters, permit requests surged. For the three months ending July, permits are 4.6% above starts and that points to a rebound in construction over the next few months. That said, it looks as if home construction has largely stabilized and with sales pretty much flatlined as well, there is little reason to expect starts will jump either.
Meanwhile, the consumer is beginning to get a little antsy about the trade war. The University of Michigan’s Consumer Sentiment index tanked in the first half of August and the biggest reason given was the trade situation. According to the report, “Consumers strongly reacted to the proposed September increase in tariffs on Chinese imports, spontaneously cited by 33% of all consumers in early August, barely below the recent peak of 37%.” Both the current conditions and expectations indices declined.MARKETS AND FED POLICY IMPLICATIONS: The next FOMC meeting is September 17-18 and there is lots of new data that may – or may not – provide some clarity on where the economy is headed. The Fed, regardless of what it says, is no longer data dependent. At least not data that have to do with the U.S. economy, which may be moderating but is not faltering.Instead, it is being tossed around in the same way as investors by the president’s tweets. The trade war is what concerns most Fed members; at least I think that is the case. We haven’t heard a lot from them lately. The Fed has to guess what the president is actually going to do, when he will do it and what those decisions, whatever they are, will mean for the U.S. and world growth. In other words, the Fed is flying blind. What it has going for it is an economy that is still in pretty good shape. What it has to worry about is a faltering Chinese economy that is starting to impact other countries around the world and a potential all out trade war. The longer this goes, the less the Chinese have reason to settle before the 2020 election. President Xi has to weigh further economic pain over the next fifteen months against a possible Trump re-election and uncertain policies afterward. As President for Life, he has some flexibility to take the pain for potential long-term gain. If that happens, the Fed is in a total bind. It would have to cut rates significantly to have any chance of improving the economy and even then it is not clear if aggressive action would do much. If Chair Powell continues on his race back to zero, what does he do then? For several years now, I and many other economists have warned that the Fed needs to get rates back up to more normal levels so it has the ability to fight the next war/recession. Does anyone believe they succeeded in doing that? With such great uncertainty over what Trump will do next, it should surprise no one if we continue to see wild swings in the stock and bond markets.