KEY DATA: Sales: +16.6%; Over-Year: +12.7%; Prices (Over-Year): +1.6%/ Phila. Fed (NonMan.): -3.6 (up 65 points); Business Activity: 7.3 (up 48.7 points)
IN A NUTSHELL: “The leading light, housing, remains on a clear upward track.”
WHAT IT MEANS: Yesterday, when the May existing home sales numbers came out lower than expected, I explained that the data were lagging in that they were closings of contracts signed in previous months. I suggested we wait a few months to see how recent activity changes conditions. Well, if the new housing sales numbers are any indication of the current state of the housing market, it looks like things are quite good. Purchases, or at least contract signings, jumped in May with three of the four regions showing demand growth anywhere from 15% to 45%. The only negative was in the Midwest, where sales fell. It is unclear why demand was weak there, but it is also not unusual that one area differs from the others. Still, there was one concern in the report: Inventory is extremely low and that could restrain sales, unless construction picks up. As for prices, they rose, but only modestly.
NonManufacturing activity picked up in the MidAtlantic area. The Philadelphia Fed’s Index went from a record low to a nearly flat condition. But remember, this is a diffusion index and it only shows direction, not magnitude of change. Indeed, the negative index points to continued weakness in the economy, though the business index did show some gains. That said, this was not a great report. Orders are still falling sharply, order books are thinning and payrolls for both full-time and part-time workers continue to be cut. Those details point out that changes in diffusion indices have to interpreted very carefully.
IMPLICATIONS: At least housing is in good shape. With mortgage rates incredibly low and the Fed making sure there is plenty of money to go around (and around and around), as long as the virus doesn’t get totally out of hand, this sector should continue to do well. For the next few months, as the reopenings continue, the darkest cloud is the virus surge in those parts of the country that didn’t have major problems early in the pandemic. The virus sets its own conditions and even if areas don’t return to shut down status, a high level of cases would restrain a wide range of activities. We still haven’t had a massive return of workers to downtown areas and high rises, especially in the hardest hit areas. That could take months and it is unclear what will happen when they do return. All those support businesses that depend upon office workers for their income are going to be stressed for a long time. That means governments that depend upon tax revenues generated by those activities will continue to see shortfalls in income. For example, the latest data from the City of Philadelphia has May tax revenues down 31.2% from the May 2019 level. But investors see nothing but blue skies ahead and exuberance is hard to restrain. In other words, equity prices are delinked from economics and the potential for earnings, and when that happens, forecasting the direction of the markets becomes even more difficult than forecasting the weather more than a few hours out.