KEY DATA: Sales (Month): -0.4%; 2019 vs. 2018: +10.3%
IN A NUTSHELL: “Builders had a good 2019, but sales look like they plateaued at the end of the year.”
WHAT IT MEANS: If the economy is going to pick up any steam, the housing sector needs to play a key role. While the existing market did fine at the end of the year, sales of new homes were down modestly in December. That was the third consecutive monthly drop. Comparing 2019 to 2018, sales soared. But even there, we have to read the data carefully. The East and Midwest posted sharp declines in annual sales. However, double-digit gains in the South and West overwhelmed those cut backs. But there was some question about those increases, especially in the West. In December 2018, sales in the West were the lowest in over three years. However, they doubled – yes doubled – from that pace in December 2019. That makes no sense. So, you have to conclude that the large increase in annual sales was somewhat overstated. Stepping back from the data anomalies, it is likely that demand is improving somewhat, but it is hard to believe there will be any major increases going forward, especially given the limited supply of homes on the market.
The Dallas Fed’s Texas Manufacturing Outlook Index rose a touch in January, though the details were better than the headline number. New orders and production levels jumped, while wage gains continued to accelerate somewhat. What kept the overall index down was weakness in hiring, hours worked and capital expenditures. In addition, order books continued to thin, though not quite as quickly as they had been. Expectations did improve. At least for one part of the country, manufacturing is improving. MARKETS AND FED POLICY IMPLICATIONS:Clearly, investors are concerned about the potential impacts of the coronavirus. Given China’s lockdown of millions of people, there is reason to worry about how much further it will spread and what the short-term impacts will be on Chinese and world economic growth. It is easy to say that in past health crises similar to this, the actual effects were a lot less than what were feared and we can hope that is the case once again. Unfortunately, we just don’t know and uncertainty is never good for the economy or the markets. Given the U.S. is expanding at a modest to moderate pace and there are few if any indicators pointing to a major acceleration in growth, any negative impact could push the pace of activity toward quite low levels. But, we just don’t know. Thus, the monthly data should take on added importance, as it would be nice to know we have a buffer just in case the health issues do have a negative impact on the economy. But for now, the only thing that can be concluded is that the economy is in decent shape. That should keep Fed Chair Powell from panicking again if the markets decline, but who knows what he is trying to accomplish.