August Home Builders Index and New York Fed Manufacturing Index

KEY DATA: NAHB: +6 points/ Empire State: -13.5 points; Orders: -15.6 points; Expectations: -4.1 points

IN A NUTSHELL: “The housing market is going gangbusters, but the factory recovery may be flattening.”

WHAT IT MEANS:  The data today are in the category of some good news and some questionable news.  We are starting to transition from reopening to recovery and that means some sectors that were soaring will start to settle down to more normal or supportable growth.  Others will continue to pick up steam.  Housing is steaming.  The National Association of Home Builders overall index of market conditions jumped again in August and hit one of the highest levels on record.  Actually, that was true for the sub-indices, including present conditions, future conditions and traffic.  These results support the findings of that the market is strong as prices continue to rise, while listings are coming back, though they are still down from last year.   Both the new and existing housing markets are doing well and that is good news for economic growth going forward.

But then there is manufacturing.  The New York Fed’s Empire State Index of manufacturing activity did a U-turn in early August as all the major indices were down sharply from their July readings. That said, this is a perfect time to revisit my discussion about diffusion indices.  These measure direction, not magnitude and even the directional information can be problematic.  The overall index of activity fell sharply, but it is still positive.  What it is indicating is that the manufacturing sector is consolidating its gains, not necessarily giving them up.  That has kept respondents fairly confident as the expectations index, though down from July’s level, is still pretty solid.  Nevertheless, there were some worrisome signs in this report.  There was a sharp rise in the percent of respondents saying orders declined. It is one thing to stabilize, it is another to lose ground and falling demand, even if the reduction was not great, is not a good sign.   

IMPLICATIONS: Today’s numbers don’t change the economic picture and indeed, the current data may not be a whole lot helpful in understanding where the economy is going if the gridlock in Washington over a new stimulus package continues. The president’s proposals aren’t likely to do much as they are well below what the unemployed had been receiving and they could run out by the end of September.  The payroll tax cuts simply do little. As most economists have argued, like it or not, the stimulus programs have kept large numbers of households and businesses afloat and with the funds being cut or running out, the recovery could start running out of steam.  The longer this goes on, the smaller the third quarter increase will be and the sooner firms that have been hanging on start laying off workers or simply go out of business.  Some firms are doing their best to retain their workers for as long as possible (like until after the election), but the layoffs are coming and a failure to find a way out of the quagmire will only make the ultimately breaking point more devastating.  But this is an election year when playing to the base is the only thing that matters. How cutting unemployment and business payments plays to anyone’s base is beyond my understanding, but politicians have their own bizarre way of thinking.  What I am saying is that the risks to the recovery are to the downside and I am not convinced investors understand that.  Eventually, they just may.